HM Revenue &Customs (HMRC) will be publishing new guidance early next year about how it plans to bring VAT into scope for certain charges associated with vehicle lease contracts. It has confirmed that it will not be looking to claim any VAT on a retrospective basis.
This announcement follows a campaign from the BVRLA and other trade bodies seeking urgent clarity on the issue of VAT and vehicle leasing.
It followed a Revenue and Customs Brief 12 (2020) (RCB12) published back in September, which brought payments for early termination into the scope of VAT.
This briefing note raised concerns around:
- Whether retrospective action could be taken to claim VAT on previous early terminations.
- Whether other payments (e.g. fair wear and tear or write-off charges) would also be brought into scope.
The BVRLA wrote to HMRC asking for three changes to RCB 12 (2020): no-retrospective action; clarity on what payments are in scope; and delaying the introduction until next year.
HMRC has now confirmed that it will not apply the change retrospectively but will instead apply the change from 1 February 2021. It will publish a new RCB note early next year giving more clarity on which payments will fall in scope of VAT. The September RCB guidance note will be withdrawn.
HMRC has already provided some early clarity on the broad terms in which VAT will be applied. Where a charge is made which is provided for in a contract but not directly linked to the intended supply, it will be outside the scope of VAT.
HMRC has used the example of a payment required from a customer when a car is written off during its hire. The payment lacks the necessary link to the intended supply of car hire, as the supplier does not agree in the contract that the customer can write the car off (even if the contract makes provision for such an eventuality). The necessary reciprocity is not present in order to link the supply and the consideration. The fee for writing off the car is therefore outside the scope of VAT. The same is true of charges for excess wear and tear (that is wear and tear greater than that consistent with normal use of the car in the hire period).
Also see the BVRLA’s Taxation campaigns page.