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VAT IN RELATION TO HIRE PURCHASE OR LEASING OF VEHICLES
latever method of vehicle replacement the operator adopts the finance use will be called upon to solve what problems might arise. It will pay to .ange matters so that delivery, is effected near the end of the operator's in tax period, however, if hire purchase is your choice by Johnny Johnson
4MERCIAL VEHICLES, hitherto ipt from purchase tax, will be subject ie VAT which replaces it on April 1. rficially, this should add nothing to the icial burden of the operator because he be able to set the tax he pays on the hase against the tax he collects from his )mers.
aere is, however, the consideration he might have to wait a month or two !claim the VAT content of the vehicle hase price and this might be a good 311 for timing vehicle replacement fully.
this context, it ought to be borne in 1 that the tax raised on the price of the zle is reclaimable in the operator's own !-monthly tax period which includes late of the invoice whether he has paid Dill or not.
,utright purchase, if handled judiciously an eye on the end of the operator's tax should present few problems. But t of hire purchase or leasing? So far Mance houses are concerned, finance nich is classified as exempt but hire ;hase and leasing certainly are not.
cginal hp increases a this stage, the probability is that hire :lime will cost marginally more at each ment. This will, however, be more than et by what happens at the initial Lsaction.
n the case of a hire purchase agreement, T will become due on the whole purchase a on delivery of the vehicle. This will be aimed almost immediately by the wise rator, who has timed his vehicle replaceit correctly, with consequent cash-flow efit,
rake this simple example of a vehicle Ling £10,000 for which the finance house uires a deposit of £2000. The real capital involved is £10,000 + £1000 VAT-or ,000. When the operator has reclaimed
the tax the effect will be that he will have contributed £1000 and the finance house £9000 though the agreement has been made on only £8000. Moreover, the finance house will have to wait for its money to be paid back over the period of the agreement.
Originally, the finance houses considered a scheme in which the operator handed back the tax refund to them when it had been received. This would maintain the original balance and help to stabilize hp charges. This idea has been dismissed as impracticable, however, and the probability is that the hp repayment interest rate will be "loaded" slightly to take the new circumstances into account.
Set against the advantageous £1000 favourable cash flow or the necessity to find only half the original deposit, whichever viewpoint suits the operator, the advantage appears to be with the hire purchaser.
The procedure for payment of VAT in the case of a vehicle leasing agreement is, however, very different. Here the tax becomes due as each leasing payment is made and not in one sum on the delivery of the vehicle.
In his turn, the operator will be able to claim back the VAT content of each periodic lease payment. To facilitate this, the tax authority has agreed to allow the finance, houses to issue annual summary invoices showing the lease payment due each month or quarter plus the amount of VAT payable.
Each monthly or quarterly figure will be regarded by the Customs and Excise as a tax invoice on which the operator will be. able to reclaim the tax amount. Normally, three monthly or one quarterly tax invoices will fall within each one of the operator's own tax periods.
Standing orders for payment to the finance house, however, will merely show the gross amount due.
Because the tax becomes due when the vehicle is delivered under hire purchase agreements, existing agreements will not be affected. Leasing and hiring agreements already in existence will feel the effect of the introduction of VAT. In these cases, all outstanding periodic payments will be increased by 10 per cent to meet VAT requirements.
Because tax paid on both hire purchase and leasing agreements is recoverable by the operator, there will be no merit in changing from one to the other or even terminating existing agreements and renegotiating.
From the finance house point of view, however, there might be an advantage in negotiating a loan agreement with an operator. This transaction would then fall within the exempt category of finance. On his part, the operator might feel that he ought to ask for 10 per cent more on loan to account for the tax he will be called upon to pay on the purchase. This might depend on whether the purchase is sufficiently near the end of the operator's value-added tax period to ensure a quick return of tax thus avoiding an adverse cash flow for a month or two. It might even be a way of raising a bit of extra capital if such is required.
In considering the effect of VAT on vehicle acquisition, it might be as well to consider also the disposal of depreciated vehicles.
Whether sold separately or part exchanged, it will be necessary for the operator to raise a tax invoice in respect of the sale of vehicles. The effect on the trade-in price of secondhand vehicles has yet to become apparent but it could result in a reduced trade-in price and consequently a reduced VAT amount. The two together might equal the current price which could be obtained in a "straight" deal.
To summarize the matter, therefore, it seems that whatever method of financing vehicle purchase the operator adopts in hire purchase and leasing the problems remain with the finance house and the operator will not suffer.