Private use of leased cars – are VAT changes afoot?

28 November 2016

We understand HMRC are now looking to withdraw the Treatment of Transactions Order. Have you checked your relevant policies to ascertain if any vehicles might fall into the category of arm's length?

Background

The Council of the European Union has agreed to extend to 31 December 2019 the derogation authorising the UK to apply a 50 per cent input tax restriction on charges incurred for the hire or lease of a car where the car is not used entirely for business purposes. The extension of the derogation restricting input tax recovery also removes the need for the hirer/lessee to keep records of the private mileage travelled in business cars and to account for tax on the actual private use of each car.

We have also recently received guidance from HMRC that they do not believe the extant Treatment of Transactions Order (SI1993/630) is good law. This has caused considerable commotion in the NHS sector where, historically, the 50 per cent input tax restriction does not legally apply. Furthermore, HMRC has formally put forward the proposition that output tax should be accounted for where a car is provided on an arm’s length basis.

Why is this important?

Whilst not included in the Autumn Statement, we understand HMRC are now looking to withdraw the Treatment of Transactions Order plus there is risk that cars provided to, and used by friends and family, on a commercial basis may result in an output tax charge. It would be sensible timing to check your relevant policies and ascertain if any vehicles might fall into the category of arm’s length irrespective if VAT recovery has been restricted by the authority.