Tax Benefits of Business Car Leasing

If you're a self-employed contractor, freelancer, or sole trader thinking about leasing a vehicle for work purposes, it's important to understand both the tax implications and whether leasing costs can be deducted from your profits to lower your tax bill.

In this article, Pineapple Accounts will guide you through the eligibility criteria for tax deductions through car leasing, how to claim the VAT back, and the benefits of leasing your car through your business. 

Eligibility for Business Car Lease Tax Deductions

When leasing a company car, it remains the property of the lender, who is the registered keeper of the leased vehicle. Road tax on a lease is administered entirely by the funder of your lease deal as the lender is the ‘taxpayer’ in this arrangement. However, they forward the tax cost to you, along with depreciation costs. 

To be eligible for tax deductions, your business should fall under one of the following categories:

• Sole Trader/Self-Employed
• Partnership
• VAT Registered Business
• LLP (Limited Liability Partnership)
• Limited Company

 

Tax Benefits of Car Leasing Through Your Limited Company

With business car leasing, you’ll have to pay tax based on various factors, such as the car’s CO2 emissions, the P11D value (list price), and your personal income tax bracket. However, as there are some tax obligations, there are also some potential savings to be made. If you decide to take out a business car lease, you could potentially claim back up to 100% of the tax paid.

The amount you can claim back will depend on whether your company is VAT-registered, how much the car is used for personal and business convenience, and the car’s CO2 emissions. 

Deduct Lease Costs from Your Tax Bill

If you are a limited company, you can use your monthly lease payments to offset your corporation tax. If you’re a sole trader or partnership, you can also deduct your lease costs from your annual tax liability. 

You can deduct the cost of your lease from your annual tax liability. Unlike a purchased asset, the cost of leasing your vehicle is considered an expense by the tax authorities. This means you can offset your lease payments against your profits, therefore reducing your tax bill.

The exact amount you can claim will depend on the emissions of the car. If emissions are below 110g/km, you will be able to claim 100% of the lease rentals against profits. If they exceed this threshold, you can claim 85%. Additionally, running costs such as fuel and insurance are also considered deductible expenses.

Boost Cash Flow

Lease costs are based on vehicle depreciation, with this value being set at the beginning of the lease agreement. While there are borrowing costs involved that wouldn't apply when purchasing outright, the fact that the depreciation value is set upfront means you are not exposed to the investment risk. Keep in mind that even if you were to buy the vehicle outright, it would still experience depreciation.

The value of leasing becomes clear when considering that road tax, breakdown cover, and UK mainland delivery are always included compared to buying. Plus, you won't have to worry about expenses associated with selling the car since you don’t have to buy the vehicle at the end of the contract. 

Leasing can help with maintaining a healthy cash flow due to it working out cheaper than buying the same vehicle. As a result, you can allocate those expenses to other vital areas of your business. 

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Tax Deductions On Electric Cars

Electric and ultra-low emission vehicles (ULEVs) not only aren’t great for the environment, but they also offer significant tax benefits as road tax and company car tax on electric cars are much lower. 

Electric cars and vehicles with lower emissions benefit from lower rates of Benefit In Kind (BIK), with the rate set at 2% for the 2022/23 period. Not only that, zero-emission cars are exempted from road tax. And, in addition to all these tax incentives, you can also get the advantage of reduced running costs associated with electric and ULEVs.

100% VAT Claim on the Lease Cost

Most leased company cars have some degree of personal use, so it won’t be always possible to claim back the full amount of tax. If you use your business car lease for personal use too, you can only claim up to 50% VAT back.

You can claim 100% VAT if your vehicle is used exclusively for business purposes. However, each trip taken in the car must be necessary for completing your job. These can include:

• Making deliveries or collections.
• Travelling back and forth from meetings.
• Commute between company branches or offices. 

There are other tax benefits associated with service charges related to leasing cars or vans. These charges include excess mileage and maintenance packages. If any of these apply to your lease deal, you can also claim 100% VAT back on those charges and offset the full amount against your annual tax bill. 

You can also write off some of the lease cost as a business expense. The amount depends on the CO2 emissions of the car. To calculate the exact amount, it is recommended to speak with a chartered accountant.

Savings on Running Costs

The first few years of a vehicle’s life are known to be it's most reliable, resulting in fewer unexpected repairs and less downtime that could affect your income. While a leased vehicle will require regular servicing (based on your annual mileage), it won’t need an MOT until it is 3 years old. 

Moreover, any faults with your leased vehicle will be covered by the manufacturer's warranty, ensuring repairs will be done free of charge. Manufacturer warranties typically last 3 years or 60,000 miles and cover most non-consumable parts.

The funder takes care of the Road Fund Licence, and at the end of the lease term, they handle the vehicle collection. You can also choose a maintenance package, reducing all administrative burdens. 

Furthermore, leased vehicles are newer and more fuel-efficient compared to older models, resulting in reduced fuel costs, adding to all the above benefits of leasing. 

How to Reclaim Tax on a Leased Car

If you’re eligible to claim back on tax, you’ll need to complete a VAT return form that includes a breakdown of the personal mileage covered. It’s a good idea to keep a record of this information so you can go ahead and submit your VAT Return to HMRC either through a digital form or via compatible accounting software.

Is Business Car Leasing For You?

Business car leasing can offer your company and your staff advanced features offered by the newest cars such as electric or hybrid engines and improved fuel efficiency, which can result in appealing tax reductions.

Car leasing can be hugely advantageous when compared to financing or traditional PCP (Personal Contract Purchase) deals. One key benefit is that leasing a car or van does not count as a liability on your balance sheet. 

Since you don’t own the vehicle, it won’t be recorded as an asset to your company, which can improve your chances of securing future loans, especially if you’re leasing multiple company cars.

Get Help from Chartered Online Accountants

Business owners already have a lot on their plate, which is why car leasing offers a stress-free driving experience and improved tax efficiency in one. At Pineapple Accounts, we understand the importance of expert advice and tailored solutions when it comes to optimising your company’s resources.

We offer a wide range of digital accounting services, including tax returns, VAT, bookkeeping, and more. We'll work closely with you to maximise your business’ tax efficiency and ensure compliance with all relevant tax laws.

Use our free quote calculator to identify the best monthly accounting package for you or contact us via WhatsApp to speak to one of our chartered online accountants for more information.