Tax Relief for lease arrangements

Tax Question

I am considering acquiring a car through my company via a lease arrangement, what tax relief will the company be entitled to and what benefit in kind charge will I, as the director using the vehicle, incur.

Tax Answer

If the company acquires the vehicle through an operating lease, effectively renting the car for the length of the contract, then it may claim the monthly rental costs in full if the emissions are below 110g/km. If the emissions exceed this level, then there is an automatic reduction of the relief of 15%. Capital allowances are not available on this type of arrangement as ownership of the vehicle remains with the lessor and does not pass to your company at any stage.

If the vehicle is obtained via a finance lease or lease purchase arrangement, then the situation is different and there are two possible options;

Where legal title passes over at the beginning – if legal title of the vehicle passes over to the lessee (your company) at the beginning of the lease then capital allowances can be claimed in the usual manner based on the CO2 emissions.

Where legal title passes over at a later date – the most common finance lease will see legal title remaining with the lessor for the majority of the contract with the lessee only taking ownership of the vehicle once a final “balloon” payment is made. In this scenario as legal ownership does not transfer until this payment is made, no capital allowances can be claimed until this payment is made. Instead, the company can claim tax relief in a different manner during the initial lease period CFM97830 confirms it can claim relief on:

  • The depreciation figure included in the accounts; and
  • The interest element of the monthly payments to the lessor.

This is one of the only times that accounting deprecation is an allowable deduction for tax purposes.

Whichever method of purchase – including hire purchase- is used the benefit in kind on the person using the vehicle remains the same. This is calculated on the basis of the emissions of the vehicle and its original list price. If private fuel is provided by the company, then a separate benefit in kind is additionally incurred.

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