Under a lease or hire agreement VAT is due on vehicle rentals at the standard VAT rate (20% at the date of publication).

Subject to the normal rules of VAT recovery for VAT registered organisations, the lessee can usually recover VAT on vehicle rentals, but this is subject to a restriction in the case of passenger cars.

For passenger cars a maximum of 50% of the VAT on the rental is recoverable, even for VAT registered organisations that would normally be able to recover all of the VAT on business costs.

The restriction on VAT recovery applies to all passenger cars with the exception of those used wholly for business purposes. Effectively this means that typical company cars are subject to the 50% restriction, but pool cars which are never used for private motoring are not subject to the restriction.

Rental Rebates

Where a lessee receives a rebate of lease rentals (effectively a refund), the VAT refunded with the rental rebate is treated in a similar way to the original VAT paid.

In effect, because the lessee could not recover 50% of the VAT incurred on the original lease rentals only 50% of the VAT refunded with the rental rebate is passed on to HM Revenue & Customs.

Maintenance

The VAT recovery restriction applies to the lease/hire rental, but if any maintenance services provided by the leasing company are supplied under a separate maintenance contract which is distinct from the vehicle lease contract, the VAT recovery restriction does not apply to maintenance payments.