Options When Financing a Car for Your Business

A modern, well-maintained vehicle says a lot about your business, especially if you're using it to visit clients. No wonder that as business starts to pick up, many people turn their thoughts to acquiring a new car. Whether you're self-employed or part of a larger organisation, the options for buying a car for business aren't that different from buying privately. The main variation is how the purchase will be treated for accounting and tax purposes.

We've looked at the main options to help you decide which finance route is best for you.

 

Buying Outright

 

Purchasing a car outright, whether with cash or by using a loan, means that the cost of the vehicle is capitalised. An annual charge for depreciation can then be made in the profit and loss account. This calculation is based on the life of the car and its residual value. It means that the asset value of the car on the balance sheet reduces year on year as it depreciates.

Despite the credit crunch, as a business you're likely to have a greater range of borrowing available to you. You may be able to borrow more cheaply than individuals can. You may even be able to use a business credit card, but bear in mind that this is usually an expensive way to borrow.

Note that cars don't qualify for the 100 percent capital allowance on the first £250,000 of annual plant and equipment expenditure introduced by HMRC in 2015. It's not usually possible to reclaim VAT on cars either, so if your business is VAT registered, you may find it more favourable to lease rather than buy.

 

Hire Purchase

 

Because hire purchase gives you the option to buy the vehicle, either part way through the agreement when you've paid half the value or at the end of the agreement, it's treated in the same way as an outright purchase in terms of accounting. This means that the value of the car is capitalised on the balance sheet. However, the future payments are recorded as a liability. The tax treatment is the same as if the car had been bought outright.

It's important to understand any extra costs associated with the agreement, such as mileage charges or allowances for wear and tear should you choose not to exercise your option to buy.

 

Leasing

 

Leasing is where things get a bit more complicated. Lease purchase, where you have the option to buy the car at the end of the agreement, is treated in the same way as purchase. Contract hire, however, is handled differently. The key to understanding this is to look at how VAT is charged. If it's on the purchase price of the vehicle, you will own it in relation to tax purposes. If, on the other hand, VAT is charged on each payment, it qualifies as a lease.

When you're leasing, the value of the car isn't capitalised, and the cost of the payments will be charged to the profit and loss account over the term of the agreement. The payments themselves will be smaller with a lease because you're not buying the vehicle, but you'll have no residual value at the end.

It gets more complicated when it comes to tax. If the car has CO2 emissions of more than 130 g/km, there's a reduction of 15 percent on the amount of the payments that can be offset against tax.

Because VAT is charged on the payments, the liability is spread over the life of the lease. However, for cars, only 50 percent of the VAT can be reclaimed. If the agreement includes maintenance, though, the VAT on that portion can be reclaimed in full. For VAT registered business, therefore, leasing a car may well be a more tax-efficient option.

The important lesson to take away from all of this is to look at what is going to be best for the business. Whilst leasing may be more tax efficient, you don't own the car at the end of it. Ownership, on the other hand, may cost you more in the short term, but you do have a valuable asset, with a residual value at the end of the day.

It pays to weigh up the options carefully, and don't let tax or accounting considerations get in the way of doing the right thing for your business. Look at the overall cost of the deal and take into account any extra charges for excess mileage or wear and tear.

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