Is A Business Car Lease Tax Deductible?

Is A Business Car Lease Tax Deductible?

A business car lease is now well-established as a more cost-effective and practical means of running a fleet of vehicles, compared to the negative cost constraints of ownership. But there is still an element of confusion about the supplementary benefits of business leases, and this is a big factor in how a fleet manager runs their function.

Specifically, how does business leasing affect tax and VAT status, and what tax benefits are there relating to business leasing? The good news is that tax rules offer some relief to motorists who are committed to business leasing, and this is even more accommodating if you have also made the switch to electric vehicles (EVs). Business leasing is up 4% year-on-year in 2023, according to the British Vehicle Rental & Leasing Association (BVRLA), and it is thought this growth has been helped by long-term clarity on the position regarding EVs and Business-In-Kind tax (BIK tax for EVs is fixed at 2% until 2025). Indeed, the BVRLA also states that 53% of new business lease deals are for EVs. So what are the tax implications of business leasing?

What tax relief is available for business lease drivers?

If you are a limited company then you can use the monthly lease payment on a vehicle to offset your corporation tax commitment, and also, if you are a sole trader or a partnership you can offset your lease costs against your annual tax bill.

However, since 1st April 2018 there have been some amendments to the level of this relief, namely in the form of the amount of relief you receive being dependent on the type of vehicle you are driving.

• A vehicle is 100% tax deductible if it emits less than 110g/km of carbon. So this will include all fully electric vehicles and some hybrid vehicles.

• Vehicles that emit 111g/km of carbon or above are still tax deductible but only up to 85% of the vehicle value.

• Vans are 100% tax deductible regardless of their vehicle emissions.

So if you want to be 100% sure of tax-deductible business leasing then you can opt to lease an EV, or a van, or an electric van! In comparison terms, driving a petrol/diesel BMW 3 Series Saloon would put you in the 34% BIK tax bracket, and in pounds and pence terms would cost you an extra £445 as a 40% tax payer. However, you should also be aware that your leasing payments may not be fully tax deductible if the lease agreement contains clauses giving you the option of owning the vehicle at the end of the lease by buying it outright.

Corporation tax is a cost that a business has to control and plays a central role in annual financial planning, so it is hugely significant if a business can budget and manage business leasing in this way.

VAT relief on business leasing

In addition to tax relief on corporation tax for business leasing, a VAT-registered business can also claim back up to 100% of VAT through business leasing. If a vehicle is used solely for business use, you can claim back 100% of the VAT, however, in many cases, business leasing also allows for personal use, in which case the business can claim back 50% of the VAT.

If you need any further guidance on business leasing or specifically the tax implications, then contact our expert team at Pink Car Leasing today. Many of our products and packages are built around the specialist advice and guidance of tax experts, so make sure you benefit from accessible and understandable tax advice on the very latest rules and learn how they directly apply to you.