New Car Buyers Can Still Beat The Rise In VAT

Blog post   •   Feb 03, 2011 13:59 GMT

All car shoppers are most likely aware that VAT increased on January 4. The question now is, how can people and businesses minimise the impact of the VAT increase when they are obtaining a new car?

The starting point is that businesses can avoid 100% of all VAT by using a car finance product called contract hire (a form of car leasing). If the vehicle will be used 100% for business purposes and not for any recreational/personal reasons, then the business acquiring the vehicle can avoid paying any VAT whatsoever. If, however, the vehicle is used partly for business and partly for personal reasons (e.g.; a company car) then the business will only have to pay 50% of the cost of VAT. Therefore, if you operate a business and are looking to obtain a new van you can totally avoid the increase in VAT by using contract hire.

For those not familiar with contract hire, it is a form of car leasing that allows a business to lease a company car by simply making a fixed monthly payment for a period that is typically between 2 and 4 years. At the end of the lease contract, the business returns the old company car and obtains a new car and lease contract. Occasionally, here may be an opportunity to purchase the vehicle at the end of the period if done through a third party.

If you are a car shopper that is looking for a new car but will use it for personal reasons, avoiding VAT becomes much more difficult. There are really only two options:

1. There are some dealers and manufacturers offering prices fixed at 2010. These can be found by looking for deals on the internet. Alternatively, you can haggle with dealers to offer a price using the old VAT rate.

2. Utilise a salary sacrifice scheme with your employer. Many large companies that offer company cars also offer a salary sacrifice scheme for employees to obtain a car. These work on the basis that the employee chooses an amount per month that they would like to spend on repayments for a car (e.g.; £300) and then negotiates with their employer that they reduce the monthly salary by £300 and the employer becomes the entity that signs a car leasing contract which is actually a contract hire product. In effect, this enables a consumer to gain the benefits of the reduced VAT offered to businesses. However, you should be aware that there are other potential taxes that you and the business might be liable for (e.g.; road tax etc).

Whatever your scenario, personal or business, there are still options that are tax efficient for you. You ought to consider these fully before buying your next car.