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Should I buy, lease, hire purchase or PCP?

This is not a decision we feel should be principally driven by the tax treatment. Instead, we recommend putting tax to one side for a moment and considering which option makes most sense from a purely commercial basis:

  1. Are you going to want to own the car in, say, five years time or would you be looking to upgrade?
    1. How much more would you pay, in total, under a hire purchase deal as compared with PCP?
    1. What about if you add in the PCP balloon payment?
    1. How reliable do you think the car is and how much of a disaster would it be were it to require expensive repairs?
    1. Who would be on the hook for those repair costs?

Once you have determined the most sensible approach from a commercial perspective, you can find the tax treatment below:

Purchase: You would get relief by means of capital allowances. So, for a £50,000 car your limited company would get corporation tax relief of £9,500 (£50,000 Purchase Price x 100% First Year Allowance x 19% Corporation Tax Rate).

Hire Purchase: Again, relief would be through capital allowances, same as for an upfront purchase. To the extent interest is charged, this is a deductible business expense.

Operating Lease: The monthly lease fees are deductible business expenses. So, say the monthly cost is £1,000. You claim £12,000 a year as a deduction in your corporation tax return and save £2,280 in tax (£12,000 expense x 19% Corporation Tax Rate).

Finance Lease: The asset is, “depreciated” over its economic life in the accounts. The depreciation and any interest are deductible expenses. Say the car cost £50,000 and the useful economic life is determined to be 8 years. You can deduct 1/8th the cost each year, so £6,250, saving £1,187.50 in tax (£6,250 depreciation x 19% Corporation Tax Rate).

For sole traders, relief would be at their marginal rate of tax (20%, 40% or 45%) rather than at the 19% corporation tax rate. So, in theory, were a sole trader to purchase a £50,000 electric car solely for business use they could save up to £22,500 in tax by buying through their business (£50,000 x 45% Additional Rate).

What’s the difference between an operating lease and a finance lease?

An operating lease is a typical, bog standard lease agreement. You get the use of a car; you pay a fee and in 5 years you hand the car back in.

A finance lease arises where the lease, “transfers substantially all the risks and rewards incidental to ownership.” This might exist where, for example:

  • The lease is fairly long,
  • If you add up the total payments it’s very close to buying the car,
  • You’re on the hook for repairs, insurance, and any other costs,
  • You have the option to buy at the end of the contract for a small fee

Depending on how they’re drafted, PCP contracts can sometimes fall within the definition of a finance lease.

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