TAX GUIDE: MAKING SMART CHOICES WHEN BUYING OR LEASING A COMPANY VAN
Are you considering buying or leasing a company van? It’s an important decision that can have tax implications for your business. In this tax guide, we’ll explore the difference between buying and leasing a company van and help you understand the taxes you can save in each scenario.
The Difference Between Buying and Leasing
Let’s start by understanding the fundamental difference between buying and leasing a company van. When you buy a van outright, you pay the full cost upfront, and you become the owner from the moment of purchase. On the other hand, when you choose to lease a van, you pay a monthly fee instead of owning the vehicle. While you don’t own the van when you lease it, you still need to insure it and pay road tax unless these costs are included in your monthly payment plan. At the end of the lease contract, you may have the option to purchase the van or return it.
Tax Advantages of Buying
Buying a company van can provide significant tax benefits compared to purchasing a company car. The full cost of the van is deductible as a capital allowance, reducing your corporation tax obligation. In contrast, company cars can only be partially claimed as capital allowances based on fixed rates set by HMRC, depending on their CO2 emissions.
Furthermore, company vans are classified as ‘plant and machinery’ and qualify for the Annual Investment Allowance (AIA). Until 31 March 2023, the AIA has been temporarily increased to £1 million. This means you can invest in as much plant and machinery as you need and deduct the full cost from your profits.
If your limited company is VAT registered and you purchase a van that includes VAT, you may be able to claim VAT. As long as the van is primarily used for business purposes, HMRC is more lenient with company vans regarding incidental personal use. However, the amount of VAT you can recover depends on the percentage of business use and may be reduced if there is significant personal usage.
Considerations When Buying
While tax savings are attractive, it’s crucial to consider other practical aspects when purchasing a company van. Vans are depreciating assets, meaning you are unlikely to recover the full amount you paid when you sell it. Moreover, buying a van outright can have a significant impact on your cash flow, so ensure you have sufficient funds to cover your business expenses.
Tax Advantages of Leasing
Leasing a company van may be a more appealing option if you don’t have enough funds to purchase the vehicle outright. Although you don’t own the van, the monthly lease cost can still be deducted as an allowable business expense, reducing your corporation tax. The interest charged on top of the monthly fee is also an allowable expense. Like purchasing a van, you can claim VAT added to your monthly lease fee if you are VAT registered. However, significant personal usage may affect the amount of VAT you can reclaim.
Considerations When Leasing
Leasing a company van offers flexibility, but it’s important to consider certain factors. Unlike owning a van, you cannot sell a leased van if you no longer need it. Terminating a lease agreement early may result in additional fees, and exceeding the mileage limit can lead to extra charges.
Benefit-in-Kind on Company Vans
If you use a company van for personal purposes, such as picking up your children or running errands, you create a benefit-in-kind (BIK). Both your limited company and the employee (or yourself) using the van for personal reasons are subject to tax.
HMRC has established fixed rates for BIK on company vans. In the tax year 2022/23, a company is liable to pay a fixed rate of £3,600 if an employee receives a van as a benefit and uses it personally. The employee must pay income tax on the fixed £3,600, with rates depending on their tax bracket.
Benefit-in-Kind on Fuel
When it comes to fuel for personal use in a company van, it’s considered a separate BIK, and you are responsible for paying tax on it unless you supply your own fuel. The company must pay a fixed rate of £688 for the tax year 2022/23, and the employee pays tax based on their personal income tax bracket.
Good News for Electric Vans
Starting April 2021, the van benefit charge no longer applies to zero-emission vans. This means if your van emits no CO2 while being driven, you can enjoy the tax benefits without incurring the van benefit charge. Alternatively, you may consider purchasing an electric vehicle through your limited company, offering both environmental and tax advantages.
Buying or leasing a company van has its advantages, and understanding the tax implications is essential for making an informed decision. Consider your financial situation, business needs, and tax obligations before choosing the option that best suits your company.
If you want more information on the tax implications of buying or leasing a company van for your business, we’re here to help. Leave us a comment or contact us, and our experts will guide you through the process and answer any questions you may have!