The tax savvy approach to new business vehicles

Written by James Fairhurst

James has a background in accounts production, Corporation Tax and VAT for Sole Traders, Partnerships, Limited Companies and Academies. He is able to quickly and reliably gain an understanding of the accounting needs of a business, helping them to stay on top of their deadlines.

November 4, 2021

Thinking of getting a new vehicle?

Can’t decide whether you should buy outright or lease?

And what about claiming VAT back, are certain vehicles better than others?

Are there other tax implications to consider?

Believe it or not, the tax consequences of obtaining a new vehicle have confused thousands of businesses for decades, especially accountants! And many accountants still don’t fully understand the rules. 

It’s an issue that delves deep into tax law and where your personal circumstances make a huge difference.

 But let’s be clear, it DOES make a large difference how you obtain your new vehicle.

What’s in this guide?

In this guide, I will take you through the various types of vehicles that you may be considering to purchase, along with difference in method of purchasing or leasing. You will see the tax implications of each situation and be given a simple summary to help you make the best decision when choosing.

As always, do give Xoba a call and speak to us if you are thinking of taking on a new vehicle. Take advantage of the experience we have in this area and you could save yourself a lot of time and money!

Effect on taxable profits

Buying a vehicle outright (or on hire purchase)

For small businesses, when you purchase a vehicle (such as a van), the full cost of that vehicle is tax deducted from your taxable profits. This is called a “capital allowance”.

For example, if your profits were £50,000 and you purchase a £10,000 van for the business, you would be taxed on £40,000.

For cars, it’s slightly different.

When you purchase a car with CO2 emissions of 50g/km or less (or car is electric), then you can claim still claim a capital allowance for the full cost. However, this is known as a “First Year allowance” and is specific to low emission cars.

For cars with emissions up to £110g/km, capital allowances are spread over a number of years. You can only deduct 18% on the cost of the car from your taxable profits in the first year, and 18% of the remaining balance each year thereafter. So, overall you’ll have the same tax savings (roughly speaking), but it will take much longer than if it was a van, or a car with low emissions.

If you have a car with emissions above 110g/km, the rate is 8%.

 

Leasing a vehicle

Long funding leases

If instead of buying a vehicle outright, you decide to lease, you may still get capital allowances if the lease is considered a “Long Funding Lease”.

Generally speaking, a lease is a long funding lease if the following applies:

  • You take on all the risks and rewards of having the vehicle, i.e., in effect it is treated as your own vehicle.
  • The lease term covers at least 65% of the useful life of the vehicle, or the sum of the lease payments is roughly equal to the real life cost of the vehicle (plus any interest).
  • The lease term is more than 7 years, or between 5 and 7 years but where the lease payments don’t fluctuate more than 10% in any year or the residual value of the vehicle at the end of the lease term is more than 5% of the value at the start of the lease.

All other leases

If the lease doesn’t satisfy the conditions for a long funding lease, then it doesn’t get capital

allowances deducted from taxable profits. Instead, the lease payments will be deducted. There are many different types of leasing arrangements, but for the purposes of distinguishing the different tax treatments, all NON long funding leases are very similar.

Real life example

For example, a business pays £150 per month to lease a van worth £15,000 and the lease agreement shows that the lease term is 4 years.

This is not 7 years or more and so does not qualify as a long funding lease. We could also say that the useful life of the vehicle is likely to be much longer than 4 years and the sum of the lease payments (£150 x 12 x 4 = £7,200) is not substantially equal to the real life cost of £15,000.

The business therefore cannot claim capital allowances for the van, so it does not deduct £15,000 from taxable profits.

Instead, they can claim £250 x 12 months = £3,000 each year from their taxable profits.

15% disallowance on lease payments for high emission cars

To make things even more difficult, you have to add back 15% of the lease payments if you have a car with CO2 emissions greater than 130g/km.

VAT

Buying a vehicle outright (or on hire purchase)

If you are VAT registered and you have purchased a vehicle with VAT, you can put it through your VAT return to claim it all back. Even if it is on hire purchase.

BUT – and it’s a big but – if it’s a car, you can’t claim any VAT back unless it is 100% for the business, like a taxi.

Leasing a vehicle

You can claim all the VAT on any lease payments for a van. If it’s a car, only 50% of the VAT can be claimed on each lease payment.

Tax on personal use

When you make a company car available for private use by an employee, a ‘benefit in kind’ is deemed to have occurred. The employee and the employer both have to pay tax on the benefit. The value of the benefit for is calculated according to the list price of the vehicle.

If you are a director or business owner, you will most likely find that the administrative burden and additional costs of calculating and paying the taxable benefit make it an expensive option for a car. If you do want a car, it will generally be much better to obtain it outside of the business and claim mileage from the business instead.

Calculating Car Benefit

The taxable benefit of a car is taxed at the list price multiplied by a percentage dependant on the emissions of the vehicle.

https://www.gov.uk/calculate-tax-on-company-cars

This means that regardless of how much the car is used, you pay the same amount of tax.

No tax is paid on zero emission cars.

Van Benefit

A van provided to an employee for private use is considered to have a fixed rate benefit of £3,500 for 2021/22. If fuel is provided by the employer as well, the benefit is a fixed sum of £669. These figures are taxed at 13.8%, so the employer would pay (£3,500 + £669) x 13.8% = £575.32 national insurance on the benefit each year.

Table of main tax implications

Summary

When it comes to saving tax, purchasing a van is the clear winner. Even if it is on hire purchase.

The full cost of the van is deducted from taxable profits upfront (100% capital allowance), and any VAT is claimed back in full on the purchase.

At a close second, is leasing a van. You may still get 100% capital allowances if it is a “long funding lease”. If not, you can deduct the lease payments from your taxable profits. And you can claim back the VAT on each lease payment.

If you want a car, the tax savings less than for a van.

If you purchase a car outright (or get one on hire purchase) you only get 100% capital allowances if it has zero emissions. If it doesn’t, then you would claim capital allowances slowly at a rate or 18% or 8%.

You also can’t claim any of the VAT back if you purchase a car.

But if you lease a car, you can claim 50% of the VAT on the lease payments and deduct the net value of the lease payments from your taxable profits.

This means that for cars, its generally better to lease, rather than purchase, unless it has zero emissions.

Also, don’t forget about a potential benefit in kind. If you make a company vehicle available to a staff member (including a director) for personal use, then you may both have to pay tax on it. The tax is based on fixed rates rather than solely on use so it can be quite expensive. If you are a director of your own company (or you’re a sole trader) wishing to save tax and you aren’t VAT registered, then you will generally be better purchasing a car outside of the business and claiming mileage from the business instead.

Useful links

For more information, check out HMRC’s website. I have some helpful links to take you to the right places:

  1. https://www.gov.uk/capital-allowances/business-cars
  2. https://www.gov.uk/tax-company-benefits/tax-on-company-cars
  3. http://cccfcalculator.hmrc.gov.uk/CCF0.aspx
  4. https://www.gov.uk/reclaim-vat/cars
  5. https://www.gov.uk/hmrc-internal-manuals/capital-allowances-manual/ca23830
  6. https://www.gov.uk/government/publications/capital-allowances-for-business-cars/capital-allowances-for-business-cars

Disclaimer

Please note that I have simplified the tax and accounting treatment in this article, in order to provide general guidance that will suit most clients.

If you would like to discuss your next vehicle purchase with us, please give me a call and I will be happy to advise.

You May Also Like…

0 Comments

Leave a Reply