What Are The Tax Advantages of Car Leasing?
As a business owner, there is always more than one reason to make a decision. Leasing a car can be advantageous because of the flexibility it allows, as well as the quick access to vehicles when you need more of them for the business.
However, there are also tax reasons to consider whether you look at business car leasing or buying a company car. Here, we’re going to address some car lease tax questions you might have and look more closely at some of the advantages.
Are car lease payments tax deductible?
This is undoubtedly the question looming largest in your mind and, to answer the question briefly: yes, car lease payments are tax-deductible. From self-employed sole traders to corporations, you can reduce the tax bill you owe each year, in the UK, by offsetting the cars that you lease.
This is possible due to the fact that you don’t own the car, so it doesn’t count as an asset. Instead, it counts as an ongoing expense due to the fact that lease is technically a rental. How much of a deduction you are going to get depends on what kind of vehicle it is. For a car, the standard is that you can deduct around 50% of the contract hire value since people tend to also use leased business cars for personal use around 50% of the time. For a van lease, you will usually get a 100% tax deduction, claiming it all back if you meet the necessary criteria.
How to write off your car lease
Depending on how you use your leased car, you can potentially write it off 100%. If you are able to prove that the car is used for zero personal mileage, such as by showing that it remains on company property, then you may be able to claim 100% of the lease contract value back in your tax return. However, before you do that, it’s important to know how to write off a lease, too.
Accurate record-keeping of your business mileage is essential. You need to add your lease payments and other running costs to your annual cost for the year, then work out the business proportion of those costs. This means working out how many miles were for personal use and how many were for business use. Divide both numbers by the total mileage then multiply by 100 to get the percentages. One percentage should show how many of your costs will be personal, and how many can be deducted as a business expense. We recommended registering a free account to easily monitor your lease mileage usage.
Just remember, you may be required to show some proof as to which expenses were business-related and which were personal. Effective record keeping with mileage tracking systems can help. As can having proof such as video evidence that the vehicle is kept on company property when not being driven.
What cars does this not apply to?
You may want to make sure that, before you agree to any lease hire contract, any tax benefits that you can expect are, indeed, going to be applicable to you. The circumstances can change the criteria for applicability. However, here are a few basic rules that can make it much more likely that you’re able to write off your car lease.
For one, your car needs to have CO2 emissions that are under 110g/km to apply. Otherwise, the car may be subject to a 15% car disallowance on the proportion of rental costs that can be claimed against profits.
Similarly, you cannot claim taxes on a lease contract with clauses that eventually allows you to own the car. If it has these clauses, the lease may not count as a rental anymore, and the car is treated as a business asset, instead.
The tax benefit of lease maintenance packages
If your company is VAT registered, then 50% of the VAT will be reclaimable on the monthly rental cost of the contract hire agreement. However, there is an additional benefit for contract hire agreements that come with a maintenance package.
The service and maintenance element of your contract is also 100% VAT reclaimable. As such, it’s a good idea to invest in those packages that can help you keep your leased cars running as well as possible to help you take care of your motoring costs.
Offsetting your lease service charges
One of the drawbacks that people tend to think about when they lease cars is that they may have to deal with a bill for additional service charges. These service charges can include having more mileage on the car than your lease contract allows for, wear and tear to the vehicle that lies outside the guidelines, and other minor fees. Choosing the right contract with the right mileage estimates and other options can help you avoid those fees at the end of your car lease.
However, if you’re leasing a company car, you don’t need to worry too much about these costs. Both limited companies and the self-employed can get the costs 100% offset against their annual taxes since they count as service charges. The costs of any additional fees on a leased car could be absorbed completely, reducing the amount of tax that you have to pay.
Car leasing can improve your company accounts
Whichever car you choose and from whom, a major advantage of leasing a business vehicle is that the vehicle doesn’t show up as a liability on the balance sheet. The balance sheet is important to the business as lenders tend to look at it when opening or extending a line of credit. When you need funding for a major expansion, scaling effort, or other large purchase, then having a large fleet of owned vehicles as liabilities can cause some lenders to reconsider whether to give you the money. On a business contract hire, that’s not a problem.
Hopefully, we’ve shown some of the advantages of lease taxes worth considering. However, if you want to think beyond the taxes alone, then you might also want to take a look at the comparison we put together of buying vs. leasing your next vehicle.