FLEETS which exploited a VAT leasing loophole will have to repay a large part of their tax savings on company car expenditure. HM Customs & Excise estimates that as much as £20 million of VAT was lost through a scheme which exploited the change in the VAT treatment of a leased company car on August 1, 1995.

The ploy required fleets to set up in-house leasing companies before August 1, 1995 to which they pre-paid rentals. The fleets could then recover VAT on the payments as the old tax rules allowed. But the in-house leasing companies did not contract with external leasing suppliers to source any company cars until after August 1, 1995, when leasing firms gained the right to recover all the VAT on cars bought to lease to business customers. As a result, these fleets were run on a VAT-free basis.

Customs & Excise attacked the scheme, using the arrangement between Kunick plc and BRS Car Lease as a test case. Kunick had set up a wholly-owned fleet subsidiary called Pool Master which was then contracted to supply another Kunick subsidiary called MHG with 1,800 cars over a four-year period. Customs & Excise tried to recoup the VAT shortfall from BRS, which was innocently caught up in the arrangement, rather than Kunick. But the Court of Appeal ruled in favour of BRS, leading to fresh legislation to invalidate the tax avoidance scheme.

Customs has now blocked 50% of the VAT on charges incurred by the in-house leasing company after November 13, 1998 - the date of the Court of Appeal hearing - and is seeking VAT on rentals covering the period between August 1, 1995 and November 13, 1998. This will be calculated with reference to the amount of private use of the company cars. So if a car was driven 90% for private use, then the fleet will owe Customs and Excise 90% of the VAT on the lease.