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Tax Advantages of Business Car Leasing

Business leasing has been around for many years now, and it is one of the most popular ways of getting a new vehicle, or a fleet of cars or vans, for your business. This is because there are many benefits for a company to lease a car instead of purchasing 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 without hidden surprises and ensure a more predictable cash flow.

However, the clear and positive tax implications of leasing a company car are an essential 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 vital that businesses understand the various car leasing tax implications to make considered decisions for their specific situation.

Does leasing a vehicle help my company accounts?

The main advantage of Business Contract Hire leasing is that it’s tax-efficient and suitable for company accounts because the vehicle is not shown as a liability on your balance sheet.

Your company’s balance sheet is vital because that is what is used to judge whether people will give your business credit. Being able to obtain credit is hugely essential for many businesses. If you stretch yourself by buying a fleet of cars through traditional means, 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.

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Is leasing a car tax deductible?

Controlling levels of corporation tax is a crucial part of any incorporated business’ financial planning, and the question of whether car lease payments are tax-deductible is essential. The good news is that for most types of leases, including business contract hire, car lease payments are tax-deductible for corporation tax purposes. However, it would be best if you considered the following stipulations.

Company car leasing payments are not fully tax-deductible if:

• The car has CO2 emissions of over 110g/km
• The rentals aren’t evenly spread over the life of the lease, or
• The lease has clauses that may allow the company to own the car eventually

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. There is no disallowance for a business that contract-hires a vehicle with a CO2 output of 110g/km or less. Tax relief is fully available against the profits of the company – making contract hire highly tax efficient.

With Business Contract Hire, capital allowances cannot be claimed as there is no option to purchase the car.

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VAT and Business Contract Hire

VAT is a crucial consideration for registered businesses and forms an important part of business contract hire tax assessment. 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 is 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.

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Are you a Sole Trader or Self-Employed?

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:

• Own a business and work for themselves

• Work for multiple clients

• Provide the relevant and sufficient tools and equipment to finish a job

• Agree on fixed prices for their work with employers or clients

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Who qualifies for a Business Lease Deal?

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:

• Sole Trader/Self-Employed
• Partnership
• VAT Registered Business
• PLC
• LLP (Limited Liability Partnership)
• Limited Company
• Charity
• Local Authority
• Government/Embassy

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.

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Do I have to pay Company Car Tax if I’m Self-Employed?

You are exempt from paying company car tax if you:

• Are the proprietor (owner) of your own business

• Are a partner or a small partnership

• A member of a Limited Liability Partnership (LLP)

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.

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What expenses can I claim if I'm self-employed?

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:

What you can claim for

Knowing what constitutes actual motoring expenses is important to keep an organised record of all your expenses. You can claim actual motoring expenses for:

• Vehicle insurance
• Repairs and servicing
• MOT’s
• Road Tax
• Fuel
• Parking
• Hire Charges
• Vehicle Licence Fees
• Breakdown Cover

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You cannot claim for the following

• Non-business driving or travel costs

• Penalty fines

• Travel between work and home

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.

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Flat Rate for business expenses

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

 

Example

You’ve driven 11,000 business miles over the year.

Calculation:

10,000 miles x 45p = £4,500

1,000 miles x 25p = £250

Total you can claim = £4,750

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.

Can I lease a car through my limited company?

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:

• The CO2 emissions of the car you choose
• The car’s value, including any extras – this is its P11D value
• Your marginal (highest) income tax rate
• Whether you have access to the car all or some of the time and whether you make any personal contribution towards its cost

This means that the higher the car's value, CO2 emissions, and tax rate, the more company car tax you will 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.

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Tax calculation

To calculate how much company car leasing tax you’ll have to pay each year you would use the calculation below

P11D value of the car x CO2 Benefit-in-kind tax rate x Personal income tax rate

For example:

£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.