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VAT: early termination of car leases

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VAT Notice 700/64: Motoring expenses has been updated to reflect HMRC’s change of policy on the VAT treatment of early termination payments under a lease which, from 1 April 2022, are generally treated as subject to VAT.

Where a business terminates its lease early, the leasing company will treat the termination payment and any associated rebate of rental as taxable for VAT purposes. It will normally offset the termination payment against the rebate and issue the business with a VAT invoice for the difference.

From 1 April 2022, if a business terminates a contract early, any early termination fees charged are regarded as further consideration for the contracted supply.

The 50% block (which prevents recovery of 50% of the VAT charged, to cover private use of the car) will apply because the termination charge is additional charge for the rental of the car.

The change was also confirmed in Revenue and Customs Brief 2 (2022): VAT early termination fees and compensation payments.

Issue: 1573
Categories: News