Is a Car Lease Tax Deductible?
You know by now that you can get tax deductions for the personal use of a business car. But, what about if you’re leasing a car.
Let’s see how the HMRC treats car leasing when it comes to tax relief.
If your company is leasing a vehicle, you don’t own it. That means that you can claim your monthly lease payments as a business expense. Nevertheless, for cars with CO2 emissions above 130g/km, there’s a flat-rate disallowance of 15 percent of relevant payments. In other words, 15 percent of the expense is not allowable for tax purposes.
Of course, your running costs of the car include insurance and tax, and these are deductible expenses under the Corporation Tax.
Benefit in Kind
However you buy the car, it’s seen as a taxable Benefit in Kind by HMRC to you as an individual. HMRC calculates this as a percentage of the car’s market list price based around CO2 emissions.
The list price is the price of the car when new, not the price you paid, plus any added extras. Be aware that some dealers undercut the RRP.
There’s also another additional taxable Benefit in Kind if your limited company pays for your private fuel costs. You can calculate the taxable car-fuel benefit for 2017/18 by applying the CO2-based car-benefit percentage to the current car-fuel benefit charge multiplier of £22,600.
Note that if you pay for all your private fuel, including home to work, you won’t get the car-fuel benefit. Otherwise, the full benefit will be due.
Car-fuel benefit example
Here’s an example: your business car has a list price of £30,000 the day before it was first registered. It’s a petrol car that emits 178 g/km of CO2.
Let’s assume you pay tax at 40 percent. That makes the current-year tax bill on the car: £30,000 x 34 percent (the appropriate CO2 percentage) x 40 percent = £4080.
As a limited company, you’ll also pay extra National Insurance on these benefits at a rate of 13.8 percent and must complete a P11D form.
The P11D discloses the car details and the value of the benefit. HMRC treats taxable benefits such as this as income and includes them in your total earnings for the tax year. If you pay tax at the higher rate, that will mean you pay tax at 40 percent on benefits you receive.
If CO2 emissions of your company car are below 130g/km, you can claim Corporation Tax benefits that enable you to offset all of your rentals against your company profits. This is a great way to cut your annual tax bill.
Taking this step needn’t mean pootling around on a bicycle, either. Attractive cars that duck under the 130g/km threshold include the Audi A6 2.0 TDi SE, the VW Scirocco Bluemotion, the Range Rover Evoque Coupe ed4 Pure, and the Mercedes-Benz C220 CDi Coupe Executive SE.
Reclaiming VAT on a car lease
If you have some private mileage on the car, you can claim back 50 percent of the VAT on the rental itself, but if the car is used entirely for business, you’ll get back 100 percent of the VAT on the rental. For a van, you can claim 100 percent back in all circumstances.
If you get a maintenance package with your contract-hire agreement, they’re also 100 percent VAT reclaimable. And if you need to hire a vehicle through the company because one of your vehicles isn’t running, you can get back half the VAT on the rental there, too.
Hire a car for any other reason – for example, a new sales rep is starting but their car isn’t ready yet – and you can get back all of the VAT for up to ten days. You can also reclaim your VAT if you use a lease car just for a day, provided it’s purely for business.
In short, when it comes to company cars, it makes sense for SMEs to choose leasing over loans, because of the benefits of tax relief and VAT-reclamation.