The essential guide for business vehicles

UK business owners frequently inquire about business vehicles. In this guide, we’ll explore some key questions around this topic: from leasing vs buying a business vehicle, business vs private use to calculating motor vehicle expenses. ​

When it comes to getting a business vehicle in the UK, you can either lease it or buy it. Both choices have different financial and tax implications to consider.​

There are two types of lease to discuss here - a hire purchase, or a normal lease (also known as contract hire). A hire purchase is a common method for businesses to finance a vehicle. Unlike leasing, with hire purchase, you’re working towards owning the vehicle. You make an initial deposit followed by regular payments. Once all payments are made, you own the vehicle. For tax purposes, the interest on the hire purchase payments can be deducted as a business expense, and the vehicle can be included in your capital allowances (discussed below).​

In contrast, with a normal lease you never own the vehicle. The leasing company retains ownership, and you simply make monthly payments to use it. These payments are deductible as a business expense, but you don't benefit from capital allowances since the asset isn't owned by your business. If the car has CO2 emissions above a certain threshold (currently 50g/km), you can only claim 85% of the lease payments as a deductible expense.​

On the other hand, buying a vehicle means you own it, and its value becomes part of your business assets. Similar to a finance lease, you will claim a deduction for the cost of the vehicle in line with the rules on capital allowances. ​

Capital allowances​

When your business buys a vehicle, you can claim capital allowances to deduct a portion of the vehicle's cost from your taxable income. Here’s a breakdown of the capital allowance rules relevant to vehicles:​

1. Annual Investment Allowance (AIA)​

The AIA allows businesses to deduct the full cost of qualifying vehicles up to a certain limit from their profits before tax in the year of purchase. The AIA limit is currently set at £1 million. The qualifying vehicles include commercial vehicles such as vans, lorries etc, but exclude cars. ​

Head to HMRC’s website to know more about AIA.​

2. Writing Down Allowances (WDA)​

For costs that exceed the AIA limit, or for cars which don’t qualify for AIA, businesses can claim WDAs. These allow business owners to deduct a percentage of the vehicle's value each year. The rate depends on the vehicle's CO2 emissions:​

To work out WDA, check out the information on HMRC’s website or consult with your accountant.​

The choice between leasing and buying depends on your business's financial situation and the type of vehicle you intend to purchase.  If you’re not sure which option you should choose, it’s best to consult your accountant and understand the tax implications. If you’re not working with an accountant, register today and you’ll get a team of experts that take care of you and your business. ​

Read more: Business expenses checklist (free download)​

Using a vehicle for both business and private purposes has specific tax implications which differ depending on whether you’re trading as a limited company or sole trader.​

If you’re a sole trader and you use your vehicle solely for business, you can claim the full running costs (e.g., fuel, insurance, maintenance etc) as a business expense. However, if you use it for both business and personal purposes, the situation becomes more complex and you need to allocate costs correctly. For instance, if a vehicle is used 70% for business and 30% for private use, only 70% of the total expenses can be deducted. ​

If you operate a limited company, and your company provides a company vehicle to either yourself or your employees for private use, this counts as a benefit in kind (BIK) on which tax will be payable. ​

When a company provides a vehicle for private use by a director or employee, several employment tax implications arise. ​

BIK value calculation​

Company car tax, or Benefit-in-Kind (BIK) tax, is calculated based on two things: the car's price and its CO2 emissions.​

This calculation gives you the "taxable value" of the car benefit. This amount is added to your salary and taxed as income. The amount of tax you actually pay depends on your income tax rate (20%, 40%, or 45% in the UK).​

Employer’s NICs: The company providing the vehicle must pay Class 1A NICs on the BIK value. The current rate for Class 1A NICs is 13.8%. This contribution is payable annually by the employer.​

Fuel provided for private use: If your company pays for fuel used for personal trips, there's an extra tax to pay on top of the car benefit (fuel benefit). The amount of this extra tax is worked out using a number set by HMRC and this number changes every year. The fuel benefit, just like the car benefit, gets added to your salary and is taxed as income. It's also subject to Class 1A National Insurance Contributions (NICs).​

If your business is registered for VAT, you can claim back the VAT paid on purchasing vehicles as long as the vehicle is used for business use. If you are a sole trader and the vehicle is used for personal use then no VAT can be reclaimed. ​

When it comes to selling a vehicle, if you are VAT registered and paid VAT on the purchase price, you should also charge VAT on the full selling price. This is regardless of whether you reclaimed the VAT on the purchase price.​

If you are unsure about how VAT works or how to calculate how much VAT you need to pay/claim back, contact your accountant. ​

Read more: VAT basics for business owners: what’s VAT?​

When claiming motor vehicle expenses for business purposes, you can use either the actual cost method or the mileage allowance method. ​

The actual cost method involves tracking all expenses related to the vehicle, such as fuel, insurance, repairs, and depreciation. If you are a sole trader you will need to keep detailed records and receipts for all these expenses and log both business and private mileage to calculate the business use percentage. Please note only the portion of expenses attributable to business use is deductible for a sole trader.​

The mileage allowance method, on the other hand, allows you to claim a standard rate for each mile driven (set by HMRC) for business purposes. Currently, the rate is 45p per mile for the first 10,000 miles and 25p per mile thereafter for cars and vans. This method simplifies record-keeping, and makes it easier to calculate the VAT claim.​

Read more: What motor vehicle expenses can I claim for my business?​

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