How will VAT rise affect company cars?

If you read nothing else, read this…

  • Accept leasing, purchase, servicing, maintenance, fuel and insurance costs – whether reclaimable or not – will rise as value-added tax (VAT) is going up.
  • Employers should audit their fleet funding and acquisition model now so they do not get caught out in January.
  • Do not necessarily rush into pulling forward orders into December just to escape the rise. It might be orders can still be slipped through in January
  • Consider moving from outright purchase to contract hire to gain in terms of reclaimable VAT.

Employers should act now to mitigate the effects of next January’s VAT rise on company car fleets, says Nic Paton

Predicting the future might seem a mug’s game, but there’s one thing you can be sure about: come December, UK high streets will be plastered with “Buy now and escape the VAT rise” posters.

Much like shoppers, one of the key decisions facing company car managers this autumn is whether to pull forward orders planned for January and avoid the increase in value-added tax (VAT) from 17.5% to 20%.

This and other tax changes announced in the government’s emergency Budget in June are likely to make employers focus on which funding mechanism is now most tax-efficient for their fleet and what the VAT rise is likely to mean when it comes to servicing, maintenance and fuel costs.

John Lewis, chief executive of the British Vehicle Rental and Leasing Association (BVRLA), says organisations need to plan how to respond to the VAT rise now, rather than wait until the run-up to Christmas.

“Will they bring forward purchasing agreements?” he says. “There will probably be some who pull things forward, but people have to be careful not to be panicked into buying cars in December when the rise actually takes place on 4 January.

“If employers were planning to replace vehicles in January or February anyway, it probably makes sense to ensure they have been invoiced in the first few days and have done all the paperwork. As 1 January is a public holiday, it may be a good idea to be booking space with a dealer, too.”

Fleet operators that buy vehicles outright will not only effectively see their acquisition or replacement costs rise by 2.5% – which the Society of Motor Manufacturers and Traders says will add about £300 to the price of the average car – but will be unable to recover this cost if the vehicle is used for private use as well as company business.

Of course, leasing firms are keen to point out that the VAT rise may make leasing or contract hire a more attractive option than outright purchase. Under contract hire regulations, there is a 50% block under which employers can reclaim half the VAT of the finance element on their monthly rentals and 100% of the maintenance element.

But organisations will have to accept that VAT paid on leased rentals will rise and, even where it is recoverable on maintenance and fuel costs, there could be a higher cash-flow burden. There is also likely to be a knock-on effect for fleet operators from the Budget’s 1% rise in insurance premium tax.

Salary sacrifice arrangements

The fact that salary sacrifice arrangements can be made for contract hire vehicles should mean it stays a relatively attractive option, despite the fact that costs will inevitably rise, says the BVRLA’s Lewis. But the rise in personal tax allowances announced in the Budget could mean staff on lower incomes might need to revisit how much salary they can legally sacrifice. Overall, the VAT rise is not “a paradigm shift in taxation”, says Ben Creswick, head of business development at Zenith Provecta.

“But it is a change that needs to be modelled and understood.” he says. “So it is important to sit down with your leasing company and work it through.

“Employers should see this as an opportunity for a proper fleet audit. Some outright-purchase fleets may be slightly better off going over to contract hire, but the important thing is to revisit the funding and acquisition model.

“Once they have undertaken their audit, some organisations may decide to go for a hybrid or mixed-funding solution.”

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