Commercial needs rather than tax implications should be the main driving force, and individual circumstances may affect a final decision. This advice is therefore by nature very general and should not be relied upon as correct for your own individual circumstance.
Before considering tax, look at the price differential between purchase and lease. If you can get a good price for cash, but will be charged a high interest rate on the lease, then buy it! If you don’t have the cash to hand, then lease it!
If you aim to keep the vehicle for a long time, purchase is generally a better and cheaper option.
What type of lease?
Hire purchase/ finance leases/lease purchase ensure that at the end of the payment period the customer either owns the vehicle, or has the option to own.
Operating leases are equivalent to a rental agreement, where the customer pays a monthly fee and at the end of the agreement the vehicle is handed back to the original owner.
What happens when I buy?
If you have been charged VAT on the sale (i.re. it is not a private sale) you will be able to reclaim the VAT immediately (assuming you qualify under normal VAT rules).
You will receive full capital allowances for the purchase, and if your total asset purchases in the year are less than £50,000 (2009/10) then the whole sum will be …to the annual investment allowance.
If you do not need to use the allowances then these can be carried forward at 20%.
What happens on HP or a finance lease?
From an accounting perspective the vehicle is treated as if purchased. The finance company will be shown as a creditor in the accounts.
As with purchase, you will receive capital allowances ad for purchase, and the interest element of the payments will also be a tax-deductible expense.
With HP, An attractive part of this is that you will generally be able to claim the full amount of the VAT up front. This doesn’t necessarily mean on the day you take possession of the vehicle, as there will probably be a delay in the finance company issuing a VAT invoice. A finance lease may differ slightly in the VAT is charged on the initial payment and subsequent instalments.
You therefore generally get the tax advantages of purchasing the vehicle, with the added benefit of improved cashflow but the added cost of the interest payments.
What happens when I lease?
This is the equivalent of rental, and the rental payments treated as a tax-deductible expense in the profit and loss accounts.
The VAT portion of the payments is reclaimable when charged.
This information is only for guidance to please get in touch fo our advice.
