The tax implications of buying a vehicle are far reaching and it is imperative to research how best to use the various rules and regulations to your benefit. Choosing a certain method of financing your purchase may be the difference between saving thousands of pounds in tax and seeing this tax relief trickle in over many years.
Types of purchasing agreements
Largely speaking, there are three types of purchasing agreements.
Buying the vehicle upfront and outright may seem like the ‘old fashioned’ method, however, it means no capital repayments and no added interest.
A hire purchase agreement effectively sees ownership of the vehicle transferred to the buyer at the date of purchase, however, regular repayments inflated with interest are necessary to maintain such a deal.
A lease hire deal essentially sees the lessee pay regular repayments for the use of a vehicle which is then returned at the end of the contract period.
Business tax perspective
Be it corporation tax for a company, or personal tax calculated for your self-assessment, the rules are fairly similar for vehicles. Yearly Capital Allowances are available in various forms, allowing the full cost or a percentage of cost to be deducted from taxable profits.
Generally speaking for small businesses, if you purchase a vehicle (such as a van) outright, the full cost of that vehicle is tax deductible in the form of a ‘Capital Allowance’ under the ‘Annual Investment Allowance’.
For example, if your profits were £100,000 and you purchase a £15,000 van for the business, you would be taxed on £85,000.
The rules are slightly different for cars. If you purchase a new and unused car, with CO2 emissions of 50g/km or less (or electric), then you can claim 100% capital allowances under the ‘First Year Allowance’ and is specific to low emission cars to encourage their use.
For cars with emissions up to 110g/km, capital allowances are available at a lower rate, whereby you can 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. If you have a car with emissions above 110g/km, the rate is 8%. All of the car’s value will eventually be deducted from taxable profits, however, it will take longer for this to happen.
Generally speaking, if the vehicle is being paid over a lease period, capital allowance aren’t available. Instead, tax relief comes in the form of the lease payments being deducted from turnover as an allowable business expense, and therefore reducing total taxable profit and in turn, the tax to be paid.
When a company car is made available for private use by an employee, a ‘benefit in kind’ is deemed to have occurred, which is taxed on both the employee and the employer. The value of the benefit for is calculated in relation to the list price of the vehicles.
“You’ll pay tax if you or your family use a company car privately, including for commuting. You pay tax on the value to you of the company car, which depends on things like how much it would cost to buy and the type of fuel it uses.
This value of the car is reduced if:
- you have it part-time
- you contribute towards its cost
- it has low CO2 emissions
If your employer pays for fuel you use for personal journeys, you’ll pay tax on this separately.”
Whether the vehicle is leased or purchased outright by the company makes no difference to the taxable benefit.
Due to the administrative burden and the potentially high benefit received, it is usually more time and cost-efficient to obtain a car outside of the business and be reimbursed for mileage instead.
If you are VAT registered and you have purchased a vehicle inclusive of VAT, you can claim it all back in your next return. However, if it’s a car, you can’t claim any VAT back at all (unless you can prove it is 100% for the business, with no private use whatsoever – such as a taxi).
For leases, you can claim all the VAT on each lease payment, unless it’s a car, of which 50% of the VAT can be claimed per each lease payment.
Purchasing a van over a car is a clear winner when it comes to saving tax, providing it is obtained outright or through hire purchase. The van receives 100% capital allowances and VAT on the purchase is claimed back immediately. Alternatively and less tax effective from an immediacy standpoint is obtaining a van through lease hire.
If you decide to go for a car, the available tax savings are less desirable than for a van unless it qualifies as a zero-emissions vehicle. Otherwise the capital allowances are granted at a far slower rate, 18% or 8%. A business owner should also be aware of a potential benefit in kind arising from the provision of a company car for personal use. Claiming mileage instead of purchasing a vehicle through the business is generally considered a more tax efficient method.
Please note that the tax and accounting treatment in this article have been simplified. Please do not hesitate to contact us to discuss these further should you be looking at purchasing a vehicle for your business.