The Inland Revenue has changed its interpretation of the rules, which disallow part of the rental charge incurred on cars with a retail price when new of more than £12,000. The change is in the taxpayer’s favour.
What does ‘retail price when new’ mean? Formerly, the Revenue took the view that it referred to the manufacturer’s list price net of any discount, which was generally available. The Revenue considers that this figure should still be used in computing the disallowance if the lessee is not aware of the actual price paid by the lessor. However, following discussions with the car leasing industry, the Revenue now considers that where the lessee knows the actual cost paid by the lessor for the car when new, this can be used as the retail price when new in the disallowance formula. (The Revenue has stated that this interpretation only applies to the car rental disallowance; it does not affect other tax rules concerning cars, such as those on benefit charges for employees, which use different definitions of the price of the car.)
It appears that the new interpretation will apply to all open periods.
This change of interpretation is good news for lessees: the lower the ‘retail price when new’, the lower the disallowance. The tax saving as a percentage of the rentals payable will be:
T% x (A2 - A1),
where T% is the tax rate and A1 and A2 are the percentages of the rentals which are deductible before and after the Revenue’s change of interpretation. By way of illustration, if the cost of the car to the lessor is £15,000 and the list price is £16,500, A1 would be 86.36% (based on list price) and A2 would be 90% (based on lessor’s cost). With corporation tax at 30%, the tax saving would then be about 1.1% of the rental payable. For a typical lease of such a car, the saving amounts to about £100 per car.
For a business with a large fleet of leased cars, the cumulative tax savings could be quite considerable.
Businesses should ask their lessors to tell them the actual prices paid for their cars, and claim the increased tax relief.
For further information, or assistance in making revised claims, please speak to your usual KPMG tax contact.
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