VAT Increase
VAT Increase, Tax and Company Cars, Company Car Tax, Lease or Buy
By increasing VAT to 20% and changing the Corporation Tax treatment, Chancellor George Osborne has given the Car Leasing Industry a much needed boost and made Leases Leasing the most tax efficient option by far when it comes to Company Car Finance and Fleet Finance.
Here we take a look at what affect the VAT Increase and Corporation Tax changes have had on the decision to Lease or Buy Company Cars.
Scenario
Imagine you have a new engineer starting work and need to provide a Company Car.
You order a Ford Mondeo Estate car and choose a model with emissions below 160g/km.
The Car costs £18000 and will have a disposal value of £5000 in three years time and is financed using either a HP agreement to buy or a simple Finance Lease to rent.
We will assume that your company is VAT registered and pays Corporation Tax at the Small Companies Rate of 21%. We will also assume that the cost of finance is exactly the same for the Lease and Hire Purchase and that no other costs such as Fleet Management, Fleet Administration or Road Tax are included.
Option 1 – Company Car acquired on a Hire Purchase
| Purchase Price | £18000 |
| Disposal Price | £5000 |
| Depreciation | £13000 |
| Interest Cost | £3105 |
| Total Cost of Hire Purchase | £16105 |
| Corporation Tax Allowance on Depreciation | £1844 |
| Corporation Tax Allowance on Interest | £625 |
| Total Cost Net of Tax | £13636 |
NB. Balance on disposal of £4216 to go into General Pool.
Option 2 – Company Car acquired on a Leasing Agreement
| Purchase Price Ex VAT | £15000 |
| Disposal Price Ex VAT | £4166 |
| Depreciation | £10834 |
| Interest Cost | £2587 |
| Total Cost of Lease | £13421 |
| Blocked VAT on Lease Rental | £1342 |
| Effective Cost | £14763 |
| Corporation Tax Allowance on Lease | £3100 |
| Total Cost Net of Tax to Lease | £11663 |
| Total Saving in Favour of Leasing | £1973 |
| Saving on Company Car Fleet of 50 Cars | £98650 |
It’s worth bearing in mind that this is a very simple calculation to illustrate the VAT and Corporation Tax advantages of Leases and Leasing and that in all cases we recommend that you consult your Accountant or Professional Advisor to gain their view as to how any change in Company Car Finance will apply to you and your business.
If you would like to know more about Car Leasing and Company Car Finance then please feel free to Contact TeleLease for an informal discussion.
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