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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