In summary, the correct treatment of Personal Contract Purchases (PCP) and similar contracts depends upon the level of the final optional payment. If, at the start of the contract, it is set at a level where that final payment would be greater than the market value, it is classed as a supply of a service. VAT is therefore accounted for on the full value of each instalment.
On the other hand, if, at the start of the contract, the final payment is set to be below the expected market value i.e deemed that a rational customer would make the payment, this is classed as a supply of goods and as such, VAT is due on the supply of goods from the start and the finance is exempt from VAT. An element of judgement is therefore required when considering the final payment and estimated market value three years or so down the line.
Obviously as well as the above, other considerations are required as not all vehicles allow you to reclaim the VAT on them at the outset.
We would suggest that you discuss with us further before claiming the VAT back and we can advise you on whether the process is correct.
Should you be claiming the VAT on the lease costs then the following is applicable:
Following recent HMRC changes to VAT on personal contract purchases (PCP), there has been a lot of confusion about when to claim on the leases. Previously, PCP and other similar contracts were seen as supplies of goods and a separate supply of credit. However, in some instances, these are now being viewed as a single supply of taxable leasing services.
Here are different scenarios where you can reclaim VAT on leased vehicles…
You can reclaim all of the VAT – if you are leasing a ‘qualifying car’, which is being used as either a taxi or to provide driving instruction. See the link for details of what a qualifying car is in the eyes of HMRC!
Businesses: You can reclaim 50% of the VAT – if you are a business leasing a qualifying car that is not for the purposes above, as the 50% VAT block covers private use. For more details, see VAT guide (Notice 700) and Notice 706: partial exemption.
Self-drive hire: You can reclaim 50% of the VAT – if the car rental is due to a company car being off the road. In some cases, if you hire a car for business use and for 10 days or less, the 50% block may not apply (for example, if you do not have a company car).
The 50% block applies to all VAT on charges you will pay for the rental of the car – under the terms of the leasing agreement, this would include any optional services (unless supplied separately on the tax invoice) and excess mileage charge (if it forms part of a supply of leasing, but not if it was incurred on an excess mileage charge that forms part of a separate supply of maintenance).
If you terminate your lease early, the 50% block will not apply – in this instance, the leasing company may treat the termination payment and any related rental rebate as taxable, or it may treat this as being outside of the VAT scope. If the leasing company chooses to tax, the termination payment is usually offset against the rebate, so you would be issued with a tax invoice for the difference. If the rebate exceeds the termination payment, the leasing company will issue you with a VAT credit note for the balance.
If you receive a rental rebate and you incur the 50% block, the VAT will need adjusting – at the end of the full lease term, you would be issued with a VAT credit note for a rental rebate, so you would only need to adjust 50% of the VAT credit in your VAT account. See VAT guide (Notice 700).
For example, when a car is sold at the end of a lease, you would receive a rebate of rental payments. In this instance, the leasing company would use the proceeds to rebate the monthly rental payments.
As with all things VAT, nothing is ever as simple as you think. Don’t be fooled into thinking that you can reclaim all of the VAT purely because you have received a VAT invoice as part the lease. If you would like more advice on how VAT is applied to PCP contracts, then please get in touch by emailing: accountants@charnwoodaccountants.co.uk