VAT on GAP

[thewinelake]

When one is looking at gap insurance for a PCH vehicle, should it be based on the ex-VAT price of the vehicle to get a depreciated value and then the contract payments INC-VAT?

I think the VAT element is the key to the greatness of PCH, but just wondering how that relates to GAP. If the vehicle is stolen/written-off, then Skoda are going to want to continue getting the agreed payments AND a car at the end (or a cash equivalent). Yes? No?

[David@GAPInsurance]

When one is looking at gap insurance for a PCH vehicle, should it be based on the ex-VAT price of the vehicle to get a depreciated value and then the contract payments INC-VAT?

I think the VAT element is the key to the greatness of PCH, but just wondering how that relates to GAP. If the vehicle is stolen/written-off, then Skoda are going to want to continue getting the agreed payments AND a car at the end (or a cash equivalent). Yes? No?

 

Other companies may approach this differently, but this is how we do it...

 

In simple terms... it depends whether you (if it's a personal lease) or the business (if it's a commercial lease) is VAT registered.  If you are, at the time of purchasing a GAP insurance policy we would need you to declare to us, the invoice/P11d value of the vehicle (and in order to calculate an appropriate Claim Limit,  the monthly rentals) EXCLUSIVE of the VAT you'll be claiming back as part of your normal VAT return. Note that this means that if you're only able to claim back 50% of the VAT as part of your normal VAT Return, we'll need you to declare the figures to us exclusive of 50% of the VAT.

 

If you are *not* VAT registered, you should declare to us, the invoice/P11d value of the vehicle and the monthly rentals INCLUSIVE of VAT.

 

The reason, is quite simple... in the event of a claim on a GAP insurance policy, the GAP insurance payout will not be paying you an amount of VAT that you would technically have previously claimed back already.  To do so would result in you having claimed back the VAT twice.

 

I hope this helps.

 

David

[thewinelake]

Thanks for the answer. Let's keep things simple - I'm not VAT registered.

However, in the event of the car being stolen, is the Leasing company essentially selling the car to me (and thus adding on VAT) or am I just compensating them for their loss (which perhaps wouldn't be liable for VAT)? 

It's perfectly reasonable that outstanding payments would have to include the VAT, it's just that the residual value element perhaps need not!?!

Maybe we need an accountant's view here...

[thewinelake]

...and while we're at it - if the plan is that I get a new car and pay the leasing company £6000 for 2 years and then give back a 2-year-old car.

 

If the car is stolen after 1 year, I'll still owe the leasing company £3000 (excluding the effects of initial payment) and will be obliged to give them something approximating to a 2 year old car in 12 months time.

 

The "gap" here is presumably the difference between what the insurance company value the 1 year old car at, and how much it really costs to get a 1 year old car?

[David@GAPInsurance]

Sorry for the delay.

 

I think you're worrying about the VAT unnecessarily...

 

The residual value of the vehicle at the time of loss, is not (strictly speaking) anything to do with you as that's a figure that your Motor Insurer will arrive at and then pay directly to the finance company... the issue this causes for you, is whether the amount paid out by your Motor Insurer is sufficient enough to clear the settlement figure (sometimes referred to as an "Early Termination Fee") of the PCH agreement.

 

Thus, it's important to understand how that settlement figure is arrived at.  In very simple terms, it normally works something along the lines of this:

 

In the event of your vehicle becoming a Total Loss, your finance company will calculate the remaining balance of the agreement.  This will usually be the combined sum of what they believe the vehicle to be worth (normally by referring to the likes of Glass' Guide or similar) and (separately) the as yet unpaid monthly rentals including VAT.

Your Motor Insurance will then pay (directly to the finance company) the amount that they (your motor insurer) believe your car to be worth.  This will either be sufficient to clear the remaining balance of the Contract Hire Agreement (and if so *some* finance houses will refund you the surplus funds - but most don't say if they will or not) OR it will fall short of clearing the remaining balance.

If it falls short, the terms of your Contract Hire Agreement will require you to pay one of the following:

1 - ALL of the remaining balance
2 - SOME of the remaining balance
3 - NONE of the remaining balance

 

Up and until January 22nd this year, I'd never come across a PCH Agreement stating that you would not be liable for VAT on the outstanding rentals (and I've been in this game for a fair while) but, as it happens, another BRISKODA member mentioned via PM on the 22nd that they believed their PCH agreement stated exactly that.  I've not seen the agreement myself, but, I guess it's not impossible.  My own PCH agreement with VWFS, certainly makes no mention that I may not be liable for the VAT on the outstanding rentals and my prior PCH agreement with Volvo (which incidentally, WAS terminated early due to the vehicle being written off) never either (the assumption being that if it didn't exclude VAT from a Total Loss calculation, it was payable) - in terms of the Volvo, the payout from my Motor Insurer actually fell £3,800 short of the settlement figure on the PCH agreement but their terms were such that I was liable for NONE of that, therefore the topic of how much VAT was or was not payable, wasn't even remotely raised.

 

Ultimately, the way we approach GAP insurance for a PCH vehicle, in terms of calculating what Claim Limit *may* be needed... is to tot up every penny that you're due to pay under the terms of the agreement from the upfront rentals through to the final monthly rental (inclusive) and THEN look at the terms of your PCH Agreement to see whether, in the event of a Total Loss, it states you're liable for (as above) all, some or none of any shortfall between the balance still outstanding at the time of claim and the amount paid out by your Motor Insurer.

 

The resulting figure should give you a good starting point.  For example,

• If your monthly rentals were £230.77 (inc VAT) and your PCH structure was 3 + 23, you'd be looking at paying back a total of £6,000 over the PCH term.

The worst case scenario (with some PCH companies taking up to 8 weeks to take the inital rentals payment by Direct Debit) is that the car is written off before you'd paid anything towards it.  In which case hypothetically, the Motor Insurer pays out whatever they think the car is worth directly to the finance company and the finance company still come after you for the £6,000 that you promised to pay them over the next 3 years.

 

Based on the above, given that most GAP insurance companies offer Claim Limit options in increments of £2,500, the natural Claim Limit we'd advise to be the minimum you should consider would be £7,500, which would permit some movement "room" in the event that there was a very early claim and the Motor Insurer paid out less than what the finance house thought the vehicle was worth.

 

Now let's look at what else may affect the outstanding balance

• If your lease states that they'd grant you say, a 4% discount (a somewhat common approach) on the outstanding rentals in the event of a Total Loss, the £6,000 figure above  would be reduced to £5,760.

The same advice above in terms of the Claim Limit applies.

• IF (and I'm convinced it's a big if) like the other BRISKODA member reported to me, you weren't liable for VAT on the outstanding rentals in the event of a Total Loss, the £6,000 figure above would be reduced to £5,000 AND if there's a further 4% discount that would be granted it would fall further to £4,800.

In this case, our advice would be exactly the same in that a £5,000 Claim Limit would potentially leave you short in the event of a very early claim (combined with a low offer from the Motor Insurer), therefore £7,500 should be the minimum Claim Limit you consider.

 

 

What does this mean in monetary terms though? Well... £4.85 in this example.

 

Consider.... let's say the vehicle's P11d value was £24,999.  Our prices for a 2yr GAP insurance policy (after BRISKODA forum discount) based on the Claim Limit options discused above, would be as follows:

• £5,000 = £62.46
• £7,500 = £67.31

The difference between the lowest and highest Claim Limit (discussed above) is £4.85 or, over the 2yr term, the equivalent of £2.43 per year.

 

*IF* you wanted to really push the boat out and take a more-than-you-should-ever-possibly-need £10,000 Claim Limit, the price only goes up to £71.03!

 

Of course, the thing to also note here is that each month when you make your scheduled repayment, your liability will be reducing by £230.77 (or £192.30 ex vat)... thus, it's worth rememberring that a GAP insurance policy for a PCH agreement works quite the opposite than a GAP insurance policy for a car that's being purchased given that with say, a "traditional" Invoice GAP insurance policy, the gap is small to begin with and gets bigger with time, whereas with a PCH agreement the potential gap is large to begin with and reduces over time.

 

Personally... I'd plump for the higher Claim Limit and for the sake of £4.85 or (if you wanted to take an overkill approach with £10k) £8.57 more (it may be a different figure if your vehicle's P11d value is higher than £24,999), put any concerns to rest.  Assuming of course (referring back to my ALL, SOME or NONE point above), your PCH terms are such that you need any GAP insurance cover at all - honestly it's worth checking the specific terms of your lease!

Best wishes

 

David

[thewinelake]

Thanks for the lengthy reply! I will take a look...

Btw, those prices sound very good indeed!

[David@GAPInsurance]

Thanks for the lengthy reply! I will take a look...

Btw, those prices sound very good indeed!

 

It's no trouble at all...

In terms of the prices, just note that those were based on a 2yr duration and a P11d/Invoice value of £24,999... if the value of your vehicle is actually greater than £25k or less than £15k the prices will change (though not usually by a great deal).  If you'd like me to do a custom quote specific for your vehicle, let me know.

[thewinelake]

I'll call you tomorrow, but those are very close to my numbers as it happens. Car is notionally about £19k+VAT (although I don't have any paperwork to prove it, strangely enough!), and the monthly payments are about £250ish (inc the dreaded VAT)

[David@GAPInsurance]

I'll call you tomorrow, but those are very close to my numbers as it happens. Car is notionally about £19k+VAT (although I don't have any paperwork to prove it, strangely enough!), and the monthly payments are about £250ish (inc the dreaded VAT)

 

I've been away since you posted the message above, but I did forward the post on to the guys in the office so that they'd expect your call when it came.

Did you get in touch with them and if so, so you have all the information you require?  Can I be of any further assistance at all?

 

David

[thewinelake]

Your guys got the business ;-)

[David@GAPInsurance]

Your guys got the business ;-)

 

I can't complain at that!  Thank you very much for your custom.

 

If I can be of any further help at all, please just ask.