The tax benefits of business contract hire
Business contract hire is already a useful way to acquire a company car without using valuable cash reserves to purchase the vehicle.
But did you know that in addition to the cash flow benefits, there are many tax advantages to business leasing as well?
These extend to both the company and the driver if ultra low emission vehicles are chosen. Generally these are zero emission electric vehicles and ultra low emission plug-in hybrid (PHEV) vehicles.
Understanding the range of tax advantages is important and will help your business decide if contract hire is the right car acquisition method for them.
What are the tax advantages for the business?
Managing corporation tax is important for any business, and the good news here is that a company car on a business contract hire agreement is a tax deductible item.
However, you will need to plan the sort of car you wish to lease. At the moment, 100% of the rental is tax deductible as long as the vehicle has CO2 emissions below 110g/km. But this will change in April next year: contracts entered into from 2021 will only be 100% claimable against corporation tax if they are 50g/km of CO2 or below.
For cars above 110g/km there is a restriction to 85% of the rental which can be claimed. So understanding the technicalities of this tax can help you manage your corporation tax bill more efficiently.
What are the tax advantages for the driver?
The tax advantages for the company driver, along with directors considering returning to a company car, are significant.
The most advantageous tax benefits are for choosing a zero emission battery electric vehicle - for example a Renault Zoe, MINI E, Hyundai Kona Electric, Tesla Model 3 or Audi e-tron. Tax rates for 2020-21 are 0%, rising to 1% in 2021/22, and then 2% until April 2025.
Choosing an ultra low emission vehicle with CO2 emissions of 50g/km or below, such as a plug-in electric hybrid, are also tax efficient although not quite as advantageous as a zero emission electric vehicle. Taxation levels depend on the number of miles the vehicle can travel in zero emission mode, but are typically between 6-12% for the 2020-21 tax year.
Are there any VAT advantages to business contract hire?
We've explored the favourable corporation tax and personal tax implications of business contract hire, but there is a further benefit in the VAT treatment.
In most cases, where there is some personal use of the car, 50% of the VAT on the monthly rental can be reclaimed. There are occasions when 100% of the VAT can be reclaimed if the car is used solely for business purposes, for example as a pool car.
Where a maintenance agreement is included then this will be billed separately and 100% of the VAT can be reclaimed on the maintenance agreement.
Is business contract right for you?
"We think many businesses should be reconsidering their motoring policies to take advantage of the latest ultra low emission technology, which not only offers little or no pollution, but substantial business and personal tax benefits," says Rob Marshall, operations director of Gateway2Lease.
"In particular, those company directors who had previously decided to run a personal lease car outside the business, should now actively consider moving to a zero emission company car.
"Please do talk to us and we can explain more fully the benefits to you."
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