Company cars – part 5
Lease or buy a company car – what is more tax efficient
About to choose a car – how should you finance it?
Over previous posts we have looked at the tax advantages, or disadvantages of running a car through your company. in this article we try to address how you should finance the cost of the car.
Whether you should lease or buy a car for your business depends on a number of issues, including cash flow, mileage, and other issues that are specific to your business. Generally, you will need to spend the time to research both options before making a decision. But as specialist accountants, we can then help estimate what is better from a tax point of view.
Loan Payments vs. Lease Payments
The first thing to understand is that there is a plethora of options, from good old-fashioned hire purchase (HP), through contract purchase, lease purchase to full leasing. Even from one garage to the next, let alone one dealer to another, the same terms can mean different things. What it will come down to in the end is things like:
How much is the deposit
How much are the monthly instalments
What is the residual value
Is there a mileage restriction
Buy or lease?
So should you buy a vehicle and own it outright, along with all the costs that it may incur? Or lease a vehicle, spreading the cost over time with the possibility of purchase at the end of the lease? There are advantages and disadvantages with each option; here are some of the pros and cons to consider.
Advantages of buying:
- You usually have a better opportunity to negotiate a discount on the list price of the vehicle than you do with leasing.
- You own the asset and can decide to sell or trade it in at anytime.
- You are not tied into running the vehicle for a specific period as you are with leasing.
- However if you have financed the purchase you will probably have to settle any outstanding payments due before you transfer ownership on.
- There are no mileage restrictions when you own the vehicle (against leasing where you pay an additional amount if you exceed an agreed annual limit).
Disadvantages of buying:
- Depreciation begins as soon as a vehicle leaves the forecourt. According to the AA, a new car will have lost around 40% of its value by the end of the first year alone.
- Depending on how you finance the purchase, you may need to have a large amount of capital available as a deposit, which you are then tying up in a depreciating asset rather than leaving to spend or invest in other areas of your business.
Advantages of leasing:
- For a relatively low initial payment, followed by regular monthly payments, you get all of the benefits associated with running a brand new vehicle. This can include full manufacturer’s warranty cover, which typically lasts for two to five years. But watch the terms!
- For tax purposes, leasing can be an attractive option because many businesses are able to claim back part of the VAT. Exact figures depend on the VAT scheme that your company falls under but as a general rule companies can claim back 50% of the VAT on the leasing payments on a car (and up to 100% on a van).
- Leasing agreements can have servicing and maintenance added to the monthly package. This allows you to better predict the cost of motoring and avoid the nasty surprise of unexpected repair bills.
- Most lease agreements now offer a degree of flexibility at the end of the lease, allowing you to choose between purchasing the vehicle outright, refinancing or simply handing the vehicle back.
Disadvantages of leasing:
- You don’t own the asset.
- Annual mileage is one of the main factors that determines the cost of leasing a new vehicle – the more miles you do, the more expensive the monthly payment will be. If you are in a rural area and cover a lot of miles this could have an impact on availability.
- If you purchase a vehicle outright you only have one upfront payment to make (albeit for a large amount). With vehicle leasing you are committing to paying hundreds of pounds each month for the duration of the lease, a commitment not to be taken lightly.
Corporation tax
Whether you purchase or lease the car you will get Corporation Tax relief. Under a lease agreement you will be able to offset the lease costs NET of VAT against your income. If you purchase a car you will get “capital allowances”, what is a sort of depreciation for tax purposes. However this is quite restricted (unless the car is electric or very energy efficient – see our earlier blog – LINK). You will also be able to claim the cost of the finance i.e. interest against tax, but not the whole monthly payment.
Conclusion
This is a very complex area and will depend on individual circumstances. That is both the circumstances of the company and of the individual taxpayer. We suggest you choose a car and see what the best finance deals on offer are. Shop around. Once you have some offers, speak to us and we will advise you what is best for tax purposes. And sometimes what is best for tax won’t suit your personal choice – choosing a car is very personal to many people and sometimes you have to let your heart rule your head!
For further advice existing clients email us at support@anytime.uk.com or call 03333 110 230
For new enquiries contact us now
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