COMPANY CARS - 03.04.2012

The perennial question - should you buy or lease a car?

Funding your car

What’s the best way for a company to acquire a car? It’s a question that crops up time and again; phone your accountant and ask and you shouldn’t be surprised to hear a faint groan at the end of the line. So rather than trouble him and rack up fees into the bargain, here’s our view.

Director’s tax

The first point to note is that it doesn’t matter how your company funds a car purchase, the tax position for the director or employee driving the car is the same. It counts as a benefit-in-kind on which you’ll be taxed in varying amounts according to the car’s CO₂ emissions and its original list price. But for your company there’s more to consider.

Essentially two choices

There are several different finance options a company can use to acquire a car, but as far as the Taxman is concerned these fall into two types:

• contracts where your company owns or will own the car
• and those where your company rents (leases) the car without ownership.

Choice one - capital allowances

Where your company buys a car outright or enters into a contract, such as a finance lease (see The next step), which will result in ownership, it can claim capital allowances (CAs) (the Taxman’s version of depreciation) on the full cost of the car, but only on a percentage of the cost on a reducing balance. For example, if a car costs £30,000 and its CAs rate is 8% (see below), in the first year the tax deduction will be £2,400. The next year CAs of 8% apply to the balance of £27,600. We’ll save you the trouble of doing the maths by telling you it will take over 20 years to get a tax deduction for the full cost.

Tip. You can increase the rate of CAs by choosing a car which has CO₂ emissions of less than 160g/km. The rate of CAs for these is more than double, 18% in fact. This means it will take less than half the time to get a full tax deduction compared to a car with higher emissions. And if you’re prepared to go for a car with emissions of less than 110g/km, you can claim a 100% CAs rate.

Choice two - almost full deduction

Where your company leases a car under a contract that won’t result in ownership, e.g. contract hire, it can claim a tax deduction for 85% of the rental/lease payments. So if you pay lease charges of, say, £3,000 a year, you’ll get a tax deduction of £2,550.

Tip. If you choose a car with less than 160g/km CO₂ emissions, you can get a 100% deduction for the lease or rental charges.

Golden rules

Despite the different methods of tax relief, in the long run these usually even out. Therefore, our golden rules are: if you have the cash to spare, buy a car outright, you’ll save on interest or lease charges. If that’s not the case, simply choose the lease/rental deal that suits you best, say because it offers you better cash flow.

For more information on tax and the types of car lease, visit http://companydirector.indicator.co.uk (CD 13.13.05).