The time has come to consider buying your first vehicle for your business, or to replace your existing vehicle. But the question we’re often asked is: “should I buy or lease a vehicle?”
The reason we’re asked the question is that there is actually a lot to think about.
If you’re looking for guidance on buying a car, check out our other blogs: Should I buy an electric car, and Should I buy a car through my company.
Firstly, there are 3 different ways you can finance your vehicle purchase:
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Buy it
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Lease it
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Hire purchase it
Then, there are so many questions to ask!
- What’s the difference between buying or leasing?
- How much will it cost?
- Can I afford it?
- Will it save me tax?
- Should I register for VAT so I can claim the VAT back?
So let’s look at each of these in turn:
1. What’s the difference between buying or leasing?
Buying:
- If you buy the vehicle, you own it outright, and all risks, liabilities etc pass to you.
- You pay for the vehiclein full, including VAT.
- You should have no further payments due to the vehicle seller.
Leasing:
- If you lease the vehicle, you are effectively renting the vehicle, so it’s never yours.
- You will have monthly repayments, which include VAT (this is the big clue that shows it’s a lease not a purchase)
- You may have an initial deposit, and a final balloon payment.
- There may be a monthly cap on mileage, with you paying the excess.
Hire Purchase:
- You own the vehicle, but make monthly finance repayments, which include interest.
- You usually have to pay a deposit, sometimes equal to the VAT on the cost of the vehicle.
- You’ll then have monthly repayments. These will include interest but not VAT.
- You may have a balloon payment at the end, but you’ll usually be able to part exchange for a new vehicle, and avoid this.
2. How much will it cost?
Buying:
- You pay what you’ve agreed with the seller, no more, no less. If it’s through a dealership, then VAT will be included in the cost.
- If you’re buying from a private seller, do make sure you get an invoice, and check whether they are VAT registered or not.
Leasing:
- You’re paying a monthly rental, so check the lease agreement and the small print.
- Also check the total rentals over the whole lease term, and compare this to the actual cost of the vehicle.
- Is it a good deal?
- Make sure you get a lease agreement which sets out all the costs and charges, so that you understand fully what you’re paying for.
Hire Purchase:
- You will pay for the cost of the vehicle, plus the agreed interest.
- This will all be set out in your hire purchase agreement, with dates of payments.
- Make sure you work out your total costs over the hire purchase period, including initial payments and balloon payments.
- Compare this to the actual cost of the vehicle. The difference will be interest.
- Is it a good deal?
3. Can I afford it?
This is why you really need to ask yourself how much it will cost, and include everything.
Buying the vehicle will probably cost you less, but if you can’t make the full payment, you will need to look at hire purchase or leasing.
You could also consider a loan from family or friend, or a loan from a bank or lender.
If you’re looking at a loan, you will also need to look at arrangement fees and interest.
4. Will it save me tax?
This is usually the first thing we look at as your accountants!
Buying:
- Some or all of the cost of the vehicle will be deducted from your profits, and therefore reduce your tax This depends on whether it’s a commercial vehicle or car).
- If you’re a limited company, this will reduce your tax by between 19% and 25% of the cost of the vehicle (eg £10,000 vehicle will save you £1,900 in corporation tax)
- If you’re VAT registered, the cost of a commercial vehicle net of VAT will reduce your profits.
- If you’re not VAT registered, or you’re buying a car, the cost of the vehicle including VAT will reduce your profits.
Leasing:
- You will save tax on the monthly lease payments, as these will reduce your profits, and then your tax.
- So if your lease is for 3 years, you will save a small amount of tax over 3 years, instead of buying your vehicle, where you get the full tax saving when you buy it.
- If you’re leasing a car, watch out because you can only claim 50% of the VAT on the lease payments (if you’re VAT registered)
Hire Purchase:
- Because you own the vehicle, the full or partial cost of the vehicle will be deducted from your profits, the same as if you were to buy the vehicle.
- You will also save tax during the hire purchase term. So if your hire purchase payments are over 3 years, you will save tax on the interest charged each year.
5. Should I register for VAT so I can claim the VAT back?
- This is a loaded question!
- The initial answer would be Yes! Claim the VAT! (If it’s a commercial vehicle, that is. You can’t claim the VAT back on a car purchase)
- BUT have a look at your business first.
- Are you anywhere near the VAT threshold (currently £90,000 as of April 2024)
- Are you likely to cross the VAT threshold in the next couple of years?
- If you’re not near the VAT threshold are most of your customers VAT registered?
- The reason for asking is that if you register for VAT – great – you can claim the VAT back on the vehicle or lease payments, and on running costs.
- However, you are then going to have to charge VAT at 20% to all your customers.
- If your customers are mainly not VAT registered, you’re immediately putting your prices up by 20%.
- If your customers are VAT registered, then it’s not a problem for them, as they’ll claim the VAT back.
- Also, what do you sell? If you’re a baker most of your supplies will be zero rated for VAT, so then you could register for VAT, and your prices won’t change.
Easy answer: it’s complicated, come and speak to us!
The small print
As you can see, deciding whether to buy or lease a vehicle is a big decision, full of things to check out first, so we’d always recommend getting specific advice for your situation.
The above is compiled as a guide only, and using fictitious examples, so again, get customised advice.
VAT and tax rates, and how much the cost of a vehicle will reduce your profits all relate to current UK tax law, which changes annually.
Please get specific and up to date advice and guidance when you’re ready to buy your vehicle!
Get in touch if you’d like us to help you to make the right vehicle decision.
