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A common question asked by clients is, “Is it better to buy or lease a vehicle?”. The answer to this question can depend on a number of factors and also the financial circumstances of the individual or company acquiring the vehicle. The advantages and disadvantages for each are as follows:

Advantages of Buying

 

Ownership - when purchasing a vehicle whether it’s purchased outright, via hire purchase or finance lease, at the end of the term the asset will be owned

No mileage restrictions - as the vehicle will be owned, there will be no mileage restrictions as with leasing

Capital Allowances - tax relief will be available in the form of capital allowances at 100% for qualifying commercial vehicles and low emission cars with Co2 emissions of less than 75g/km or electric cars (up to a total of £500,000 until 31 December 2015)

VAT - when purchasing a vehicle, any VAT included within the cost can be reclaimed right away on the individual’s/company’s next VAT return in full assuming it is a commercial vehicle or is a car used as a taxi, for driving instruction or self-drive hire etc.

 

Disadvantages of Buying

 

Higher initial payment - as a rule, when purchasing a vehicle via hire purchase, the initial deposit will be higher than that of leasing

Higher monthly payments – hire purchase monthly repayments are usually higher than that of lease payments

Repair and maintenance costs met by the owner – with a lease agreement, there is a option for the lessor to cover the cost of repairing and maintaining the vehicle, however when purchasing a vehicle, this cost must be met by the owner

Depreciation – as the asset will be owned, the owner will experience depreciation of the vehicle which will impact on its future resale value

Reclaiming VAT – if the vehicle being purchased is not a commercial vehicle but rather a car, then any VAT included within the purchase price cannot be reclaimed (unless it’s solely used for business purposes as mentioned above, i.e. taxis etc)

 

Advantages of Leasing

 

Lower initial payment – the initial payment of a lease agreement is usually relatively low and can be anything from 3 to 6 times the monthly rental

Lower monthly payments – monthly payments are usually lower than that of a hire purchase and as such prove far more beneficial for cash flow purposes

Repair and maintenance costs can be included – many lease companies offer to take care of the repair and maintenance of the vehicle and include this in the monthly rental

Flexibility to have a new vehicle every 2-3 years – for those who would prefer to have a new vehicle every 2-3 years, leasing allows the flexibility to do this without having the burden of having to sell the vehicle before doing so as would be the case with buying

Reclaiming VAT – VAT can be reclaimed in full on the lease of commercial vehicles and 50% on the lease of cars where private use is present. A business may be able to reclaim 100% of the VAT on the lease of a car, as long as the car is used for business purposes only i.e. taxis, ambulances, driving instructor vehicles or is a pool car etc.

 

Disadvantages of Leasing

 

No ownership – leasing does not result in ownership, meaning monthly repayments continue year on year without ever resulting in ownership

Limited mileage – a lease agreement is usually subject to a mileage restriction with excess mileage charges being applied for exceeding the maximum

Wear and tear – when the lease agreement comes to an end, the lease company will assess the vehicle for any damage that exceeds what they consider to be general wear and tear and charge for its rectification

The leasing habit – once you’ve become used to leasing, monthly payments can go on forever whereas when a vehicle is purchased and the debt is paid, the asset is owned and can be used for many years to come.

 

VAT

 

When deciding whether buying or leasing is the best option for a business, VAT can be an important consideration for business owners. If a vehicle’s purchase price includes VAT, as long as the vehicle is a commercial vehicle, then it can be reclaimed in full on the business’ next return, assuming the business is VAT registered. This is regardless of whether the vehicle was purchased outright, via hire purchase or finance lease.

If the vehicle being purchased is a car, then no VAT can be reclaimed.

Should the vehicle be leased, then VAT can be reclaimed on the monthly payments as they occur. However, should this vehicle be a car, then only 50% of the VAT may be reclaimed unless the car is used solely for business purposes only, in which case 100% of the VAT may be reclaimed.

 

Tax Relief

 

The business may achieve tax relief on the purchase or lease of a vehicle depending upon the individual circumstances and this relief will differ depending on whether the vehicle is commercial or a car:

Tax relief available on the outright purchase, hire purchase or finance lease of a vehicle:

Capital Allowances

Commercial vehicles                     - 100% Annual Investment Allowance

Cars:

Co2 < 75g/km                             - 100% First Year Allowance

Co2 > 75g/km but < 130g/km      - 18% Allowance on a reducing balance basis per annum

Co2 > 130g/km                           - 8% Allowance on a reducing balance basis per annum

For sole traders and partners where a proportion of personal use of the car exists, a percentage adjustment must be made to reduce the capital allowance claim so that it only reflects business use.

Where personal use of cars occurs within a company, the result will be a benefit in kind on which personal tax will be payable.

Tax relief available on the lease of a vehicle:

Tax relief is available on the lease or contract hire of a vehicle via a deduction of profit equal to the value of the lease payments. Therefore, rather than being a tax deduction, the lease payments reduce the business’ net profit to provide tax relief. This relief is available at 100% for commercial vehicles and cars with Co2 emissions of < 130g/km, with only 85% relief of the total lease payments for cars with Co2 emissions of > 130g/km.

 

Conclusion

 

In summary, when deciding on whether to buy or lease your next business vehicle, the key considerations are cash flow, your desire for ownership, anticipated mileage and maintenance costs. If the vehicle is a car and a proportion of its use will be personal, then benefits in kind should also be considered.

If there is no requirement for your business to have a new vehicle every 2-3 years and cashflow isn’t an issue, then purchasing a vehicle outright or via hire purchase would be the appropriate choice. It results in ownership and means tax savings are achieved up front. It also means that any VAT can also be recovered in full upon purchase.

If cashflow is an issue and a relatively high initial payment followed by high monthly repayments are out of reach, leasing may be the way forward. Leasing still allows tax relief, however over the lease term rather than up front. The same applies to the reclaiming of VAT on the lease payments, this is achieved each month once payment is made. Leasing could be an option for a business until it finds itself in a position where it can afford to purchase its own vehicle rather than continue to lease.

If you have any queries relating to the above, or are looking to make your own “buy or lease” decision and would like further guidance, please contact our team. We will be more than happy to answer any queries you may have.