Business leasing has been around for many years now and is one of the most popular ways of getting a new vehicle or a fleet of vehicles for your business. This is because there are many benefits for why a business should choose to lease a car as opposed to buying one outright.
Such advantages include driving a new or nearly-new car fitted with the latest safety and in-car technology which not only helps protect staff on the road but also helps increase your company’s brand image. The affordable fixed monthly payments allow your business to easily budget costs, with no hidden surprises and ensure a more predictable cash flow.
However, the clear and positive tax implications of leasing a company car are an important reason why Business Contract Hire leasing has become so popular.
In this guide, we look at this topic in greater detail and you’ll find answers to questions such as ‘Are car lease payments tax deductible?’, ‘What is the VAT position for car leasing?’ and ‘How much is company car leasing tax?’.
We think it’s important that businesses understand the various car leasing tax implications so that they can make considered decisions for their specific situation.
The main advantage of Business Contract Hire leasing is that it’s tax-efficient and good for company accounts because the vehicle isn’t shown as a liability on your balance sheet.
Needless to say, your company’s balance sheet is key because that is what is used to judge whether people will give your business credit. Being able to obtain credit is hugely important for many businesses, and if you stretch yourself by buying a fleet of cars through traditional means then you will show an enormous level of liability on your books.
For example, if you purchased ten vehicles for £30,000 per car, that’s a fleet cost of more than a quarter of a million pounds and could have an impact on your business obtaining future credit for years.
With Business Contract Hire, vehicles are not shown as an asset or a liability on your company’s balance sheet, which gives you an advantage as it allows you to apply for more credit for other important business assets.
Controlling levels of corporation tax is a key part of any incorporated business’ financial planning. This means the question of whether car lease payments are tax-deductible is important. The good news is that for most types of lease, including business contract hire, car lease payments are tax-deductible for corporation tax purposes. However, the following stipulations should be considered.
Company car leasing payments are not fully tax-deductible if:
Since 1st April 2018, cars emitting 111/km or more of CO2 have been subject to a 15% tax disallowance on the amount of rental which can be claimed back against the business’ profits. Only 85% of the value of the car leasing costs qualify for tax relief. For cars contract-hired by a business with a CO2 output of 110g/km or less, there is no disallowance. Tax relief is fully available against the profits of the business – making contract hire highly tax efficient.
In the case of Business Contract Hire, capital allowances cannot be claimed as there is no option to purchase the car.
VAT is a key consideration for registered businesses and forms an important part of the overall assessment of business contract hire tax. Since 1995, companies that acquire cars using contract hire wholly for business use may recover the VAT.
If the vehicle has no private use and is used wholly for business purposes, a VAT-registered business can reclaim 100% of the VAT paid on the finance element. For example, this could either be a taxi, or a vehicle being used as a ‘pool car’, in which the vehicle is left on-site overnight and at weekends, and is driven by multiple employees for business purposes, such as travelling to meetings or training days.
Please be aware that HMRC really are hot on this, so please don’t take the risk of claiming back 100% VAT if the vehicle has been used for only one personal journey, as HMRC will find out.
For vehicles where there’s any degree of private use – which applies to the overwhelming majority of company cars in the UK – then only 50% of the VAT on the finance element can be reclaimed.
If your company takes out an optional maintenance package on the leased vehicle, 100% of the VAT can be claimed back on the maintenance element of the rental, provided this cost is shown separately to the monthly business contract lease amount.
Before we discuss whether a Sole Trader or a Self-Employed person qualifies for a business lease, let’s make sure you’re eligible to class yourself as a Sole Trader or Self-Employed.
An individual meets HMRC’s criteria for self-employment if they:
As a self-employed person, you might be wondering if you’re eligible to lease a car through a business contract instead of a personal one.
Qualifying for a business lease deal requires you to fall under any of the following categories:
If you're self-employed you can certainly pursue a business lease contract. You will, however, have to go through a legal process that is similar to the one you would complete if you were applying as a private individual.
You are exempt from paying company car tax if you:
As a sole trader/self-employer, you don’t have to pay company car tax because there is technically no difference between you and your business.
However, please note that if your business ever becomes Limited Company then you’ll have to start paying company car tax.
You must keep a record of all your motoring expenses that you have collected during the financial year so that you can provide proof to HMRC when you claim them back. If you’re self-employed, you have two options to claim back tax deductible expenses on business mileage:
Knowing what constitutes actual motoring expenses is important to keep an organised record of all your expenses. You can claim actual motoring expenses for:
You cannot claim for:
If you use your car for both business and personal purposes, you’ll need to calculate what percentage of mileage was used for business use before you claim your expenses back from the HMRC. You can work this out using the following calculation:
Business miles ÷ Total Miles x 100
Your tax-deductible expense can then be calculated by multiplying your business use against your total motoring costs.
Claiming expenses using the flat rate for business mileage covers the whole cost of buying, running and maintaining the vehicle which makes you ineligible to claim capital allowance.
You’ll still need to keep a note of how many business miles you travel, so you can provide the HMRC with your annual mileage.
The current flat rates for vehicles are:
|VEHICLE||FLAT RATE PER MILE WITH SIMPLIFIED EXPENSES|
|Cars & Goods vehicles first 10,000 miles||45p|
|Cars & Goods vehicles after 10,000 miles||25p|
It’s important to note that once you start using the flat rate for a vehicle, you can’t switch to the actual cost method.
If you run a limited company, you have the option of taking a business lease deal for your car, but it’s important to note that you’ll have to pay company car tax – also known as Benefit in Kind (BIK) if it’s used for personal journeys. Company car tax is based on the following criteria:
This means that the higher the value of the car, its CO2 emissions and your tax rate, the more company car tax you’ll be liable for. The flip side of this is that if you choose a highly efficient car, with a relatively low P11D value, you can save a lot of money. If you choose a fully electric, or very efficient hybrid car, you’ll only pay 1% company car tax from 2021/22, rising to only 2% in the 2022/23 tax year.
To calculate how much company car leasing tax you’ll have to pay each year you would use the following calculation:
P11D value of the car x CO2 Benefit-in-kind tax rate x Personal income tax rate
£40,000 (P11D value) x 25% (CO2 Benefit-in-kind tax rate) x 40% (Income tax rate) = £4,000 annual company car tax bill
You can find out the P11D and CO2 emissions rating for the car from the vehicle manufacturer’s website.
In summary, there are major tax benefits of business leasing, including the fact that the vehicle, or fleet of vehicles, are off your balance sheet.
This means that the liability of the vehicle does not appear on the company balance sheet, ensuring that this does not impact your chances of getting a credit line in the future.
You can also claim back 100% of the charges on the excess mileage fee and the maintenance agreements. This is because they count as a service charge.
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