Tax Treatment of Cars

For business

Please note some changes have been proposed in the 2008 budget that will change the information contained in this page, for an overview of the effects of the 2008 budget please click HERE

Contract Hire

VAT is recovered by the lease company, and then charged on the rental. For cars with any element of private use, your business can reclaim 50% of the VAT charged. Please note we normally quote ex VAT.

VAT on any services provided in the lease such as breakdown cover or maintenance is fully recoverable. The VAT will be broken out by the finance company for easy identification of the VAT type.

Because the business does not take any risk of the value of the car, the car does not normally need to be shown as an asset on your balance sheet, which can reduce your company’s gearing ratio.

Rentals can be offset against corporation tax, subject to a prgressive restriction on cars costing over £12,000.

Key Features

• Off balance sheet
• Fixed monthly cost
• Possible VAT benefits
• Less administration

Contract Purchase

VAT is not charged on Contract Purchase.

Contract Purchase is best suited to companies who are unable to recover VAT, or have a lot of cars costing a lot over £12,000, where a progressive restriction on offsetting rentals against Corporation tax applies for contract hire. With Contract Purchase your company does take title to the vehicle, so claim capital allowances for the vehicle, but the finance company provide a guarantee to buy the vehicle back at an amount equivalent to the final payment (balloon), therefore removing any hassle or risk associated with vehicle disposal

Key Features

• Same administrative and management benefits as contract hire
• Fixed monthly payments
• Normally “On” balance sheet funding (Note I have seen examples of this funding method being treated as “Off” balance sheet, on account of the fact that the company has no residual value risk – check this with your auditors!)
• No VAT charged on funding element of the payments
• No permanent restriction on corporation tax allowance on “expensive” (12K+) cars

Finance lease (Business Lease)

VAT is recovered by the lease company, and then charged on the rental. For cars with any element of private use, your business can reclaim 50% of the VAT charged. Please note our quotes normally exclude VAT.

VAT on any services provided in the lease such as breakdown cover or maintenance is fully recoverable. The VAT will be broken out by the finance company for easy identification of the VAT type.

Because the business does take risk on the value of the car, the car does need to be shown on your balance sheet.

Hire Purchase

VAT is not charged on Hire Purchase, and is not recovered by the funding provider.

Finally, you should note that the Government is currently reviewing the tax treatment of cars, so expect all the above to change and something completley unworkable in it's place fairly shortly judging by past legislation from the bunch of muppets currently occuping No 10. For more details on the proposals for change click here