Is a Business Car Lease Tax Deductible?

What tax can I reclaim with a business lease?

There are several areas where your organisation may enjoy tax benefits with a business car lease. These include:

1. Reclaim costs through corporation tax

Limited companies that opt for business vehicle leases can take advantage of claiming up to 100% of the monthly payments back through their corporation tax bill. This also applies to costs such as maintenance packages alongside your lease agreement.

However, it's worth noting this benefit applies according to company car emissions as determined by allowances set by HMRC. Vans are excluded from this, and businesses can claim 100% regardless of the emissions.

2. Claiming back VAT

In most cases, 50% of the VAT on car lease payment for a Business Contract Hire vehicle can be reclaimed if your company is VAT registered. This figure takes into account any personal use. So, if the car is solely used for business purposes, you can claim up to 100% VAT back on the initial rental and monthly instalments.

3. Improves the balance sheet

Buying a company car outright is a significant hit to business cash flow, and this asset is also listed on the balance sheet. In comparison, lease vehicles spread the cost of your liability, and as you don't own the car, they are not listed as an asset in your financial statements.

This helps improve the outlook on your balance sheet and reduces the impact of securing more credit in the future.

In addition to the tax benefits of car leases, considering the tax implications for staff that use the vehicle is essential. In this case, employees benefiting from a company car perk must pay tax in the form of higher national insurance payments. This tax is also known as Benefit in Kind (BiK). For more information on company car tax, check out our what is BIK guide.

Five tax benefits for business car leasing

There are several business leasing benefits that come with this option. Below are some of the most important ways it can help your company.

1. Improved accounts

Every business wants to keep its balance sheet looking as healthy as possible, not only to maintain credibility as a company but also to maintain your ability to obtain credit, if required.

Business car leasing is a tax-efficient way of keeping your company accounts in good shape.

2. Reclaim monthly costs through tax

Based on current legislation, limited companies can offset their monthly repayment costs against their corporation tax. If you are a partnership or sole trader, these charges can instead be offset against the annual taxation.

The government's annual budget also dictates the amount that can be offset based on the CO2 emissions of the car you have leased. However, if you have leased a van instead of a vehicle, you can offset 100%, no matter how high or low the emissions.

VAT on the initial and monthly rental costs can also be claimed back. HMRC allows you to claim 50% as they assume the car will be split evenly between business and personal use. However, you can claim back 100% if the vehicle is used only for business reasons and is left on the premises overnight and on weekends.

This also applies to the vehicle if it is a 'pool' car (which is driven by several employees and is left at the business premises overnight and at weekends), for which you will be able to claim back 100%.

3. Claim back mileage costs and maintenance packages

When you take out a business car lease, you also agree to an annual mileage allowance based on how many miles you expect will be driven during the contract term. When you return the car, it will be checked to see if the mileage has exceeded the allowance. If so, you will be liable for the excess mileage charge.

However, you might be able to claim tax relief on any excess mileage, which could help if you exceed your allowance.

Excess mileage is treated as a “service charge”, so a company can claim back 100% of the VAT instead of 50% like the vehicle's monthly rental.

Maintenance packages are an optional extra when you are taking out a business car lease, though this can be considered as a service charge. This leaves you free to claim back 100% against corporation tax and all of the VAT.

4. Access the latest vehicles

Leasing a car gives you access to a variety of modern cars and vans, ideal for company use. Most lease agreements last between two and four years, so you can upgrade regularly and enjoy the latest models and technology more frequently.

5. Save money compared to a personal lease

Business car leasing is typically cheaper than a personal lease as you can claim the VAT back on monthly instalments.

In most cases, you can claim up to 50% VAT back, but if you can prove the car is only used for business reasons, you can claim the full 100%.

What are the business contract hire tax implications?

While there are many tax considerations for business car leasing, there are a few important areas you should be aware of.

• Mileage limits – Every business lease has an agreed mileage allowance. Estimating how many annual miles you need is vital, as anything over in your agreed period will incur excess charges
• The business doesn't own the vehicle – At the end of the contract, you must return the car to the leasing company. This is ideal if you want to upgrade frequently. But if you want to own the car, other car finance options may be more suitable
• Wear and tear policies – Your lease car is subject to a fair wear and tear policy, and anything deemed over this upon returning the vehicle is charged accordingly
• Expensive to end the contract early – If you want to return the car before the end of the agreement, you will be charged an early settlement fee. This fee can be costly depending on your contract agreement
• Increased NIC contributions for employees – Providing a company car as a perk means your staff will have to pay tax on this benefit. The amount is subject to the model, emissions and value of the vehicle. Opting for lower emissions models can help lower the tax rate

Are electric car lease payments tax deductible?

Opting for an electric car business lease works in the same way as any other vehicle. You get a range of tax benefits as mentioned above, including:

• Monthly costs and initial payments are tax-deductible
• Claim 50% or 100% of the VAT back on monthly costs and additional packages (depending on vehicle use)
• No huge initial outlay to purchase
• Lower BiK rates for employees

Electric company car tax explained

Similar to traditional petrol and diesel cars, electric vehicles also incur BIK tax. However, by choosing a zero-emissions car, employees pay a lower rate compared to other models.

BIK rates are set by HMRC, and currently, they are frozen until 2025. Now, fully electric vehicles have a rate of 2% until then and rise to 3% in 2025-26.

Below, the table shows the current rates for zero and low emissions vehicles:

For more electric car business lease benefits, check out our guide.

How do I reclaim tax for my business car?

To reclaim tax for your monthly instalments, initial rental payments and any additional packages alongside your car lease, such as maintenance, you must record the amounts in your accounts and file these in your end-of-year financial statements.

For example:

• Sole traders – complete a Self-Assessment tax return
• Partnerships – complete a Partnership tax return
• Limited companies – complete a Company Tax Return

VAT-registered businesses can also claim back the VAT on monthly instalments, and these need to be recorded in your quarterly VAT return.

Do I always need to pay company car tax?

If you are using a company car as a benefit from your employer, benefit-in-kind tax is payable as it is classed as a taxable perk.

Situations where company car tax doesn't apply include:

• Vehicles that are solely used for business purposes and are not used in any way for personal reasons - these cars are typically left at a place of work overnight and at weekends
• Pool cars – These cars are loaned to employees during working hours and are not available for private use

Can I write off the full cost of the lease as a business expense?

Business leases enable you to write off some or all of the cost of the monthly payments, depending on the vehicle's emissions. HMRC sets this amount, for example, if you leased a car on or after 6 April 2021 and the CO2 emissions are over 50g/km, you must disallow 15% of hire charges. But vans, no matter the emissions, can claim 100% back.

For VAT, if the car is used for business and personal reasons, only 50% of VAT can be reclaimed. However, if the vehicle is purely used for business usage, 100% can be claimed back.

Business car leases are a great way to upgrade your fleet and offer perks to employees. If you'd like more information on current deals and models, contact our team for further details.