Business Contract Hire VAT: Understanding the Basics
If you`re a business owner or manager looking to acquire new vehicles for your company, you may have come across the term “business contract hire VAT” in your research. Understanding how VAT applies to business contract hire can save you money and headaches down the road. In this article, we`ll explore the basics of business contract hire VAT.
What is Business Contract Hire?
Business contract hire is a type of leasing arrangement where a company hires a vehicle for a fixed period of time (usually 2-5 years) with a set monthly payment. At the end of the contract, the vehicle is returned to the leasing company. This is a popular option for businesses that need to regularly update their fleets without the hassle and expense of buying and selling vehicles.
How Does VAT Apply to Business Contract Hire?
Value-added tax (VAT) is a tax that is added to goods and services in the UK. When it comes to business contract hire, there are a few key factors that affect how VAT is applied:
– The type of vehicle: VAT is charged differently depending on whether the vehicle is a car, van, or other type of commercial vehicle. Cars are subject to a higher rate of VAT (currently 20%) than commercial vehicles (currently 20% for the purchase price and 0% for the lease payments). This means that if you`re leasing a car, you`ll pay more VAT than if you`re leasing a van or other commercial vehicle.
– The length of the contract: VAT is also charged differently depending on the length of the lease. If the lease is for less than 3 years, the VAT is charged up front (which means that the VAT is calculated on the total cost of the lease and paid in full at the start of the contract). If the lease is for more than 3 years, the VAT is charged on each monthly payment.
– The ownership of the vehicle: In a business contract hire arrangement, the leasing company owns the vehicle and the business hires it. This means that the leasing company is responsible for paying VAT on the purchase price of the vehicle. However, the business is responsible for paying VAT on the monthly lease payments.
How Can You Claim VAT Back?
If your business is registered for VAT, you may be able to claim back some of the VAT paid on your business contract hire payments. To do so, you must be using the vehicle for business purposes (such as transportation for employees or deliveries) and you must keep accurate records of the lease payments and VAT paid. You can claim back the VAT paid on the lease payments on your VAT return.
Conclusion
Business contract hire VAT can be a complex topic, but understanding the basics can help you make informed decisions about your vehicle leasing options. By considering the type of vehicle, the length of the lease, and how VAT is charged and claimed back, you can ensure that you`re getting the best deal for your business.