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HMRC internal manual

Business Income Manual

Specific deductions: travel and subsistence: cars - restriction of hiring costs: hire periods beginning before 1/6 April 2009: calculation

S48-S50 Income Tax (Trading and Other Income) Act 2005, S578A, S578B Income and Corporation Taxes Act 1988

This guidance applies to expenditure incurred on hiring cars where the hire period began before 1 April 2009 for Corporation Tax purposes and 6 April 2009 for Income Tax purposes. See BIM47775 for the election to apply the rules described in this guidance where the hire period begins on or after 1/6 April 2009 but before 1/6 April 2010.

The restriction

The allowable element of the ‘rent’ for the car is restricted to:

Expenditure x (£12,000 + P) / 2P

where P is the retail price of the car when new.

The expenditure can be wider than just the actual rent. It includes any element of unrelievable VAT.

In Britax International GmbH v CIR [2002] 74TC662, Parker LJ said at paragraph 72:

‘I also bear in mind that the concept of “expenditure” is wide enough to include payments which may not strictly be regarded as rentals.’


Company E rents a car. The car has a retail price when new of £20,000 and the company pays a rent of £5,000 a year. The company recognises that they have to restrict the amount of relief claimed. The allowable rent is limited to:

£5,000 x (£12,000 + £20,000) / (2 x £20,000) = £5,000 x £32,000 / £40,000 = £4,000.

The company has to restrict their claim to £4,000.

What is the retail price when new?

New cars are ’unused and not second hand’. A car can be accepted as unused and not second hand even if it has been driven a limited number of miles for the purposes of testing, delivery, test driven by a potential purchaser, or used as a demonstration car.

Following discussions with the British Vehicle and Rental Leasing Association, HMRC takes the view that where the lessee knows the actual price paid by the lessor for the car when new, this can be used as the retail price when new.

If the lessee does not know the price paid by the lessor then they should use the manufacturer’s list of suggested retail prices net of any discount available generally; that is, not just available to a particular group of customers or chain.

In either case, the price to be used is inclusive of extras, delivery and VAT.

This interpretation only applies to this rule. It does not affect other tax provisions on cars, including the benefit charges for employees, which use different definitions for the price of the car.

Maintenance agreements

If the rental agreement separately identifies charges for costs such as maintenance in the lease agreement, then these costs should be excluded. The restriction is only applied to the rental payment.

If there is an all-inclusive rental payment, which includes costs such as maintenance, then the whole of the payment is included as ’expenditure’ when calculating the restriction.

Hire/lease purchase

If the car is held under a hire/lease purchase agreement where:

  • ownership does not pass automatically at the end of the contract; and
  • there is no purchase option or the price payable under a purchase option is more than one per cent of the retail price when new,

the restriction is applied to the allowable expense computed in accordance with the guidance at BIM45350 onwards.

The restriction applies to the total amount for which relief is claimed; that is, both the finance charge element and the ’depreciation’.

Rebates and reductions in rent

It is possible that after the amount of the rent allowable as a deduction has been restricted, a part of the rent is rebated or the amount of rent due is reduced.

In this situation the amount of the rebate or reduction in rent which is taxable is reduced by the same proportion as the rent was reduced.


At the end of the lease, Company E in the example above received a rebate of £2,000. The allowable fraction of the rent was:

(£12,000 + £20,000) / (2 x £20,000) = 4/5

Only 4/5 of the rebate (that is 4/5 x £2,000 = £1,600) is taxable.