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Buying or leasing a car or van...what are the options? In this article we hope to answer the common questions raised when you are considering buying or leasing a vehicle in your business and the key considerations to be made to ensure your decision is tax efficient.
Car or van?
First of all, consider whether you are buying a car or van. If it's a van, tax issues have very little bearing and you should go for the source of finance that is cheapest. Vans are a lot more tax efficient than cars and because of this some vehicles are designed to qualify as a van even though most of them are not bought for that purpose. To determine whether the vehicle you are using qualifies as a van please see the guidance on the HM Revenue and Customs website.
I run a limited company, what are my options?
The days of running cars through limited companies in a tax efficient manner are long gone. Over the last few years, benefits in kind payable on company cars have slowly increased to the point at which it is generally more tax efficient to run a private vehicle than it is to run a company vehicle.
Therefore, it is probably more tax-efficient to reimburse yourself for any business mileage** travelled on behalf of the limited company at the rate of 45p per mile for the first 10,000 miles and 25p per mile for any mileage above that.
**Business miles includes journeys in the course of your business but does not include travelling to and from your normal place of work.
I am a sole-trader, what are my options?
If you are self-employed you can deduct the cost of using your car for business purposes. There are two ways of working out how much you can deduct:
- A fixed rate for each mile travelled on business**, using HMRC fixed mileage rates which are currently 45p per mile and 25p per mile for any mileage in excess of 10,000 miles.
- The business may purchase the car and pay for all the running costs. You should keep detailed records of all these costs. However, at the end of the year, you will need to add back the percentage of the cost that relates to the private element e.g. if you do 10,000 miles and 40% of those miles are personal then only 60% of the costs will be allowed for tax purposes.
Most people will be better off with option 'b' but if you have a cheap run-around, option a will be better. If you are a client of ours, we can work this out for you for free.
My car is provided by my employer, what are my options?
If you are provided a car by your employer it is worth noting that both you and the company you work for will normally suffer an additional tax burden for the benefit of having the car. Tax is also chargeable on any fuel provided for private use.
If you are using a company car it is worth looking at the alternative options with your employer as there may be a cheaper way, for example by using your own car and claiming mileage at HM Revenue and Customs approved rates. If the club also increases your salary by the right amount you might both be better off!
Should I but the car or lease it?
You now need to decide whether to lease or buy the car. You should consider the tax implications of buying the car outright (including using finance to purchase the car) or leasing the car and these have been summarised below:
The cost of purchasing the car will be fully tax allowable as an expense over a period of time. For very low emission cars (less than 110g/km) the full cost will be allowable in year 1 but for less efficient cars the tax allowance will be received slowly across the life of the vehicle.
In most cases the VAT on the purchase is not reclaimable.
The monthly cost of leasing the vehicle will be allowable for tax relief and, for businesses which are registered for VAT, 50% of the VAT on each monthly charge will be reclaimable. However, for bigger cars (emissions over 130g/km) the tax relief on lease charges will be restricted by 15%.
In both cases all running costs will be fully tax allowable subject to a personal use adjustment/benefit in kind dependant on your circumstances.
In summary, for businesses which are VAT registered leasing a car will be more tax efficient than outright purchase for cars where the emissions are <130g/km. For cars with emissions >130g/km it will normally be more tax efficient to purchase the car outright as the benefit of saving the VAT will be outweighed by losing 15% of the running costs.
For businesses which are not VAT registered there are no benefits to leasing the car other than the reduced monthly cost of leasing over financing. By purchasing the car the full cost of the purchase will be allowable over the long term whereas leasing the car normally 15% of the lease cost will be lost.
However, tax is not the only consideration and you may decide that there are other advantages or one or other of the options that outweigh any tax considerations.
Every situation is different depending on what type of business you have and what car you chose to run.