Special rules restrict the amount of VAT your business can reclaim on leased car payments. But these so-called blocking rules don’t apply to all charges made by rental companies. What and how much are you entitled to claim?
As you probably know, you can’t reclaim the VAT paid on the cost of a car, even where you use it mainly for your business. Vehicles used primarily as taxis or by driving schools are an exception, as are those not available for private use and actually used 100% for business. However, VAT on leased cars is different.
Where you lease a car for use in your business either by yourself or your employees, you can reclaim 50% of the VAT charged on the “rent” payments. That’s good news, but you need to watch out – some types of contract referred to as leases, e.g. lease purchases, are actually just alternative ways to buy a car over time, and so the full VAT block applies. Tip. It can be tricky to decide from the wording of some contracts whether you’re buying a car or just leasing it. The simple, but reliable, way to tell one from the other is to check whether the invoice includes VAT. If it does, then it’s a lease arrangement and you can reclaim 50% of it. But if it doesn’t you might need to look closer at the paperwork.
Some lease companies only issue a VAT invoice once a year. In the interim they might send you requests for payment or payment receipts. These don’t have to show VAT and so you might be fooled into thinking you haven’t been charged it. Your bookkeeper might not be sure either, which might mean you’re missing out on the 50% VAT claim. Tip. If you’re not sure of the VAT status of your contract by looking at the paperwork, phone the finance (leasing) company and enquire. They should be able to give you an immediate answer.
With some car lease contracts you can choose to include a maintenance arrangement. This will cover the cost of servicing etc. Where these charges are shown separately, the VAT position differs from the main leasing charge.
Tip 1. Although a maintenance charge might appear on the same invoice as the lease payment, you aren’t restricted to reclaiming 50% of the VAT. Even where the car is available and used for non-business journeys, you’re entitled to reclaim 100% of the VAT.
Tip 2. If, instead of having a maintenance contract with the leasing company, your business arranges and pays for the cost of the servicing etc. itself, you can reclaim 100% of the VAT on these costs. As was the position in Tip 1, you don’t need to reduce the amount you reclaim to account for any personal or other non-business use of the car.