One of the reasons business car leasing is because it has a huge amount of tax benefits. It is these benefits that often sway businesses to opt for business leasing over any other options.
So what are these tax benefits? And are there any implications you should also be aware of?
In this article, we look at the tax benefits and implications of business car leasing, and how they apply to you.
What are the tax benefits of business car leasing?
As we said, there are lots of benefits of business car leasing. Many of these benefits apply to Business Contract Leasing, or Business Contract Hire. This is the most common form of business leasing and is where you have a vehicle, or a fleet of vehicles, for a set period of time while paying fixed monthly payments. At the end of the contract, the vehicles are returned with nothing more to pay, subject to mileage and condition restrictions.
You can watch our video on Business Contract Hire below for more information
As we said, many of these benefits apply to Business Contract Hire, so that is the main lease option that we are going to be talking about in this article.
It’s good for company accounts
Irrespective of who you go through or what car you choose, the main advantage of business leasing is that it is tax efficient and good for company accounts. This is because it does not show as a liability on your balance sheet.
Your company’s balance sheet is important because it is what people use to judge whether to give you a credit line. When making a major purchase through your business, you will have to think about how it will impact on your balance sheet. If you were going to purchase a vehicle, or a fleet of vehicles, then this will show up on your balance sheet as a huge liability. After all, if you borrow money to buy several vehicles at 25K each, it is understandable why it would look like you had too much borrowing. Therefore, it could hinder your chances of borrowing further down the line.
However, on a Business Contract Hire, the vehicle or the fleet of vehicles are not shown as a liability or an asset on the company balance sheet. Instead, the vehicles are “off balance sheet”. This is a huge advantage for businesses as it means you can apply for more credit lines.
You can offset the rental
If you are a limited company, then you can offset the monthly rental against your end of your corporation tax. If you are a sole trader or a partnership, then you can offset the rental against the yearly taxation.
Therefore, business leasing is hugely tax efficient.
How much you can offset tends to depend on the Government budget and what they decide. However, as it stands, how much you can offset against the monthly rental depends on the CO2 emissions of the car. If your car emits more than 160g/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 have a van, in which case, you can always claim 100% of the monthly rental back, regardless of the CO2 emissions.
Another advantage is that you can claim back 50% of the initial and monthly rental. This is because you are technically renting the car, you don’t own it. You can only claim 50% back because HMRC assume that you are using the vehicle for business use 50% of the time and personal use for the other 50%. The only exception is if the vehicle is a ‘pool car’, in which the car is left on site overnight and at weekends, and is driven by multiple employers for business purposes, such as travelling to meetings or training days. In this case, you can claim 100% back.
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 use. HMRC are really hot on this, so it’s important that you are honest. If you are claiming 100% back and you use the vehicle just once for personal use, they will find out.
You can claim back on excess mileage and maintenance agreements
When you have a Business Contract Lease, 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. However, 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. You can also claim 100% of the VAT back on your VAT return.
Therefore, it is definitely worth considering going for a lower mileage and paying the excess mileage charge, because it is more tax efficient. As long as you budget for the excess mileage charge of course.
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% against corporation tax and 100% of the VAT. This is the case regardless of whether you have a lease agreement or a purchase agreement.
A maintenance agreement is an additional monthly fee that covers all servicing costs for the duration of your contract. It essentially staggers the cost rather than you having to fork out a lot of money in one hit. This is particularly appealing if you have a fleet of vehicles, all of which will probably be serviced around the same time.
What are the tax implications of business leasing?
There aren’t that many tax implications of business leasing, 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.
This is because you are providing a benefit to your employees, and therefore HMRC say 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 how much the vehicle is.
In conclusion, there are huge 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, ensuring that this does not impact your chances of getting a credit line in the future. You can also claim back 100% of the charges on the excess mileage fee and the maintenance agreements. This is 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. This is because you are providing a business benefit. So this is something that you will have to take into consideration when you are looking at getting a fleet of vehicles.