Small business owners will at some point likely be faced with a decision regarding a company car; should you lease or should you buy? Both have their benefits, but there are many things to take into consideration before making a choice. These include tax implications, financial commitment, and also that of the question of ownership. We explore whether it’s best to buy or lease a vehicle for a small business.
What are the advantages of leasing a company car?
There are a number of benefits to leasing a company car rather than buying one;
Most business-owners seek to drive an impressive, luxury vehicle so as to make a good impression when meeting prospective clients and business partners. These, however, are expensive to purchase outright. Choosing to lease – instead of buy – such a vehicle, means lower (or included) maintenance and road tax costs, and often the monthly payments are lower than loan repayments.
Protection from depreciation
When you buy a vehicle, most people need to take out a loan and pay back a fixed amount, even while the car lowers in value as time goes on. When you lease one, however, the residual value at the end of the lease can lower your costs. At the end of the lease, you may walk away without any financial penalty if you have opted for a closed lease.
Another reason to choose a lease car is the ease with which one can be arranged. It’s possible to simply contact a vehicle broker, inform them of your budget and preferences, and they will sort the rest. This means you don’t need to spend time doing research and making comparisons – the broker will search for the best deals and let you know which options best suit your needs, and those of your business.
What are the advantages of buying a company car?
There are various reasons why small business owners choose to buy a company car outright, instead of lease one;
Tax benefits due to depreciation
Businesses that use owned vehicles will enjoy tax benefits associated with depreciation deductions, unlike those using a leased car. To receive these benefits, you must be able to prove that the vehicle is being used for business purposes for at least 50% of the time. Only the costs associated with the percentage used for business are tax-deductible as a business expense.
No mileage limitations
Those who choose to lease a vehicle will also have to contend with limitations put in place by the lease company, specifically to do with mileage. To keep costs down initially, many leaseholders are tempted to declare a lower anticipated annual mileage rate. The problem with this, however, is that when it comes to returning the vehicle, if the mileage is much higher there will be a substantial fee.
The vehicle is 100% yours
Another positive aspect of buying a vehicle for business is the fact that it is completely yours. If you choose to lease a car, there is a decision to make at the end of the lease contract regarding buying it or returning it – either way, there are more costs involved.
How do tax and depreciation work for a company car?
As mentioned above, those who lease a company car will enjoy tax-deductible lease payments for the percentage that the car is used for business. For a bought vehicle, it’s only the interest on the loan that is tax-deductible. Also, when it comes to leasing a car for business, 50% of the VAT is recoverable.
Another noteworthy tax benefit for those who lease a company car, is the exemption from corporation tax on vehicles with CO2 emissions that are less than 130g/km. In this case, 100% of the lease figure amount can be claimed back against your (taxable) company profits. For vehicles over this emission rate, it’s only possible to claim the lease rate against your businesses’ corporation tax.
When deciding between leasing or buying a company car, it’s important to think about the circumstances of your business, both in the immediate and in the future. Consider how much the vehicle will be driven; if you foresee a considerable amount of mileage being required, a lease car might not make financial sense. Think about vehicle maintenance; if you want a third party to take care of vehicle upkeep, including the costs and administration, then a lease car might be preferred. Another factor that often determines the choice is cashflow. If you have plenty to play with for a down payment on a car loan, this could help lower your monthly costs. If you don’t have this luxury, on the other hand, it can be easier to secure a lease vehicle with a low – or even no – down payment.
The article was produced in collaboration with Keith Michaels, a leading specialist and business car insurance provider.