Lease an electric car through my limited company

Mar 5, 2023

Updated on: Apr 22, 2023

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 is treated almost identically as if the car were purchased outright for cash.

Hire purchase – VAT

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.

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

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

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 appears to be several different forms a finance lease you can get for your company car, but here we are assuming it broadly follows the same principles as a Personal Contract Purchase (PCP).

Finance Lease – VAT

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.

Finance Lease – Corporation tax

This is where things get a little bit different to the status quo. The monthly payments made on a finance lease contain two elements (a) finance charge (which IS tax deductible), and (b) capital repayment (which is NOT tax deductible). Furthermore, the value of the car is shown on the balance sheet and it’s depreciation is put through the profit and loss account. In this case capital allowances are NOT allowed, however the depreciation that is calculated for the car is kept as a tax-deductible expense for the business. The overall impact on company tax is similar to an Operating Lease, but still not as good as the deduction you get when using a Hire Purchase agreement.

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