This part of GOV.UK is being rebuilt – find out what beta means

HMRC internal manual

VAT Government and Public Bodies

Other local authority activities: miscellaneous (A to E): asset leasing arrangements


For many local authorities it is more cost effective to lease, rather than purchase, equipment such as large capital items. However, once a local authority enters into a lease early termination tends to be expensive because of redemption penalties and the like. The local authority may therefore purchase goods outright and then decide at a later date whether or not to lease them. This may be achieved in a number of ways but, whatever the outcome, the local authority owns the goods until it decides to take advantage of any lease facilities that may be available.

Alternatively the local authority may buy the goods as agent of the leasing company. This produces different VAT consequences, the most common examples of which are described below. Those listed under ‘Potential leasing agreements’ are likely to be the most frequent.

Potential leasing agreements

A local authority may have an arrangement with a leasing company which will provide potential leasing services up to a certain value for a range of assets. This arrangement exists to cover situations where the local authority does not know at the time of purchase whether it is more cost effective to lease the goods. A local authority may have similar arrangements in place with a number of possible leasing companies. Alternatively it may purchase an asset and subsequently enter into a new leasing agreement.

In such cases, all that has happened is that a range of equipment has been purchased which may, or may not, be the subject of a future lease. On this basis the goods are the property of the local authority. Consequently the local authority can recover any VAT incurred at the time of purchase subject to partial exemption rules. It is only when the goods are sold to the leasing company, and a leasing agreement comes into existence, that the local authority need account for output tax. Although, in some cases, a potential leasing agreement already exists there can be no question of any agency relationship because at the time of purchase the local authority has acted entirely on its own behalf.

Pre-arranged leasing agreements

The local authority enters into a contract with a leasing company for a specific item and buys that item on the leasing company’s behalf. This represents a principal and agent relationship to which section 47(2A) of the VAT Act 1994, may apply. For further information about this see Notice 700 ’The VAT Guide’ (external users can find the notice at…

There is also a supply of leasing services by the leasing company to the local authority. Leasing agreements may last up to 10 years. There is evidence to suggest that some authorities recover all the VAT attributable to the leasing costs in the first year of the agreement rather than over the period of the lease. They should be reminded that VAT can only be recovered as it is incurred.

Alternatively a local authority may identify equipment it requires and arrange for its supply to a leasing company. The leasing company pays the supplier and leases the equipment to the local authority. Title passes from the supplier direct to the leasing company.

In such cases there is a supply of leasing services by the leasing company to the local authority. There may also be a standard rated supply of services by the local authority to the leasing company in the form of arranging the purchase. This applies if the local authority receives a consideration which may be non-monetary.

Finally the local authority simply enters into a contract with a leasing company for a specific item which the leasing company sources and purchases on its own behalf. With the local authority uninvolved in the purchase of the goods this is a simple standard rated leasing arrangement between the local authority and the leasing company.