Which is more Tax Efficient - Lease or Hire Purchase a Cars / Van

speakswan

Hi Guys,
As a director of a small company I was wondering which is more tax
efficient from a VAT, Director's Income Tax and Corporation Tax point
of view to buying & owning a company car through hire purchase, a bank
loan or lease agreement?

Your opinions would be greatly appreciated.

Thanks.

kluivert

It depends on whether the lease is a finance lease or an operating lease.

A Finance Lease is like a loan

A Operating Lease is like rent.

How do you tell the difference.

Finance Lease is a type of lease that is not an operating lease. Clear I know!

A Finance Lease is where you hold onto the asset for the majority of its useful life.

An Operating Lease is where you hold onto the asset for part of its useful life.

A lease on a car is typical of an operating lease, as companys tend to re-new the car every two three years.

Hire Purchase is a form of loan finance.

Vat Treatment
The different between a Finance Lease and a Hire Purchase is only the treatment of VAT.

With a Finance Lease/ Operating Lease you re-claim the Vat on a monthly basis over the term of the lease.

With a Hire Purchase you re-claim the Vt at the beginning, just like a normal invoice.

Accounting Treatment

Finance Lease - treated as a loan, interest charged to P & L.

Operating Lease - treated as rental, split the interest and prinicpial and post both to P & L - effect - reduces your profit over Finance lease as prinicipal element of monthly rental gets posted to P & L.

Operating Leases do not appear on your balance sheet as it is just a rental of an asset. Therefore your debt gearing ratios are reduced.

Hire Purchase - Same as Finance Lease.

Corporation Tax Treatment

For Company Cars, the rental repayments are restricted for corporation tax purposes.

There is a formula:

(Lease Payments x Relevant Capital Limit) / Retail price of vehicle.

*Relevant Capital Limit - find this from the Revenue, updated most years.

It was €22,000 when i was doing my tax exams back in 2004.

Now to make it more complicated.

You do not get capital allowances on finance leases. but you do get a capital allowance for Hire Purchase. The rate is 12.5% per year against your taxable profits.

Need to work out which is more benefit. Capital Allowances v Reduction in Profit from Operating Leases Rentals.

Example: Car costs 30000

Hire Purchase 30000 x 12.5% capital allowance rate.

Operating Lease: Yearly rental payments (Limited to formula above) x 12.5% corporation tax (Corporation Tax Saving)


For Directors BIK - have the car down as a POOLED CAR, not assigned to anyone person, anyone can drive the car, therfore no BIK applicable.

Sorry long winded but its a big area.

speakswan

Kluivert,
Thanks for the very detailed response. It looks like HP might be the better option as 1) VAT on asset is fully reclaimable the moment the car is purchased, 2) you can write off the interest against profits & 3) you can claim capital allowances against Corp Tax. In fact HP looks like very similar to a bank loan.

Again many thanks for the detail reply. I'm now armed with enough information to talk sensibly with my accountant.

dimple

The advice above regarding VAT is only applicable to commercial vehicles. Recovering VAT on a non-commercial vehicle such as company car is not permitted in the majority of cases. There are new rules from 1 Jan 2009 allowing 20% VAT recovery on non-commercial vehicles which have CO2 emissions of less than 156g/km.

The following guidance from Revenue should help clarify things -

http://www.revenue.ie/en/tax/vat/leaflets/vat-and-vrt-on-motor-vehicles.html#section4.4

speakswan

Thanks for the Vat info re passenger cars versus commercial vehicles Dimple, it is a tricky & potentially costly area.

Mr Clonfadda

It can be more tax efficient to buy car personally. The company can then pay you a rate per kilometer which is tax free to you and can be offset by the company for corporation tax

Bren1609

Depends on how much mileage you do.

If the mileage is high then purchasing a car personally and claiming mileage is more advantageous. If the mileage is low, the company car is the better option.

mickbyrne

Bren1609 wrote: »

Depends on how much mileage you do.

If the mileage is high then purchasing a car personally and claiming mileage is more advantageous. If the mileage is low, the company car is the better option.

If you are a company director and can maximise the allowable rates, its always more beneficial to own the car personally, no matter what the mileage is.