UK companies are in line for a VAT windfall on short-term daily rental cars, following a relaxation of VAT rules by HM Customs & Excise.

Customs has doubled the length of the hire period for which businesses can recover VAT on rental rates from five to 10 days, in response to representations from trade associations.

Businesses will still be able to recover VAT on cars hired for more than 10 days so long as the cars are used exclusively for business, and the business can prove there was no private use of the car.

Customs blocks VAT on hire charges to take account of the private use of rental cars, in the same way that it imposes a 50% VAT block on contract hire rentals.

Consequently, the new extended VAT concession does not apply to cars rented temporarily to replace vehicles on contract hire. In these cases the rental will suffer a 50% block on VAT recovery from day one.

'But we accept that in other cases - perhaps you do not have a company car - if you hire a car for not more than 10 days to use specifically for your business, the 50% block will not apply,' said a Customs statement.

'Five days was not long enough, and the extension is good for business.'