Business car leasing and tax relief
Firstly, it’s important to state that we are not accountants so before you make any decisions related to tax benefits you should seek up to date, professional advice.
Leasing a car for your business offers a number of useful advantages that can be used to support the growth of your business. Included in these benefits are the tax breaks that business car leasing provides. Below we go into more detail about the type of tax claims that are available and how they can help your company.
Tax benefits for business car leasing
Several tax benefits come with business car leasing. Below are some of the more common ways it can help your company.
Every business wants to keep their balance sheet looking as healthy as possible, not only to maintain credibility as a company, but also to remain able to obtain credit, if required.
Therefore, this makes business car leasing a tax-efficient way of keeping your company accounts in good shape.
However, it is important to note that following new FRS 102 rules – lease commitments do have to be referenced in the ‘Notes to Financial Statements’.
Based on current legislation, limited companies can offset their monthly repayment costs against their corporation tax. If you are a partnership or sole trader, these charges can instead be offset against the annual taxation.
The government’s annual budget also dictates the amount that can be offset, based on the CO2 emissions of the car you have leased. As of April 2021, newly registered cars that have been purchased and emit less than 50g/km can claim 100% against taxable income, while cars that are leased and emit 110g/km can claim the same amount. However, if you have leased a van instead of a car, you can offset 100% no matter how high or low the emissions may be.
VAT on the initial and monthly rental costs can also be claimed back. HMRC allows you to claim 50% as they assume the car will be split evenly between business and personal use. However, you can claim back 100% if the car is only used for business reasons and is left on the business premises overnight and at weekends.
This also applies to the vehicle if it is a ‘pool’ car (which is driven by several employees and is left at the business premises overnight and at weekends), in which you will be able to claim back 100%.
Claim back mileage costs and maintenance packages
When you take out a business car lease, you also agree to an annual mileage allowance, based on how many miles you expect will be driven during the contract term. When you return the car, it will be checked to see if the mileage has exceeded the allowance. If so, you will be liable for the excess mileage charge.
However, you might be able to claim tax relief on any excess mileage, which could help if you exceed your allowance.
Excess mileage is treated as a “service charge” so a company can claim back 100% of the VAT instead of 50% like the vehicles monthly rental.
Maintenance packages are an optional extra when you are taking out a business car lease, though this can be considered as a service charge. This leaves you free to claim back 100% against corporation tax and all of the VAT.
Tax implications for business car leasing
While there are many tax considerations for business car leasing, there is one important area you should be aware of.
An increase in National Insurance payments
Providing your employees with a company car will give rise to a taxable benefit in kind. As an employer, you will pay Class 1a National Insurance on the deemed cash value of the car at a rate of 13.8%. In a nutshell, the cash value is worked out as a percentage of the list price. The relevant percentage depends on the CO2 emissions. Each year the Chancellor will announce the rates and percentages in the budget. Your employee will pay income tax on the cash value through their salary.
For more help with business leasing, simply get in touch with our expert team, who are more than happy to help.