Vat and the end of a car lease
By Croner Taxwise
Q. My client has been leasing a car on a monthly basis and because the vehicle has been used for both business and private purposes, input tax recovery has been restricted to 50%. The lease agreement is coming to an end and although my client is prohibited from actually buying the car outright, the leasing company have advised him that he if finds a buyer for the vehicle then he will receive 95% of the sales proceeds as a “rebate of rentals”. Please can you clarify how this should be treated for VAT purposes?
A. The correct treatment of rebates of rentals is contained in HMRC’s guidance manual VIT54200 – Early termination payments and rebate of rentals. Therefore although you do not say whether your client is being charged an early termination sum, it would seem sensible to explain how both matters are dealt with as they often occur simultaneously.
When a finance lease is terminated early, the lessee is normally charged a termination fee. This charge may be offset by a ‘rebate’ based upon the residual value of the car and in some cases the rebate may exceed the termination charge and so the lessee is due a net repayment.
HMRC have agreed that the lessor may choose to treat the termination charge as either:
• An outside the scope compensation payment; or
• Consideration for a taxable supply of services
Whichever treatment they choose is then applied to the countervailing rebate. Where the lessor treats the termination payment as taxable, they often offset the rebate against the termination payment and issue either a tax invoice for a net termination payment or a tax credit note for a net rebate as appropriate.
If the lessee is charged a net termination payment, this cannot be seen as consideration for the supply of the car, rather a charge for getting out of the lease, so the input tax is 100% recoverable, subject to the normal rules. Where there is a net rebate, as in your client’s case, the lessee who has incurred a 50% restriction on the rental charges need only adjust 50% of the VAT credit.