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VAT rise to increase demand for contract hire

Date: 25 January 2011

The rise in VAT could persuade fleet operators to turn to contract hire instead of outright purchase, according to leasing and salary sacrifice specialist Tusker.

The SMMT has calculated that the hike in VAT from 17.5% to 20%, which came into force on 4 January, adds an average £300 to the cost of a new car and Tusker said for fleet operators that outright purchase vehicles, the increase adds 2.5% to acquisition costs as the VAT can not be reclaimed.

With capital allowances to be cut in April 2012 from 20% to 18% for cars emitting up to 160g/km CO2 and from 10% to 8% for those emitting more, Tusker said outright purchasing looked "increasingly less attractive".

On the other hand the firm claimed contract hire was becoming more appealing because fleet operators can reclaim half of the VAT on the finance element of their monthly rentals and all of the maintenance element VAT.

With the British Vehicle and Rental Leasing Association lobbying the Government to raise VAT recoverability to 70%, Tusker said the proportion of VAT operators can claim back may actually increase.

Tusker boss David Hosking said: "We fully expect 2011 to be the year of contract hire as more businesses wake up to the benefits it offers, not just in VAT recoverability but in cashflow management and more accurate budgeting."

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