Why does my daughter have to pay 20 per cent VAT on a PCP lease vehicle, not 17.5 per cent?

My daughter has a vehicle on a PCP from Leasedrive. The three-year agreement finishes on 1 November 2013. They say that she will have to pay an additional settlement to compensate them for the fact that VAT increased from 17.5 per cent to 20 per cent during the lease period. She contracted to cover 60,000 miles but she will do nearer 45,000 miles, but they say: "Unfortunately we do not refund any "under usage mileage". This seems a very one-sided and therefore unfair contract. Is this normal? Can she do anything about it?

Asked on 26 October 2013 by MK, Poynton

Answered by Honest John

Because she will be paying the balloon payment during the 20 per cent VAT regime, 20 per cent VAT is due on it. The finance company did not get the car at the cheaper VAT rate of 17.5 per cent because it reclaimed that. It will have to pay VAT at 20 per cent of the residual payment back to HMRC, so is charging 20 per cent to the customer.

Tags: vat lease cars pcp

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