One of the questions we are frequently asked by small businesses is whether or not to buy a car or van outright, 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.
If you buy a car outright for your business, the cost of the car will attract Capital Allowances of currently 8% each year on a reducing balance basis. If the car costs £15,000 at purchase, in the first year you will receive £1,200 allowances, in the second £1,104, and so on. If your particular choice of horse-less carriage has emissions of less than 130g/km of CO2, (110 g/km from April 2018) the rate is 18% and for new cars with emissions less than 75g/km (including electric) there is a special rate of 100% Capital Allowances. Vans are slightly different in that they are classified as plant and can be included as a purchase for the purpose of the Annual Investment Allowance (which grants 100% relief for total purchases in that year of currently £200,000) and 18% writing down allowance thereafter. (Incidentally whether a double-cab pick-up is classed as a car or plant is down to the load capacity – but to complicate things, sometimes even the weight of the tonneau can affect the result)
With Capital Allowances therefore, the full cost of the car is allowed to you (eventually), subject to any proportionate non-business use restrictions. Equally the costs of running a car are also allowable in your annual accounts, subject again to any non-business use.
When you purchase a car or van under a finance lease 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, you are treated as if you had purchased the car outright. 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, either contract or operating, this means that the car company retains title of the vehicle and legally the vehicle is not yours (The V5 document from the DVLA is a record of the keeper, not the legal owner). Therefore, under a lease agreement you cannot claim any Capital Allowances. Instead, the lease payments will be allowable deductions directly against tax but to add to further complications if you operate on an accruals accounting basis (not cash basis) there is then a 15% restriction on the lease payments being allowable when the CO2 emissions exceed 130g/km. There are further complications for long funding leases, rebate schemes and those for qualifying hire cars (where there is no option to purchase at the end of the agreement) and also occasionally when you are required to make a large up-front payment. All the usual costs of running a car in this way (e.g.: fuel & servicing) which you need to pay are still subject to a restriction for any non-business use.
So which is best? Well apart from choosing a motorbike (which by and large are a lot simpler tax wise) it will depend on the deal offered at the time, your likely usage of the vehicle and several other factors such as personal preference and availability of cash. 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, mileage 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 Range Rover might have a “No Off Road” restriction which probably is not much good if you are a farmer). Read the small print to find out. If everything else is comparable, then owning the vehicle outright and claiming Capital Allowances will spread the cost of the car over several years. A finance agreement, however, will tend to give allowances sooner against tax. This would be preferable in the case of very expensive cars which would otherwise only attract minimal tax relief each year, but is likely to cost more in the first place. 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.
As is often the case, tax planning is not the be-all and end-all and several factors need to be considered away from the pressure of the car showroom before deciding on which method of purchase is preferable.
Now where did I put that brochure for the new Mustang…