Getting more VAT back when “buying” a car

Your business leases its vehicles but for a variety of reasons you want to terminate the lease early and buy the cars from the leasing company. But how much VAT can you recover? Partner, Alister Biggar explains.

The basic rules
The normal rules for VAT recovery when buying a car are relatively simple. You can’t claim back any of the VAT if you have any private use at all, and that includes home-to-work journeys! If you lease a company car, you can only claim back 50% of the VAT on the leasing charges if you have any private use of the car.

FOR EXAMPLE
You run a company and have two Audi cars on finance leases for yourself and another director of the business. You decide to terminate the leases early and sell the cars to the directors. The leasing company is going to make a charge for the early termination.

But what’s the VAT position of the early termination payment and does the company have to charge VAT on the sale of the cars to the directors?

Early termination payment
The published guidance says that when a finance lease is terminated early, the lessee (you) is normally charged a sum that represents the balance of the amount of rental that would have been payable over the full term of the lease. HMRC allows the lessor the option of treating the early termination payment as either an outside the scope compensation payment, in which case there is no VAT to worry about; or consideration for a taxable supply of services, in which case VAT will be charged, as in the example above. But how much can be recovered by the company?

HMRC doesn’t regard an early termination payment as consideration for the supply of a car. Hence a lessee will not be subject to any input tax restriction in respect of VAT charged on a net termination payment and can recover the full amount.

Sale of the cars to the directors
The company has been able to recover the VAT on the “purchase of the car” because HMRC views the payment as a supply of services rather than of the cars. But what happens when it sells the cars to the directors?

If the directors buy the cars, the sale of a qualifying car is subject to VAT on its full value, but what is a qualifying car? It’s one on which the purchaser has been able to recover all of the VAT. The cars were qualifying when the leasing company bought them, but are they still qualifying in the hands of the company?

The company has not been able to recover the VAT on the purchase of the cars, mainly because it has not actually purchased them, but even if it had, the company wouldn’t have been able to recover the VAT because there would be private use. But can it be sure it doesn’t need to charge VAT on the sale to the directors?

HMRC could argue that if the cars were sold directly to the directors and they were not used by them in the interval between the sale and the purchase, then they might still be qualifying cars.

The directors should drive the cars for a few days. There will then be private use so they will cease to be qualifying cars for the purchaser and no VAT would be chargeable.

IN SUMMARY
You can claim the VAT back on any early termination payment you make to the leasing company. The even better news is that you don’t have to charge VAT on any subsequent sale providing you allow free use of the cars to staff or directors before you sell them.

Contact the JRW Hogg & Thorburn team to discuss this further and any other related questions you may have.