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Car sales people sometimes suggest that leasing is more tax efficient than purchase for cars used for business purposes.
There may be exceptions where this applies, but in general we disagree. Some sales people like to quote a weekly or monthly cost because it can seem affordable, particularly if it is all inclusive. Fixed monthly outgoings may be more important to you than maximum tax relief or lowest long term cost. It is also true that tax rules are a little more generous for leasing companies than for other businesses, but leasing companies will only pass on a small amount of that advantage to the customer.
Some cars are used for 100% business mileage, but the use of most cars includes an element of private use. Traveling to work is classed as private use. A limited company does not itself enjoy private use of a car and can normally claim 100% tax relief on expenses because an employee will be assessed to a private use benefit. However a business trading as a partnership or sole trader will only be able to claim the proportion of the running expenses, finance costs and capital allowances (see below) relating to business use.
You can estimate the business proportion of your car expenses, but your will be in a much stronger position, particularly in any investigation, if you have a record of the business mileage of all your business owned cars. The Inland Revenue require you to keep records although most Inspectors have been reasonable up till now.
You may have to keep records for each vehicle's running costs, against which to apply the business proportion.
CAPITAL ALLOWANCES
Unlike with other plant and machinery, successive governments have restricted the rate of capital allowances on what they define as "expensive" cars costing over £12,000. Although the maximum annual write down is £3,000, any remaining difference between buying and selling price is allowed in the year of sale. Although there is a timing delay, all the business proportion of the depreciation is allowed over the period of ownership.
THE LEASING RESTRICTION
The claim for tax relief on leasing costs must be restricted to the business use proportion as above, but for cars with a Retail Price when new (RP) more than £12,000, there is a further, permanent, restriction.
Example restrictions are 20% on a £20,000 car, 25% on a £24,000 car calculated on the following formula -
| Lease Rental x | 1/2(RP - £12,000) |
|
RP |
The legislation does not define Retail Price when new, and the Inland Revenue will accept the price paid by the leasing company which should be shown on the agreement.
Be aware of the distinction between Retail Price used for this calculation and List Price used for company car benefits.
See also -
BUDGET 2002 NEWSFLASH
Enhanced Capital Allowances
Additional Passenger Rate - a new
tax free payment from 6 April 2002.
Mileage Rates (Fuel Only) - new advisory
figures for 2002.
Mileage Rates (RAMR) - Revenue Authorised Mileage Rates
for employee owned cars.
Mileage Record - print this
handy form to record your business mileage
VAT in Mileage Allowances - can be
reclaimed by some VAT registered businesses.
Car Fuel Benefit - changes from 5 April 2003.
Car Policy - is a company or firms car and fuel
worthwhile?
Travel and Subsistence - new rules on
commuting since 6 April 1998 - are you complying?
Reminder - disclaimer applies. Please feedback your comments. This page was last modified 1 September 2002.