TAX, as its name suggests, can be taxing.
But the implications of the rather complicated rules set by the powers-that-be can make quite a financial difference to firms when it comes to acquiring and disposing of vehicles.
Colin Tourick, author of fleet managers’ guide Managing Your Company Cars, says that due to the tax structure there is an approximate cut-off point where the benefits of outright purchase begin to outweigh those of contract hire.
But to explain how this cut off works, we need to look at the tax implications of each method of acquiring a vehicle.
OUTRIGHT purchase is straightforward – simply buying a car, either with borrowed cash or the company’s own resources.
Firms can get certain tax breaks for motoring expenses. These are called allowances and are equal to 25% a year of the purchase price of a vehicle, up to £3,000 a year.
This means that only cars up to £12,000 new get the full 25% allowance.
The tax breaks are calculated on what is known as a ‘reducing balance’ basis. So 25% is applied to the original cost of the vehicle, then the ‘unrelieved balance’ is carried over to the following year, and 25% of that is applied.
For example, a £12,000 car would have an allowance of £3,000 in the first year, then 25% of £9,000 – £2,250 – the following year. The following year’s allowance would be 25% of £6,750 – £1,687.50 and so on.
Cars costing less than £12,000 are pooled with other plant and equipment and writing down allowance of 25% taken from that as a whole. The downside to this is that the allowances are not matched to the actual car to which they relate.This can mean that the difference between the allowances and the actual depreciation of the car can take several years to balance out.
Cars costing more than £12,000 are dealt with individually, and are subject to maximum allowance of £3,000 as well as a balancing allowance or charge after the car has been sold to ensure that the actual depreciation of the car is fully allowed for tax purposes.
This balancing allowance is the difference between the purchase price carried forwards and the sale price, which is taken off the writing down allowance going forward to the next year.
DAILY rental and long-term hire – when a car is leased with no plans to buy it – are subject to different rules.
Rental paid for cars costing under £12,000 is fully deductible. Above this price and the ‘half-the-excess rule’ is used to determine the disallowable amount.
The ‘half-the-excess rule’ states that the disallowable amount is determined by the following formula: ½ (retail price - £12,000) ÷ retail price when new.
So for a £24,000 car with rental of £480 a month, the disallowable amount is 0.25, meaning only three quarters of the rental would be tax deductible – £360.
The disallowance applies only to the finance of the lease rental, not of any maintenance payments, which are generally fully deductible. The important thing to note is that this is a permanent tax disallowance, not just a deferral.
The ‘lost’ allowances are not made up when the car is sold, which is what would have happened if the car had been bought outright. This makes leasing an expensive car costly from a tax perspective. A car costing £12,000 would have a 100% allowance applied to it.
A car costing £15,000 would have a 90% allowance applied, a £20,000 car 80%, and so on.
The more expensive the car, the less tax is deductible on the cost of leasing it.
Colin Tourick says: ‘Take a £12,000 car and look at the different ways a fleet manager might acquire it – outright purchase or leasing – and work out the two different costs.
‘The cost of leasing will be less. For a £13,000 car there will also be different tax costs, and for a £14,000 car, and so on.
‘There’s a crossover point at around £22,000 when the tax cost of purchase becomes cheaper than leasing. As you go up in price it becomes even more compellingly low.
‘A number of leasing companies and accountancy firms have got software that will calculate this for the client. Or organisations can do them for themselves by finding out what the tax rules are and crunching the figures.’
Tourick says the exact overall costs would vary from company to company, depending on their circumstances – tax rates can vary between large and small companies, and firms in different sectors are subject to different VAT rules.
‘The £22,000 mark is a general rule, a very good starting point, but each organisation needs to look at it closely themselves,’ he says.
Firms get 25% tax relief on the new price of a business vehicle, up to £3,000 and on a reducing balance basis.
As a general tax-saving rule, cars under £22,000 should be leased, cars over £22,000 should be bought.