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The tax relief and tax deductions on lease hire can be quite complicated if you're dealing with this by yourself, but they're much easier to work out than relief and deductions on purchasing the car where you have the car's value to take into account.
To put it simply, if you opt for lease hire, you'll incur VAT. There are two elements to the lease payments: one for the car, and one for maintenance. You can claim back all VAT on the maintenance payments, but only half of the VAT on the car itself where there is any private use of the vehicle. In addition there are tax deductions you can make on the value of the car.
Since August 1995, companies using cars solely for business purposes can recover the VAT incurred. However, you can only recover half the VAT that had previously been recoverable on the rental where there is any private use of the vehicle.
For any VAT registered company leasing is much more attractive than purchasing (which includes outright purchase, contract purchase, and hire purchase) from a VAT point of view. For example:
A Company makes 36 lease rental payments of £500 excluding VAT for the use of a company car and £43.75 VAT is reclaimable per payment
But there are down sides when you consider the effect on corporation tax. With leased cars a problem arises when the retail price of the car exceeds £12,000, as a permanent tax disallowance is applied to the monthly rental.
Unfortunately the 'retail price' is not precisely defined in the legislation - so it's assumed to be the price an ordinary member of the public might pay, which therefore includes VAT and excludes the bulk or special discounts the lease hire company will have certainly made before buying the car.
| Retail Price £ |
Deductible Rental % |
Disallowed Rental % (toner/drum) |
| 12,000 |
100.00 |
0.00 |
| 14,000 |
92.86 |
7.14 |
| 16,000 |
87.50 |
12.50 |
| 18,000 |
83.33 |
16.67 |
| 20,000 |
80.00 |
20.00 |
| 22,000 |
77.27 |
22.73 |
| 24,000 |
75.00 |
25.00 |
| 26,000 |
73.08 |
26.92 |
To enable you to calculate your own position Deloitte & Touche has developed www.cartax.co.uk and there's the always-excellent Accounting Web which has www.accountingweb.co.uk and then there's the Inland Revenue site at www.inlandrevenue.gov.uk
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