You’re a business owner manager in need of a new car. Your friend says that you should lease the car to minimise costs and get tax relief in real time. Are they correct and what could be the savings?
A new car
There’s no right or wrong answer as to whether you should purchase a car outright or by hire purchase or simply lease one instead, it comes down to personal choice. But if you don’t want to pay a large sum upfront or become the proud owner of a depreciating asset, then leasing a car may be the solution for you. A lease will usually cover vehicle excise duty, insurance, breakdown cover, as well as servicing and repairs so you don’t have to worry about additional costs.
Benefit in kind
The first point to note is that it doesn’t matter how your business finances a company car, the tax position for you personally is the same. A car that is available to you for non-business purposes (which includes your ordinary commute) counts as a perk on which you’ll be taxed according to a combination of its CO2 emissions and original list price. Tip. The more environmentally friendly the car is, the lower your income tax bill will be. The tax implications for your company are much trickier.
Who’s the owner?
The tax treatment for your company turns on who the owner is. If the company owns or will own the car eventually (as with hire purchases), the capital cost of the car isn’t tax deductible, but the company can claim capital allowances (CAs) instead. The problem with CAs is that the car is likely to depreciate much faster than the rate of tax relief given, as it is a paltry 6%/18% on a reducing balance basis. Tip. Special treatment is available if you purchase a brand new fully electric car or a car with zero CO2 emissions by 31 March 2026, whereby the full cost is deductible against profits in the year of purchase (see Further information).
Leases
Where your company leases a car under a contract that won’t result in ownership, e.g. contract hire, it can claim a tax deduction for 85% of the rental/lease payments. Trap. Although the company may pay more at the start of the lease, for tax purposes the payments are spread evenly over the term of the lease.
Example. If the cost of the lease spread evenly over the term is, say, £5,000 per year, the company will get an annual tax deduction of £4,250.
Tip. If you choose a car with CO2 emissions of 50g/km CO2 or less, the full cost of the lease or rental charges is deductible.
A VAT treat
Generally, the VAT on the purchase of a car provided to an employee or director will not be recoverable, as there will almost always be some private usage of the vehicle.
However, if the car is leased, and there is private use, 50% of the VAT on the lease payments relating to the rental can still be recovered. Tip. If the agreement is inclusive of maintenance, 100% of the VAT can be recovered on that element as long as it is identifiable, i.e. it is shown on a separate line on the rental invoice.
Where a car is leased or rented such that the company will never own the car, the cost of the lease is tax deductible. The tax relief is spread evenly over the term of the lease and restricted by 15% for cars with emissions over 50g/km. As an added bonus you can also recover 50% of the VAT costs.