Leasing costs may rise further following the VAT rise

Many fleets are facing further lease costs following the VAT rise.

They are now liable for more VAT when leasing companies come to sell cars that are currently with fleets than they reclaimed when they first purchased them.

But it will be fleets that are likely to pick up the bill, as most lease contracts will have a clause allowing this charge to be passed on.

“It is a commercial decision for each leasing company but most of the contract hire agreements that I am aware of would entitle the leasing company to make the charge,” explained BVRLA chief executive, John Lewis.

The costs facing lease companies are significant. For example, Arnold Clark Vehicle Management, which has some 40,000 vehicles out on contract hire stands to lose just under £5m. It said it will not pass this on to its customers.

The losses come about because when a lease company buys a car it reclaims the VAT immediately. However, when it comes to sell it some years later, it must repay the VAT on the sale price at the current rate.

This means they may have recovered VAT at 15 or 17.5% but from January 4 will have to repay it at 20%.
Arnold Clark Vehicle Management said it will not pass the charge on.

Managing director Hugh Wallace said: “Customers will of course have to pay the appropriate amount of VAT on their rentals during their contract, but we will absorb the higher rate of VAT we have to pay on vehicle disposals. On a typical fleet car, I estimate this freeze is worth around £10 a month.”

The hidden cost of the VAT rise for fleets

Contract hire cars are qualifying cars for VAT purposes which means the leasing company can claim back the VAT on purchase and has to pay VAT from the sale proceeds on disposal.

This is one of the dynamics behind contract hire being so competitively priced compared to other forms of acquisition where VAT is not reclaimable.

When VAT changes to 20% for the long-term, leasing companies will have to pay out 2.5% more VAT from sales proceeds for existing vehicles on contract and would expect to be able to re charge this shortfall to the lessee as it is a tax variation – just as the VAT rate on the monthly rental will have to change to 20%.