THE British Vehicle Rental and Leasing Association has warned the contract hire industry of allegations of tax evasion to gain competitive advantage.

Some companies have been accused of 'loading' service and maintenance elements of contract hire payments to reduce the VAT their customers pay. By increasing the service element included in monthly rentals, companies can reduce clients' VAT liability following last August's VAT changes, which block 50% of VAT recovery on the finance element, but allow 100% recovery of the VAT paid on maintenance. A disproportionately high service element allows clients to reclaim more VAT.

Customs and Excise said the practice was tax evasion and it would pursue clients of any company found in breach of the regulations for backdated VAT.

Lex Vehicle Leasing Marketing director Richard Koster said: 'Our sales staff are coming up against this every week when they compare our quote breakdown against that of our rivals. Some contract hire companies are hungry for short term growth. They risk damaging the contract hire industry's image and trouble with Customs.' He said some companies were charging more than £1,200, around £35 per month, more than Lex for servicing the same car over three years/60,000 miles.

A Customs spokeswoman said: 'We take a very serious view of altering the proportion of servicing so that it does not reflect the true proportion. It is illegal and we have recourse to the customer to recover the tax as far back as six years.'