Leasing a car

Produced by Tolley

The following Value Added Tax guidance note Produced by Tolley provides comprehensive and up to date tax information covering:

  • Leasing a car
  • What is the VAT treatment of supplies by leasing companies?
  • Can a lessee recover all of the VAT incurred on the lease of a car?
  • Is the leased car used solely for taxable business purposes?
  • Is the leased car used for both business and private purposes?
  • What is the VAT treatment of replacement cars?
  • What is the VAT treatment of self-drive hire cars?
  • Fleet bonuses
  • Repair and maintenance costs
  • Exempt and non-business use
    • More...

This guidance note provides an overview of what VAT can be recovered on the lease of a car. Please see the Buying and selling a car guidance note for information on buying and selling a car.

What is the VAT treatment of supplies by leasing companies?

A leasing company can recover all of the VAT incurred on the purchase of a car providing that they will lease the cars at a commercial rate to the lessor. The leasing company is required to state the following on the leasing invoice:

  1. •

    whether or not the car is ‘a qualifying car under VAT (Input Tax) Order 1992, SI 1992/3222, Article 7(2) (as amended)’

  2. •

    the VAT due on both the leasing charge and service (maintenance) charge

  3. •

    the VAT due on the leasing charge is the amount that is potentially subject to the 50% input tax restriction

SI 1995/2518, reg 14(6)

Can a lessee recover all of the VAT incurred on the lease of a car?

Is the leased car used solely for taxable business purposes?

If a business uses the car for solely business purposes, such as a taxi, driving school, pool car, etc, it can recover all of the VAT incurred on the lease of the car.

Is the leased car used for both business and private purposes?

A business that leases a qualifying car that is available for private use is only entitled to recover 50% of the VAT incurred on the leasing cost. The other 50% of the VAT incurred is blocked from VAT recovery. The 50% block applies to all charges levied in respect of the lease of the car, including the following:

  1. •

    optional services ― unless these are supplied separately from the lease of the car and clearly separately identified on the invoice

  2. •

    excess mileage charge ― the 50% block will apply to all excess mileage charges that form part of the overall lease of the car. However, the 50% block will not apply to any excess mileage charges levied

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