Tax Implications of Business Vehicle Leasing: What You Need to Know

Published 18 September 2024

Leasing a vehicle for your business can be a smart financial move. Business leasing offers flexibility and avoids the significant upfront costs of purchasing. But beyond the benefits of a new vehicle, it’s crucial to understand how vehicle leasing impacts your taxes. For businesses in the UK, the tax implications can vary depending on the type of lease and the vehicle itself. Here’s what you need to know.

1. Reclaiming VAT on Business Vehicle Leases

One of the key tax advantages of leasing a business vehicle is the ability to reclaim VAT. Here’s how it works:

• Mixed Use (Business and Private): If your business is VAT-registered, you can typically reclaim 50% of the VAT on the leasing costs for a car used for both business and private purposes.
• Exclusive Business Use: If the vehicle is used exclusively for business, you may be able to reclaim 100% of the VAT.
• Commercial Vehicles: For vans or other commercial vehicles, 100% of the VAT may be recoverable, even if there’s some personal use involved.

Example: If your business leases a van for £500 per month plus £100 VAT, you could reclaim the full £100 VAT if the van is used for business purposes, even if there’s occasional personal use.

2. How Lease Payments Affect Your Corporation Tax

Leasing payments for business vehicles are often treated as an allowable business expense.  This means they can reduce your corporation tax liability. The tax treatment will depend on the CO2 emissions of the vehicle:

• Vehicles with CO2 emissions below 50g/km: You can usually deduct the full amount of your lease payments as a business expense.
• Vehicles with CO2 emissions above 50g/km: Only 85% of the leasing costs are tax-deductible. This is part of the government’s push to encourage businesses to adopt greener, low-emission vehicles.

Example: If your business leases a car with CO2 emissions of 60g/km for £400 per month, only £340 (85%) of the lease payment is tax-deductible.

3. Benefit-in-Kind (BIK) Tax for Company Cars

If your business lease includes providing cars for employees (including yourself as a director), you need to consider Benefit-in-Kind (BIK) tax. This is the tax on the personal use of a company car, which is seen as a perk or ‘benefit’ by HMRC.

• CO2 Emissions: The amount of BIK tax payable depends on the CO2 emissions of the vehicle, the list price, and your income tax band.
• Lower-Emission Vehicles: Lower-emission cars attract a lower BIK rate, so opting for hybrid or electric vehicles can lead to significant tax savings for both the business and the employee.

Example: A hybrid car with low CO2 emissions might have a BIK rate of 10%, while a higher-emission car could have a BIK rate of 25%.

4. Capital Allowances for Leased Vehicles

Unlike buying a vehicle outright, leasing doesn’t give you the option to claim capital allowances. Instead, you claim the lease payments as a business expense. However, if your business opts for a finance lease or lease purchase agreement where you plan to eventually own the vehicle, capital allowance rules may apply. This can be more complex, and it’s advisable to consult with an accountant to determine the best approach.

5. Mileage and Excess Charges

When calculating the overall tax benefits, remember that most business vehicle leases come with mileage limits. If you exceed these, your company could face excess mileage charges, which are not tax-deductible. Keeping track of your business mileage and ensuring it stays within the agreed limits is essential to avoid unexpected costs.

Example: If your lease agreement allows for 10,000 miles per year and you drive 12,000 miles, you may incur excess mileage charges that are not tax-deductible.

Final Thoughts

Leasing a vehicle for your business can provide a range of financial benefits.  Understanding the tax implications is key to making the most of your lease. Whether it’s reclaiming VAT, reducing your corporation tax bill, or minimising Benefit-in-Kind tax, the right approach to leasing could save your business money.

As always, it’s a good idea to consult with a tax advisor or accountant to ensure you’re maximising the tax benefits of your business vehicle lease while staying compliant with HMRC regulations.