Car VAT showdown

The protracted legal dispute between car leasing companies and Customs & Excise over VAT recovery on company cars finally reached the European Court last week (12-19 November).

If Customs loses the chancellor could be forced to refund billions of pounds in overpaid VAT. The hearing opened last Thursday and was due to end today. A ruling is expected within the next two weeks.

Customs & Excise has blocked attempts by businesses to recover VAT on car fleets. Four companies – Allied Domecq, Royscot Leasing, Royscot Industrial Leasing and TC Harrison Group – have led the legal action but many other businesses have lodged substantial claims.

‘Where there is business use of a car, it seems only reasonable for a business to recover a proportion of the VAT incurred on the purchase of that car,’ said Richard Watson, a PricewaterhouseCoopers tax partner.

Currently, 50% of UK company car fleets are still bought rather than leased.

VAT recovery on cars was blocked when the system was introduced in 1973, yet it was allowed for other business assets. The rule was meant to be temporary, pending agreement of a final system of deduction which was due to be in place by 1982. But a final system of reclaiming the money was never agreed.

The original rules were relaxed in 1995, when VAT recovery was permitted if cars were intended for 100% business use. For mixed business and private use cars, no VAT recovery is allowed on purchase, while businesses that lease cars may recover half the VAT, irrespective of the actual proportion of business use.

‘The EU has taken years to agree what VAT businesses should be allowed to recover – across a whole range of categories, not just cars,’ Watson said. ‘UK Customs says we are stuck with the rules we had when VAT was introduced, but subsequent directives have said businesses should be allowed to recover VAT in proportion to business use.’

Related reading