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