Hire Purchase vs Car Leasing – Tax Benefits

Before making a decision on one of the many different finance options for a company car, the consequences of tax and VAT should be considered. For example, whilst it is well known that if a car is bought outright (or financed through hire purchase) that there are some depreciation tax ‘write offs’ that can be achieved, however, there are no VAT benefits from this route. The following article outlines the tax benefits of hire purchase and car leasing for businesses.

CAR LEASING (CONTRACT HIRE) – TAX AND VAT ADVANTAGES VERSUS HIRE PURCHASE:

1. Contract hire is an operating lease that is, for accounting purposes, classified as “off balance sheet”. The advantage of this is that it improves the debt ratios for a business. However, for hire purchase, even though you won’t own it until the final payment, the vehicle is treated as an asset as soon as you take possession;

2. With car leasing/contract hire the monthly payment can be offset against taxable profits thereby reducing the tax a business pays;

3. With car leasing/contract hire, if the business is VAT registered it can reclaim 100% of the VAT if it is used exclusively for business or 50% on the finance element of the rentals if the vehicle is used privately.

4. With car leasing, if the business is VAT registered it can reclaim 100% of the VAT charged on company vehicle repairs and maintenance so long as the business pays for the work performed on the car.

TAX ADVANTAGES OF HIRE PURCHASE VS CAR LEASING (CONTRACT HIRE):

1. If ownership is a priority (even though the business will not own the vehicle until the final payment after 3 or 4 years) hire purchase is an extremely cost effective method of borrowing;

2. Businesses might be able to claim tax relief on the interest charged across the period of the hire purchase contract;

3. With hire purchase, because the vehicle is classified as an asset, the depreciation of the car can be written off against taxable profits.

It should be noted that businesses cannot claim any VAT relief for the purchase of a car (or via hire purchase) unless the car is used exclusively (100%) for business purposes or if the car is used mainly as a taxi or a car for a driving school. Although, like car leasing, a business can generally recover the VAT on all other business motoring expenses like fleet management or off-street parking. However, there are special rules for reclaiming VAT on road fuel used for business purposes.

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