Have you purchased a company car on a PCP Lease? Can I recover VAT on the costs?
With PCP leases becoming more prominent and popular for both personal consumers and also small business owners looking for the right kind of financing for a company car, the tax treatment of the different transactions involved in a PCP lease can become complicated.
What’s the deal?
With a PCP lease, the customer usually has to pay a deposit, followed by a number of monthly payments over a number of years (usually between 3-5 years), with the option at the end of the lease period to either hand the vehicle back to the Finance company, or pay a final (and usually large) balloon payment, in order to then own the vehicle.
This form of financing is popular because it gives the consumer the choice at the end of the lease.
One of the most common questions accountants get asked, is can they recover VAT on a company car?
The simple answer is no.
But this answer assumes the vehicle has been purchased and hence is owned by the customer. The reason being that for a cost to be recoverable for VAT purposes, it has to meet the test of being wholly and exclusively for the purpose of business. With a company car, it is assumed there will always be personal use of the car (unless it can be proved that the car is kept at a business address overnight and not at the employee’s house), and hence doesn’t meet the test.
It’s different for leased vehicles – whereby 50% of the input VAT costs ( the VAT on the cost) can be recovered by a VAT-registered business.
But what about a PCP lease where the final balloon payment is made to then own the vehicle?
Well the simple way to explain it is that you break the transactions into two parts – the leasing part, where a VAT registered business can claim 50% of the input VAT cost. Then when it makes that final payment, it has effectively purchased a company car. So the Input VAT cost is blocked, and can’t be reclaimed.
How about if I sell that car at a later date?
If the VAT-registered business then sells that company car at a later date, then the sale is exempt from VAT as the recovery of input VAT has been blocked.
If you have any questions on this, please do not hesitate to us.