Business vehicle leases normally come in two forms:
- A 'finance lease' vehicle usually means a deposit down and a fixed number of payments. At the end of the lease, either the vehicle is handed back or a lump sum payment is made to keep the vehicle. This can also be referred to as Contract Purchase or Hire Purchase.
- A 'contract hire' vehicle can be referred to as an operating lease. The vehicle is essentially a long-term rental. A certain number of payments are provided upfront as a part of the 'rental' agreement and then fixed payments for the remainder of the agreed term. The vehicle is then handed back at contract end.
We'll cover both types of these leases, the tax and reporting implications and whether putting them through the business or personally acquiring them is the better option.
Finance Lease
When leasing a vehicle on a finance agreement through the business, the vehicle immediately becomes a company asset as the company becomes the owner. Your business would claim the price (minus costs for credit) as a capital allowance.
The amount claimable on the allowance will depend on the vehicle type - (zero/low emissions vehicles have a 100% write down allowance). Cars are not allowed as part of the AIA (Annual Investment Allowance).
Only the 'interest' portion of the monthly payments would then be allowed to be put as expenses on the company books.
Costs incurred as part of maintaining the vehicle would be an allowable expense.
Overall, the business would save corporation tax due to the reduced profit.
The matter gets a little complicated if the vehicle has private use. The employee using the vehicle will have to pay company car tax and the business would incur employers' NICs on the benefit provided.
Contract Hire
With the long-term hire approach, the vehicle is never on the company's balance sheet as it never 'owns' it. The upfront and monthly payments are wholly allowable as an expense as will maintenance and associated costs.
Again, if the vehicle is provided to an employee, company car taxes would need to be considered.
Personal vs Business
Business contract hire deals will normally be 20% cheaper as VAT can be reclaimed fully if 100% business use, or 50% if there is any private usage longer than 10 days.
Businesses will still be able to fully reclaim VAT on maintenance costs.
Personal leases will have costs fully covered by the employee for both types. However, the employee can claim expenses equivalent to 45p/mile for the first 10,000 miles and 25p/mile after. 10,000 miles would allow £4,500 to be taken off the company's profits before corporation tax.
It would need to be weighed up whether £4,500 @ 20% is more of a saving than reclaiming interest payments and capital allowances and paying company car taxes.
Generally, for higher emission vehicles or non-zero BiK percentage vehicles with high P11D values it would be better to have the employee personally lease and claim business mileage from the business.