Leasing an Electric Car Through a Limited Co

In our previous series of articles, we looked at buying an electric car through your limited company and we also looked at a specific example of buying a Tesla through your company. In this article I would like to take a look at another popular way of getting a company car and that is leasing an electric car through your limited company. Here we want to consider the tax implications to help work out the answer to “how much does it cost to lease an electric car”.

If you are looking for tax efficient and healthy way to get to work each day, take a look at our article about the cycle to work scheme.

This is our second worked example and again we’re looking at electric company cars because they have strong tax advantages that hybrid cars, petrol and diesel fuelled cars do not. How these tax advantages can be utilised depends on the type of lease that is used.

We will use the same background scenario as for our article Buying a Tesla company car in 2023 however in this case, we are looking at tax options around getting brand new electric cars on finance. Let quickly recap on the scenario (but we will tweak it slightly).

The Scenario

Jill is an IT contractor who has been working through her own limited company for several years now. Her usual contract rate is around £300 per day, and she has built up a cash surplus in her business over the years of £5,000.

Recently her car got caught in a localised flood and was written off by her insurance company, so she is in the market for a new car. Her old car was owned by her personally, and she does not really use a car for business related travel.

She most often catches the train to her client’s premises, or she works from home. She will use her car for some business travel, but not much. She is the sole director and shareholder of her company, the company is VAT registered, and she uses the No Worries Club Gold service which meets all her accounting needs.

Because she does not have enough money to purchase a new car outright, she is looking at lease and hire purchase options for her company. She is wanting to get a brand-new electric car, and with the £5,000 of retained earnings that she has, she figures she will be able to use this as a down payment for a business lease or electric car hire purchase agreement. Private limited companies can be an ideal purchaser of electric vehicles.

Hire Purchase or Lease?

When looking to lease an electric car through your business entity you will generally find that you have two options. The first is a hire purchase agreement and the second option is a lease agreement. Let’s take a quick look at both these options first, because it helps to understand the accounting and tax treatment for each.

Electric Car on Hire Purchase

The company takes the value of the electric vehicle onto its balance sheet (along with the liability in paying off the vehicle though the hire purchase agreement), and after making a series of payments to the hire purchase company, the vehicle is completely paid off and legal ownership transfers to your company.

Electric Car Leasing

There are two types of lease agreements you may find are offered when looking for an electric car lease. The first is called an operating lease and you can think of this as a long-term rental agreement. under an operating lease the vehicle is never included in the balance sheet and all costs are put through the profit and loss.

The second type of lease is called a finance lease. This type of lease is very similar to a Personal Contract Purchase (PCP) in the way that it works. The value of the electric car is added to the balance sheet, but tax deductions are different to how a hire purchase agreement works.

Looking at all the options

We have briefly taken a look at the different types of hire purchase and lease agreements that can be used when looking to purchase a company car. There are associated tax and VAT implications for limited liability companies with each of these options so let’s take a look at these now. Remember we are only looking at the options as they relate to fully electric vehicles.

Hire purchase

Hire purchase is an effective way for businesses to purchase expensive assets such as cars where the cost of the asset can be paid off over a series of years. From an accounting and company tax perspective a Hire purchase (HP) is treated almost identically as if the car were purchased outright for cash, because from the outset of the HP agreement, ownership of the vehicle lies with the limited company.

Hire purchase – VAT

A Hire Purchase agreement is seen by the HMRC as a supply of goods. For this reason, where the company car is used for a mix of personal and business journeys no VAT can be claimed. This is exactly the same as if the car were purchased outright (a supply of goods also).

Hire purchase – Corporation tax

Here is one of the main benefits of buying a brand new fully electric car through Hire purchase. The full purchase cost of the vehicle is tax deductible in the year of purchase, even though Jill will actually be paying off the cost of the vehicle over several years. This has significant cash flow advantages.

Operating Lease

A simplified way of considering an operating lease is to think of it as a long-term rental agreement. under an operating lease you never take ownership of the asset and you are effectively just using it for a fixed monthly charge and will then hand it back when the operating lease finishes. Sometimes this is called a business contract hire.

Operating Lease – VAT

Absolutely a supply of services, so where the company car is used for business (it does not matter if it’s only for a small proportion) the company can claim 50% of any VAT that is billed to it by the leasing company for the financing related charges.

Operating Lease – Corporation tax

The vehicle is never owned by the company so there is no depreciation here, and no capital allowances. The monthly business lease payments that are made by the business are included in the profit and loss and are treated as normal text deductible costs for the business. Compare this to a Hire purchase agreement that allows for the total vehicle cost to be text deductible in the year of purchase.

Finance Lease

There appear to be several different forms of finance leases available for company cars, but in this case, we are assuming it broadly follows the same principles as a Business Contract Purchase (BCP), which closely resembles a Personal Contract Purchase (PCP).

Finance Lease – VAT

Here, you need to determine whether a finance lease is classified as a supply of goods or services. A substantial final balloon payment suggests that ownership is not guaranteed, supporting the classification as a supply of services. Furthermore, if there is an option, rather than an obligation, to purchase the car at the end of the lease, it is more likely to be considered a service. Lastly, if ownership does not automatically transfer, this further strengthens the case for treating the agreement as a supply of services.

Based on the most recent balloon payment (BCP) agreement we’ve seen, ownership of the vehicle remains with the leasing company until the final balloon payment is made. Given this, it would be classified as a supply of services. As long as the company car is used for business purposes at some point (even if only a small proportion), the company can claim 50% of the VAT charged by the leasing company on the financing-related costs.

Finance Lease – Corporation tax

This is where things differ slightly from the status quo. Until the company makes its final balloon payment, the car is not owned by the business, meaning no capital allowances can be claimed. In such cases, the monthly payments made to the leasing company are treated as an operating lease and expensed through the profit and loss account (reducing profit and, consequently, corporation tax). The car’s value does not appear on the balance sheet at this stage, nor is its depreciation accounted for in the profit and loss statement. While the overall impact on company tax is similar to that of an operating lease, it is still not as advantageous as the deduction available through a hire purchase agreement.

If or when the company makes the final balloon payment, the vehicle is then owned by the business and will be recorded on its balance sheet. However, no first-year capital allowances can be claimed as the car is no longer brand new. In these cases, the company can still reduce its Corporation Tax by claiming the standard 18% capital allowance, applicable to the main pool for plant and machinery.