Almost half of employers do not understand VAT car costs

Almost half of UK firms do not have a firm grasp of VAT-related company car costs.

One in five financial decision makers admit to not knowing how much extra VAT they have incurred since the 17.5% rate was reintroduced in January, while 23% claim the higher rate has generated no extra company car costs on their fleet, according to a survey conducted by YouGov for Lex Autolease.

However, when asked to consider where VAT has the biggest impact, a third (36%) of respondents were concerned about paying extra tax on fuel, while others expected to see additional VAT on maintenance (13%), leasing rates (19%) and funding (8%). The remainder (25%) could not identify which areas would be hardest hit or indicted none of these costs would be affected by the VAT increase.

Andrew Hogsden, senior tax consultant for Lex Autolease, said: “The overriding impression from the survey is that a large proportion of firms do not understand how VAT impacts on the whole life cost of company cars. This is not uncommon because having tax expertise in-house to keep on top of these issues can be impractical and expensive.

“For the majority of fleets, particularly the 40% or so that use contract hire, the underlying rental cost is unaffected by VAT changes. The same applies to business fuel and maintenance because generally VAT can be claimed back.

“But firms do need to pay attention to the funding element of their fleet leasing costs, which is subject to non-reclaimable VAT at 50%. So, for those running cars for business and private use, they will find the tax take is larger than last year.”

Another impact is the likelihood of higher National Insurance contributions (NICs) because this is linked to the car’s VAT inclusive list price. Lex Autolease calculates the combined impact of these two costs will increase an average company’s VAT-related contribution by around £3 to £4 per car, per month.

The company also said employees taking delivery of a car this year, compared to last, will experience higher benefit in kind (BIK) tax due to VAT-inflated list prices. This, could cost drivers an additional £2 to £3 per month.

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