To lease or buy a Company car? HMRC adds to the dilemma

Whether a business should lease, or buy, a company car has always been one of those questions where the answer is “it depends on the circumstances”.

At least the VAT consequences have been more straightforward, until now.

If you buy a new car, you will pay VAT on the purchase price up front, and generally the VAT is not reclaimable.

If you lease a car, and you can never own it, you will pay VAT on each instalment and may be able to reclaim 50% of the VAT.

HP is treated as a purchase for VAT purposes, because the contract expressly contemplates that the customer will own the car at the end. But what about Personal Contract Purchase “PCP”?

PCP allows a customer to keep its options open. At the end of the hire period, the customer can either hand back the car, or pay a lump sum and keep the car.

Clearly the VAT treatment should be fixed from the start of the contract, based on what will happen in the normal course of events, and not dependent on what an individual customer does at the end.

HMRC saw PCP as akin to HP, because there was a possibility that a customer would own the car. It appears that some providers went along with this, but others treated their product as a lease for VAT.

HMRC lost a case on Mercedes’ “Agility” scheme. Mercedes sets the lump sum at a level where, on average, around 50 per cent of vehicles are purchased and 50 per cent are returned.

The European court ruled in 2017 that PCP is only akin to HP if the lump sum is low enough that buying the car is effectively a ”no-brainer”, assuming that the customer has access to the funds necessary to pay the lump sum.

HMRC has spent over a year deliberating and has just produced guidance on what PCP providers should do, based on their individual circumstances. Its guidance concludes with the statement that, where a provider amends its contracts, the customer must adjust its own VAT returns.

HMRC expressly contemplates that there may be some circumstances where a PCP provider has treated its product as a lease for VAT purposes, but because the option to purchase payment was low, this should always have been treated for VAT as a purchase, akin to HP. In these circumstances, a customer may have recovered 50% of the VAT on each payment, and now find that the contract is now re-characterised as a purchase, meaning that VAT shouldn’t have been claimed.

If this applies, will the provider indemnify any extra VAT cost suffered by the customer? More uncertainty.

To discuss this or anything else VAT related, please call Steve Chamberlain on 01793 818300 or send him an email

Of course, VAT is just one area of complexity when it comes to company vehicles. Quite often, the way in which a vehicle is purchased or financed can also have a direct impact on the corporation tax relief available for the costs incurred.

If you are looking to purchase a vehicle or would like to discuss the tax treatment of certain leases, please contact our corporate tax manager Stephanie Hurst on 01793 818300.