Are you considering whether to buy or lease a company vehicle? Both options have their pros and cons, and it’s important to know the tax implications beforehand. Read on to find out how each decision affects your business!
Buying the vehicle outright
The main benefit of buying the vehicle outright is that you immediately own the vehicle and aren’t tied into a contract over several years. There are no rules on how you are to use the vehicle nor are there any mileage allowances like there are with leasing.
The reason why a lot of business’ don’t buy a company vehicle outright is the upfront cost. It is a significant investment, and your company must have the cash flow to afford the purchase. Additionally, in most cases, its value will depreciate quickly, and some businesses want to avoid tying up capital in a depreciating asset.
Tax relief and VAT reclaimable
In the first year of purchase, you can claim capital allowances on the cost of the vehicle and potentially reclaim VAT, depending on the type of vehicle and its use. For example, if you purchased a van, an electric vehicle and, in some cases, a pickup truck, you could claim corporation tax relief on 100% of the cost.
The rules on claiming corporation tax relief on cars is slightly more complicated as it depends on their CO2 emissions, but capital allowances will still be available at either 18% or 6% of the cost.
You can reclaim 100% of the VAT on a van and, in some cases, a pickup truck, used for business purposes. In general, incidental private use doesn’t restrict the amount of VAT you can claim.
For a car, 100% is only reclaimable if it is used exclusively for the business and is not made available for private use. HMRC has a very strict stance on this so there are limited instances that this is applicable.
Hire purchase agreement
A hire purchase agreement is an alternative to purchasing a vehicle to own if your business does not have the cash flow to afford the full cost upfront or you prefer monthly payments. It allows you to split the cost of the vehicle over a fixed term and, at the end of the term, you own the vehicle. The only upfront cost is the VAT (and sometimes a small admin fee).
Tax relief and VAT reclaimable
In terms of corporation tax relief and reclaiming VAT, this is the same as if you were buying the vehicle outright! You will also get corporation tax relief on the interest paid each year.
Lease
The last option to consider is leasing a company vehicle for a fixed term. This is ideal for companies that don’t wish to own the vehicle and deal with the problems that come with it!
Depending on the contract, a lot of companies will require an upfront payment to cover a few months’ rent which is a lot easier on cash flow than paying the full cost up front. You also know exactly what your monthly payments are over the fixed term, so it allows for future planning.
Some leasing contracts will include maintenance and servicing, so you don’t need to worry about wear and tear of the vehicle. Be aware of mileage restrictions though as exceeding the mileage allowance will incur additional charges.
Tax relief and VAT reclaimable
Corporation tax relief is available on both the initial and monthly payments, with a restriction of 15% on cars depending on their CO2 emissions.
In most cases, only 50% of VAT on leased cars is reclaimable to allow for private use. As mentioned previously, HMRC has very strict stance on reclaiming VAT back on cars so there are limited instances in which 100% of the VAT can be reclaimed.
What option suits your business?
As you can see, there are multiple options available if you’re considering whether to buy or lease a company vehicle, and your choice should align with your company’s financial situation, operational requirements, and tax planning considerations. You also need to consider the potential benefit-in-kind implications for any employees or directors using the vehicle. MJ Kane and Co Accountants can help you withassessing these factors carefully to help determine the most suitable option for you and your business.
Author: Rachel Leckey
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