Cross border car leasing is not really a new idea – it’s been around for a few years already but recent cases in the European Court have brought it to the front of everyone’s minds and given some comfort that it actually works.

Firstly, what’s it all about? It’s about leasing your car fleet more cheaply from Germany than from the UK using the different VAT rules for cars in Germany. Many people believe that all countries within the European Union have to have the same VAT rules but it isn’t the case – the EU lays down the big picture law and each country then decides how to implement that within its own VAT system.

A UK business leasing a car from a UK lessor pays 17.5% VAT on the leasing charges and only half of that VAT is recoverable because usually cars are used both for business and non-business purposes. That same business leasing a car from a German lessor pays 16% German VAT on the lease and the whole amount is recoverable under German VAT rules. So there is an immediate saving for the lessee.

From the lessor’s point of view, he has to source the car in the UK (right hand drive, UK specification etc) which means either leasing it from another leasing company (related or third party) or buying it. Whichever way, UK VAT will be charged. Our German Leaseco recovers it from the UK VAT authorities and it is recoverable in full because the car will be used in leaseco’s business.

The system of recovering VAT from other countries applies within the EU. There are some problems with it – the foreign VAT authorities may refuse to refund the VAT leading to costly litigation. There is always a cashflow cost because although it is possible to make quarterly claims, it often takes 6 months both in the UK and in Germany to actually get a refund. In addition, there will be a corporation tax effect and extra costs from setting up a leasing operation in Germany.

All of this needs to be built into the calculation of cost/benefit leading to the leasing company and their customer sharing the VAT saving in some way to take account of each of their additional costs.

The European Court of Justice has ruled in cases like ARO Lease and Cookies World that the structure works and that having cars which you own in another country, does not create an establishment for you in that country. The Court also ruled that it is not allowable for a member state to tax a transaction which has already been taxed somewhere else. This means that the UK could not apply VAT to the leasing charges from Germany as they have already been taxed by Germany.

The one cloud on the horizon is a very recent case from the UK VAT Tribunal concerning RAL Ltd and a complicated VAT planning arrangement implemented to save VAT on takings from amusement machines. RAL lost their case but they have appealed. In addition, Customs are currently attacking all VAT mitigation schemes as unacceptable and anti-social and in at least one Tribunal case, have been supported in their view. It is important therefore in any planning arrangement to implement very carefully indeed. Good specialist advice is a pre-requisite.

In terms of cost and benefit, assuming an average lease of £400 plus VAT per month, the saving in VAT terms is £420 per car per year. With a fleet of 1,000 cars, the saving is well worth having! In terms of costs, this kind of structure usually costs between £250,000 - £500,000 to implement – a hefty amount but costs will include those of your VAT advisors, lawyers, moving people to Germany, setting up an office and company in Germany etc.

Leasing companies are finding that their customers are putting pressure on them to consider introducing this kind of scheme – clearly customers with large fleets can exert a good deal of pressure. They can also go it alone and set up their own cross border leaseco which leaves leasing companies out of the picture – leasing companies are therefore best advised to look at the planning as soon as possible.

So overall, this is planning worth investigating – the savings are potentially very high and if you are a leasing company and you don’t implement the structure, your customers may leave you behind to do it themselves or find another leasing company more amenable to change.

Sue Rathmell
VAT Director
Deloitte & Touche