The HM Revenue and Customs have updated its guidelines on the VAT treatment of early car rental lease terminations.
Starting 1 April 2022, any fees charged before the early termination of a contract are treated as additional consideration for the agreed supply.
The 50% block is applicable since the termination charge is an additional fee for the car rental. You cannot normally refund 50% of the VAT paid if you lease a ‘qualifying car’ for commercial purposes. The 50% block is intended to cover the personal usage of the vehicle.
If VAT on your rentals is capped to 50%, you just need to amend 50% of the VAT credit in your VAT account.
The leasing company will classify the early termination payment and any related rental rebate as taxable if you choose to end your lease.
In most cases, the leasing company:
If you terminate your lease early, the leasing company will treat the termination payment and any associated rebate of the rental as taxable. It will normally offset the termination payment against the rebate and issue you with a VAT invoice for the difference.