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Better to buy or lease car as sole trader?

Better to buy or lease car as sole trader?

My client, a self employed sports coach, intends to purchase a car for use in his business.  Business use will be approximately 80%.

He wishes to know whether it will be more advantageous from a tax point of view to buy or lease a car.

If he buys the car outright (expected purchase price £6,000) then this will be included in the main pool for writing down allowances at 20% (as the emissions are < 160g/km).  The vehicle will be written down by £1200 in the first year, with the allowance restricted to 80% of this value (£960) because of the private use.

If he leases the car, I understand that the amount he can claim as a business expense of the lease cost depends on the emissions of the car, and as long as the emissions are < 160g/km, then the full lease cost (less private use adjustment) can be claimed as a business expense.

He can also claim the fuel  costs and maintenance costs (less adjustment for private use) with both options, although I presume there would be less maintenance involved with a lease car if this is included in the lease arrangement.

Am I missing anything important?  It is tricky to directly compare the two options as a lease would be of a newer vehicle than the one my client has funds available to purchase, but my client is keen to understand the tax implications of his decision.

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30th Dec 2012 07:13

A few thoughts:

Very small technical point, but the purchased car will not go into the "main pool" but will go into a single asset pool. It makes no difference to the ongoing WDA claim, but makes a substantial difference to the treatment on disposal.

If he leases the car, and assuming that the lease is a finance lease rather than an operating lease, then he would still have to capitalise the total cost and amortise it.  The amount that he can claim year on year for tax would follow the accounting treatment.  This may have the effect of deferring some of the tax relief contrasted with just claiming the lease payments as they arise (but see final point below).

In both cases, over the life of the car ownership, he would get full relief for both the cost of the car plus finance costs and running costs, adjusted for private use, so you are only talking about the timing of relief: EXCEPT that as you noted you are not talking a like for like comparison of the cars, so the more expensive car will qualify for more relief but also cost him more after tax reliefs.  He needs to place some notional financial value on the benefit to him of having a nicer car.

There are spreadsheets and other software tools out there which do this sort of number crunching, and there tend to be a lot of variables to do it properly so the outcome is a bit hit and miss.

You haven't mentioned VAT.  There are scale charges for private use to worry about, which would be a neutral aspect, but there would also be VAT included in the lease charges, half of which he would be able to recover (if registered).

If his turnover is below the VAT registration threshold there is a third method of accounting for motor expenses to throw into the mix for comparison: Claim 45p per mile for business miles up to 10000 per year, and 25p per mile for excess.  This would cover all running costs including depreciation of the car, but he would be able to claim finance costs on top (contrast an employee who cannot). I think that when considering this option you should not dismiss the administrative convenience and place a notional financial value on the reduced record keeping requirements.

If his income is on the low side there are additional aspects to consider:

If he has a bad year he could disclaim capital allowances in order to preserve personal allowances and even out 4NIC exemption limits, but would not be able to disclaim the amortisation of the capitalised lease.

You haven't mentioned whether he is claiming Working Tax Credits, and perhaps more important whether he would qualify for the Universal Credit when this replaces them.  I have yet to go on Rebecca's UC course, but what little I have read the UC tends to favour leases over capital purchases.  If he is claiming WTC/CTC now, then there is a transitional run-off period before he would convert to UC.

You also may wish to look in depth into the new rules for "cash accounting" available to small businesses from April 2013.  I am still busy with 2011-12 tax returns and hope to gen up on this after 31 Jan, but there is some commentary on AWeb and you may find that if he wants to go onto cash accounting the lease option may be more attractive.

With kind regards

Clint Westwood

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30th Dec 2012 09:03

Thank you.

Thank you Clint for taking the time and trouble to provide such a comprehensive reply.  This is much appreciated.

I only gave a brief overview in my question so as to not make it unduly lengthy, but the client is not VAT registered (his turnover is currently very low).  I assume that the gross lease cost is taken into account in this case.

I believe my client does claim tax credits but I do not deal with this for him.  

Thanks also for noting the cash accounting scheme, which I too intend to research in more detail once the last tax returns are out of the way.

 

 

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30th Dec 2012 10:17

Just a thought!

You say that business use will be 80% and go on to say that turnover is very low.  Unless he goes hardly anywhere at all, business or private, this doesn't seem to stack up.

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30th Dec 2012 10:32

Good point Richard!  

Good point Richard!  

The client uses his wife's car for private use most of the time, so the vehicle to be bought is indeed mainly for business use.  His turnover last year was very small as it was the first year of trading - I expect it will be around £10-£15k this year.  Still well below the VAT threshold. He does quite a lot of business travel getting around to different sites where he is booked for sports coaching, so travel is one of the main expenses of the business.

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30th Dec 2012 15:47

so whats the answer with contract rentals

presumably these are a staright forward write off to P/L no capitalisation required so no CAs either?

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By cfield
30th Dec 2012 23:08

Lease versus Buy

Hi Sparker. As the author of a Tax Cafe book on business motoring, this is one of the questions I addressed and I've just re-read Chapter 12 to give you some advice.

Firstly, Lease v Buy is normally driven by other factors not related to tax such as financing, running costs and depreciation. It can be difficult to compare the tax effects of each decision without treating the non-tax cash flows as equal, which is never the case in reality.

However, I came to 4 conclusions in my book that may help you decide:

1) VAT registered businesses are normally better off leasing as they can recover 50% on the rentals whereas there can be no VAT recovery at all on the purchase price of a car that has any private use whatsoever. As your client is not VAT registered, this rules out one advantage of Leasing.

2) Sole traders may be better off buying as they are still able to claim a balancing allowance when the car is sold, whereas companies cannot. As your client is a sole trader, that may influence his decision.

3) Cars with CO2 emissions above 160 g/km suffer a 15% restriction on the lease rentals deductible against tax. Bought cars, on the other hand, suffer no such restriction. True, the capital allowances are much reduced above 160 g/km, but with a balancing allowance available to sole traders, your client would recover the full cost (less the private use adjustment) when the car is sold.

4) Lease rentals are subject to a private use deduction and consequently the finance cost implicit within the rentals is not deductible against tax in full. However, if your client buys the car, and (importantly) it is financed by a general loan or overdraft rather than a car loan, the WHOLE cost of the interest is tax deductible. That may give Buying a slight advantage over Leasing.

A few other points to note:

a) Written-down allowances on cars are now just 18% up to 160 g/km and 8% above.  

b) From April 2013 the 160 g/km limit is coming down to 130 g/km.

c) If your client has any employees (including his wife) he should make sure the car is not available to them for any private use whatsoever, otherwise it will enter the company car tax regime.

The above advice assumes that you mean a normal operating lease over 3-5 years, not a Hire Purchase arrangement, which for tax purposes is the same as buying.

Hope that helps.

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30th Dec 2012 20:43

Thanks cfield for all of that very useful advice.  Much appreciated indeed!

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30th Nov 2014 12:39

Most cost efficient method for Sole Trader registered for VAT

Would really appreciate your advice on this...

Im a sole trader who will have to register for VAT in the 2015/16 and need to know which would be the most cost efficient way of buying a buying a car:

1. Personal contract hire purchase

2. Lease contract hire purchase

3. Lease

4. Credit card on 0% interest 

Thanks so much.

 

 

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30th Jan 2015 13:24

Moving Ahead to Leases from Apr 2013

Sorry but I find the current car lease business taxation a bit unclear where there is private usage as in say this scenario below of a self employed person having a leased car but with private usage :

I understand a high emission business lease car cost above 130g/km attracts an adjustment to the business profit of 15% as a disallowable cost.  Fair enough and all clear there.

Now the question: If there is a personal use of say 10% is the disallowable 15% sum then further adjusted to a new total of 16.5% (15%+10 per cent private use) which is logical to me, or is the 10% private use ignored for the business tax computation ?  I just want to be clear in my mind.

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