Financial Focus On...To lease or not to lease - that is the question...
19th March 2014 by Robin Beadle
One of the questions we are frequently asked by small businesses is whether or not to buy a van or truck on HP, lease it or some other combination. Nowadays there are seemingly as many ways for you to part with your money as there are models to buy. This month’s article attempts to set out the tax treatment of the more common choices, on the basis that you are using the normal accruals basis of accounting.
First, let’s look at how you get tax relief for an asset you own. When a business purchases an asset and that asset is likely to be around for a number of years, the cost of the asset is not, technically, allowed as an income deduction against tax. Instead, the cost of the asset is relieved by way of “Capital Allowances”. Until January 2015, every business is entitled to an “Annual Investment Allowance” (AIA) of 100% on expenditure of up to £250,000 per annum and so unless you are planning on buying a number of trucks, or you have already utilised the AIA elsewhere, most businesses will attract 100% relief for the acquisition of a new van or lorry. Once you exceed the AIA, the balance of the cost is written down at differing rates from 8% to 18%. So were you to purchase a new van for, say, £25,000 and have made no other capital purchases in the same year, you are likely to receive a capital allowance in your accounting year (not tax year) of purchase of £25,000.
With Capital Allowances therefore, the full cost of the new vehicle is allowed to you either in the year of purchase (if the cost falls within the AIA) or eventually over several years, both subject to any non-business use. Equally the costs of running a van or truck are also allowable in your annual accounts, subject again to any non-business use.
When you purchase a van or truck under a finance agreement though, things start to get rather more complicated.
If the “finance” part is purely a loan and full title of the vehicle passes to you at the start (for example using cash, a bank loan or HP), you are treated as if you had purchased the vehicle outright and can claim the Capital Allowances. The loan interest element of the payments become allowable for tax in your annual accounts, subject to any private usage restrictions.
If you have a lease agreement of a regular term (generally of up to five years in length) - either contract or operating - this means that the leasing company retains title of the vehicle and legally the vehicle is not yours. Therefore you cannot claim any Capital Allowances. Instead, the lease payments (including VAT) will be allowable deductions directly against tax as you are effectively renting the vehicle at this stage. To add to the complications, if you are required to make a large deposit at commencement of the lease, this requires special tax treatment as well. (For leases in excess of five years, it is assumed for tax purposes that you had acquired title and you do then obtain capital allowances but at the expense of the “hire” element of any leasing costs).
So which is best? Well it depends on the deal offered at the time, your likely usage of the vehicle and several other factors such as personal preference. Acquiring a vehicle outright means that you own it – which you may not ultimately do at the end of the lease agreement. A lease agreement may put certain usage or maintenance restrictions on the vehicle – after all, the lease company may have to sell it themselves at the end of the term. (For example, a 4x4 based van may have a “No Off-Road Use” clause in the paperwork which would be very hard to adhere to if you were a farmer). Read the small print to find out. If everything else is comparable, then I would say that currently a low or zero-rate HP agreement allowing you to own the vehicle outright and claim Capital Allowances will often be best as this accelerates tax relief at the same time as spreading the cost over several years, but this is from a tax point of view, assuming that the options are otherwise equal. Lease hire effectively means that you are almost renting the car. If you cannot afford the lease payments in the first place, worrying about the tax treatment becomes secondary.
Finally, a couple of important points. Please make sure that the double-cab pickup, or 4x4-based van you have your eye on does actually qualify as a van (plant) and not as a car. (For twin cab pick-ups this is usually dependent on the payload capacity but be careful of any tonneau covers that may eat into your capability. The rules are different for car derived vans. HMRC love arguing these points if they can). Also, you will have noticed that I have consistently spoken about vans and trucks in this article. Tax relief on car leasing and ownership is a completely different matter nowadays, a lot more complex to explain and even more restrictive in the relief. As they almost have to be worked out on a case-by-case basis, I would therefore emphasise that they are most definitely outside the scope of this article.
As is often the case, tax planning is not the be-all and end-all and several factors need to be considered away from glossy brochure before deciding on which method of purchase is preferable.
For further information on any of the above points or to discuss your tax affairs generally, please do not hesitate to contact Robin Beadle.
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