Tax Benefits and Implications of Business Car and Van Leasing

20 December 2019

 

Business leasing has been around for a few decades now and is one of the most popular ways of getting a new vehicle or fleet of vehicles for your business. One of the reasons for that is that business car and van leasing comes with many tax benefits, which often sway businesses to opt for leasing over other options. We will explain below what these tax benefits are and what implications you should also be aware of.

What are the tax benefits of business car leasing?

There are lots of benefits to business vehicle leasing. Many of these benefits apply to Business Contract Hire (Business Contract Leasing). This is the most common form of business leasing and is where you run a vehicle, or a fleet of vehicles, for a set period of time while paying fixed monthly rentals. At the end of the contract, the vehicles are returned with nothing more to pay, subject to mileage and condition restrictions.

It’s good for company accounts

Your company’s balance sheet is important because it is one of the elements used by underwriters to judge whether to award you a credit line. When making a major purchase through your business, you will have to think about how it will impact your balance sheet. If you were going to borrow money to purchase a vehicle or a fleet of vehicles, then this will be displayed on your balance sheet as a liability. It could hinder your chances of borrowing further down the line. However, with Business Contract Hire, the vehicle or the fleet of vehicles are not displayed as a liability or an asset on the company balance sheet. Instead the vehicles are “off-balance sheet”. This can be an advantage for businesses as it may mean you can apply for more credit lines.

You can offset the rental

You can offset the monthly rental against your corporation tax - if you are a limited company, or against the yearly taxation - if you are a sole trader or a partnership.

The amount of the monthly rental that you can offset depends on the CO2 emissions of your leased car. If your car emits more than 110g/km of CO2 then you can claim 85% back. It if emits anything less, then you can claim 100% back.

The only exception to this rule is if you lease a van, in which case, you can always claim 100% of the monthly rental back, regardless of the CO2 emissions.

It should also be noted that if you have a maintenance agreement on your vehicle or fleet of vehicles, then this is also considered a service charge. This means that you can offset 100% of this element against corporation tax.

The excess mileage charge is also considered a service charge. This means that you can offset 100% of this charge against corporation tax.

Reclaim VAT

You can reclaim VAT on the initial rental, monthly rental and maintenance charges. 100% VAT can be reclaimed on commercial vehicles and 50% - 100%  on cars.

You can only claim 50% of the VAT on the finance element of the agreement of the car the back because HMRC assumes that the vehicle has a mixed of business and personal use. The only exception is if the car is a ‘pool car’ (the car 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), a taxi cab, driving school car or self-drive hire vehicle. In these cases, you can reclaim 100% of the VAT - but bear in mind it's your job to provide the proof.  You can also claim 100% of the rentals back if you keep the car on-site overnight and at weekends, and is only used for business. HMRC are really focused on this, so it’s important that you are honest.

The 50% input tax block applies to the lease element of the contract only. If there is a maintenance element, then this is deemed to be a business expense, and you are allowed to reclaim 100% of the input tax on the maintenance charge. The maintenance charge must be a separate line item on the invoice.

Vans are excluded from these restrictions, as they are deemed to be commercial vehicles where any private use is likely to be incidental to its intended commercial use.

What can you claim back on excess mileage?

With Business Contract Hire you will have a fixed mileage. If you or your employees go over this then you will be subject to an excess mileage charge. This can be anything from 1p/per mile+VAT to £1/per mile+VAT.

Because of this charge, many people often opt for a higher mileage as they do not want to risk paying the excess mileage charge. This is not always the best choice.

The excess mileage charge is considered a service charge. This means that you can offset 100% of this charge against corporation tax. The same VAT reclamation restrictions apply to excess mileage as they do with the finance and the maintenance elements in the lease.

 

What are the tax implications of business leasing?

There aren’t that many tax implications of business leasing and that’s what makes it so popular.

However, this is one implication that you should definitely be aware of before you decide whether to choose business leasing and having company vehicles.

You will have to pay more in National Insurance

If you are a Director, in a Partnership, a Sole Trader or a Limited Company, then you will have to pay more in National Insurance if you provide a company car for your employees.

This is because you are providing a benefit to your employees, and therefore HMRC says you will have to pay more in National Insurance. This isn’t exclusive to company vehicles and is the case for all benefits provided by a business.

How much you will pay in National Insurance depends on how much the vehicle costs.

 

Conclusion

There are tax benefits of business leasing including the fact that the vehicle – or fleet of vehicles – are off-balance sheet.

This means that the liability of the vehicle does not appear on the company balance sheet, which may help your chances of getting a credit line in the future.

You can also claim back a proportion of the charges on the excess mileage fee and the maintenance agreements because they count as a service charge.

However if you provide vehicles for your employees, then you will have to pay more in National Insurance because you are providing a business benefit.

These are a number of elements that you will have to take into consideration when you are looking at leasing a fleet of vehicles.

 



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