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WHEN it comes to funding company cars, more and more SMEs are choosing the leasing route (also known as contract hire), because of the tax relief on car leasing and also the VAT reclamation benefits.

Hire purchase (HP) and lease purchase with a balloon payment are not generally recognised as being as VAT efficient as leasing, because the same level of VAT relief is not available.

Tax relief available on an HP or lease purchase agreement is limited to the capital cost of a car. For a car that has CO2 emissions of between 76g/km and 130g/km it can be written down against taxable profits at 18% per annum (on a reduced balance basis).

Key benefits of business car leasing

• VAT efficient – claim 50% of VAT on the lease rental; 100% if used purely for business
• Tax efficient – claim as much as 100% of the lease rental against corporation tax

For cars with emission levels over 131g/km, the amount that a company can claim is 8% per annum.

But just how could opting for a finance lease or a contract hire agreement benefit your company?

Let’s look at the facts in simple terms and shed light on a topic that is not as complicated as you may think.
Most efficient tax relief on car leasing and VAT reclamation methods

Firstly – if you are VAT registered – contract hire and finance lease are both VAT efficient ways to fund your company cars.
There are also Corporation Tax benefits that allow you to offset all of the rentals against your company profits, if the CO2 emissions are under 130g/km, therefore lowering your annual tax bill.

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What tax relief on car leasing is available and what VAT can you claim?Tax relief on corporation tax

Business car lease rentals are 100% Corporation Tax deductible for cars up to 130g/km and 85% for those above that figure.

VAT reclamation

You can claim back 50% of the VAT back on the rental itself, if there is some private vehicle use involved, or 100% if vehicle is used solely for business purposes.
However, if there is no private use and the car is used for business reasons only, you can claim back 100% of the VAT back on the rental.
Van VAT rental reclamation rules are different to cars – you can claim 100% back in any event.

Maintenance packages that come with a contract hire agreement are also 100% VAT reclaimable.

Tax relief on daily rental

Let’s not forget daily rental; if you need to hire a vehicle through the company if one of your cars is off-the-road, you can claim 50% of the VAT back on the rental.
However, if you hire a car for any other reason, say, if you have a new employee starting and their permanent car is not quite ready, you can reclaim 100% of the VAT back (providing that the period is no longer than 10 days).

If the car is used just for the day – say in preference to a staffer using their own car – and the mileage is all business, then 100% of the VAT can be claimed too.
Tax relief on car leasing benefits

Graham Treble, a car leasing expert and director of small fleet leasing company Vehicle Contracts said:

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“Having worked with accountants, we took the decision five years ago to stop selling hire purchase and lease purchase agreements because of the tax disadvantages to our clients.
“With more and more manufactures bringing their cars’ CO2 level below the 130g/km mark, business owners are now seeing the benefits of financing their vehicles via Contract Hire.”

What tax relief on car leasing is available and what VAT can you claim?

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