Business tax relief on Leased vehicles
Since April 2009, a car has the same definition as that applied for capital allowance purposes Business tax relief on Leased vehicles
Introduction Business tax relief on Leased vehicles Business tax relief on Leased vehicles
When a business purchases a vehicle it obtains tax relief by claiming capital allowances. However, when a business leases a vehicle it obtains tax relief by deducting the cost of the lease rentals (including maintenance and service elements) from its taxable income in the tax year the rentals are paid.
Therefore to determine precisely how tax relief is calculated the business must firstly determine whether the lease constitutes a rental agreement or a form of purchase. For these purposes, an operating lease and a finance lease should be regarded as lease agreements because they are rental agreements under which the car will not become the property of the lessee.
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Once the nature of the lease has been determined it’s necessary to consider whether the tax deduction should be restricted either because accounting standards have not been followed or by virtue of the lease rental restriction rules applied to cars.
Accounting Standards Business tax relief on Leased vehicles
Providing generally accepted accounting practice has been applied the accounting treatment should be acceptable for tax purposes; hence, tax deductions for rental payments should normally be available on the basis on which expenses have been included in the accounts.
However, if the rental payment dates are not broadly in line with the use of a vehicle, for example a substantial or excessive initial payment is required, when determining the tax relief available HMRC may insist that payments should be spread evenly over the term of the contract.
Lease rental restrictions Business tax relief on Leased vehicles
Post March 2009 leases
The current provisions governing lease rental restrictions were introduced with effect from 6 April 2009 for businesses subject to income tax, and 1 April 2009 for businesses subject to corporation tax.
From April 2013, for cars with CO2 emissions exceeding 130 g/km there is a flat rate disallowance of 15% of the effective rental, that is the rental plus any blocked VAT. For cars leased before April 2013 the 15% disallowance is applied to cars with CO2 emissions exceeding 160 g/km.
Example Business tax relief on Leased vehicles
On 1 June 2013 a company leases a car which has CO₂ emissions in excess of 130 g/km for an effective rental of £540 per month. The lease rental restriction will be calculated as follows:-
|
Monthly |
Annually |
|
| Rental |
£540 |
£6,480 |
| Disallowed |
(£81) |
(£972) |
| Allowed for tax purposes |
£459 |
£5,508 |
Any rebate of hire charges for such a car would be correspondingly relieved, so that only 85% of the rebate would be subject to tax.
For these purposes, a car has the same definition as that applied for capital allowance purposes, but the restriction does not apply to cars first registered before 1 March 2001 or to qualifying hire cars; that is cars that are:-
- hired under a hire-purchase agreement with no option to purchase;
- hired under a hire-purchase agreement with an option to purchase exercisable on payment of a sum not exceeding 1% of the retail price of the car when new; or
- leased under a long-funding lease.
Short term rental Business tax relief on Leased vehicles
The lease rental restriction does not apply to cars hired for not more than 45 days.
Replacement cars Business tax relief on Leased vehicles
If a lessor provides a replacement car because the original leased car is off the road the replacement car is treated as if it were the original car for the purposes of the lease rental restriction. Hence, if the CO2 emissions of the original car exceed 130 g/km the 15% disallowance should be applied to the replacement car even if its CO2 emissions do not exceed 130 g/km.
Chains of leases Business tax relief on Leased vehicles
It’s commonplace for there to be a chain of leases between the owner of a car and its ultimate user. For example, under an undisclosed agency a bank will lease a car to a contract hire company which then leases it to its client as a company car. The lease rental restriction will only apply to the final lease in the chain and the rental paid on all intermediate leases will be fully tax deductible.
Pre April 2009 leases Business tax relief on Leased vehicles
Low emission cars Business tax relief on Leased vehicles
Low emission cars, as defined for capital allowance purposes, are excluded from the lease rental restrictions if hired on or before 31 March 2009.
Other cars Business tax relief on Leased vehicles
For leases that commenced before these dates the lease rental restriction is applied according to the formula set out below.
The restriction applies to all cars, other than low emission cars and qualifying hire cars, which had a retail price of more than £12,000 when new.
Allowable deduction = £12,000 + ½ (Retail price – £12,000) x hire charge
Retail price
This method of restricting the tax relief available should continue until the end of the lease; that is, no transitional rules are to be applied if the lease extends beyond 31 March 2014.
Leased commercial vehicles Business tax relief on Leased vehicles
As the lease rental restriction rules outlined above relate only to cars, no restriction is applied on the hire costs of commercial vehicles, such as vans and lorries.
Other costs Business tax relief on Leased vehicles
Where a maintenance package is included in the lease cost, a full tax deduction may be claimed for the maintenance element but to ensure that a car’s maintenance costs are not curtailed by the lease rental restriction the maintenance costs should be separately identified.
In practice, maintenance costs are normally disclosed separately on the lease documentation, especially since VAT may not be fully recoverable on maintenance payments unless they are separately shown.
Any other running costs incurred in respect of the leased vehicle, for example insurance, should be deductible in full.
Provided they use their cars for business purposes sole traders and partners, who are self-employed for tax purposes, may claim income tax relief for motoring expenses. The relief available should be restricted so that no tax relief is given for the proportion of the expenses relating to private motoring; in practice the business element is determined multiplying the total expenses by the ratio of business miles to total miles.
Of course, if you have anymore questions about the Business tax relief on Leased vehicles , we’re more than happy to help. Our friendly and helpful staff are only a phone call away on 028 7122 8822 . Or contact us online here.
Business tax relief on Leased vehicles