The Government increase in the standard rate of VAT to 20% from 17.5% from January 4 adds around £300 to the price of the average new car, according to the Society of Motor Manufacturers and Traders, at a time when many companies are still experiencing tough trading conditions.
 

For fleet operators which outright purchase their vehicles the move effectively adds 2.5% to their acquisition costs as the VAT cannot be reclaimed. Allied to a reduction in capital allowances from 20% to 18% in April next year for cars emitting 160g/km of CO2 or less and from 10% to 8% for those emitting more than 160g/km, outright purchase looks increasingly less attractive.

However, the changes are set to increase the attractiveness of contract hire, believes Tusker, as fleet operators can reclaim 50% of the VAT on the finance element of their monthly rentals and 100% of any maintenance element.

At the same time, the British Vehicle and Rental Leasing Association is lobbying Government to increase recoverability of VAT to 70% as being a fairer representation of business use, so the proportion of recoverable VAT may actually increase if the campaign succeeds.

Tusker managing director, David Hosking, said:”We fully expect 2011 to be the year of contract hire, as more businesses wake up to the multiple benefits it offers, not just in VAT recoverability, but in cashflow management and more accurate budgeting.

“The impact of changes to the tax regimes affecting company cars is likely to reduce the attractiveness of outright purchase which has been on the wane for some time.

“And, even before the impact of the VAT rises, we have had a record year in terms of contract hire orders, as well as seeing tremendous growth in salary sacrifice cars.”

During 2010, the Tusker contract hire fleet grew substantially on the back of some major contracts with a variety of different organisations in both private and public sectors.

One of the most significant was with utility, Northumbrian Water, which added 350 contract hire cars and up to 100 salary sacrifice vehicles to date, while a contract with a leading international logistics company added a further 550 cars.

In addition, contracts to supply several NHS Trusts in North Yorkshire and Humberside are likely to add a further 400-plus contract hire vehicles.

“2010 has been a record year for us in terms of contract hire orders, and with the tax changes from the start of 2011 through to April 2012, we fully expect this year to be even better,” he added.

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