How you choose to purchase your company car will affect your tax. That bit is simple.
The not-so-simple answer to this question is “it depends” and “it’s entirely up to you”. It all depends what you want to see in your accounts, how good a year you’ve had, and what your future plans are.
Don’t worry, we’re not going to leave you there and let you figure it all out for yourself.
Let’s look at the financial implications of each option, so you can make an informed decision based on the position your business is in.
With a contract lease or hire, you’ll put the monthly costs through the business as an expense
With these contracts you will be effectively just hiring the vehicle – there is no option to buy at the end of the contract period and you will give the car back.
You’ll put the monthly costs through your business as an expense, so you’ll get tax relief on each of the payments in the year you make them.
This won’t show as an asset on your balance sheet.
This will affect your accounts – it’ll show a lower profit, so you’ll have less available for dividends.
With a hire purchase, the total cost of the vehicle will show on your balance sheet
With a hire purchase deal, you will potentially own the vehicle at the end of the period, either once all payments are made or you pay the balloon lump sum. Even if you don’t actually get to the end of the term, that’s the nature of the contract.
The total cost of the vehicle will show up on your balance sheet (showing a higher asset total)
You’ll get full tax relief on the whole car purchase price the year you buy, but no further relief in subsequent years even though you’re still making payments.
This way won’t affect the accounting profit, it only affects tax- so it’ll show good profits on your accounts, meaning more available for dividends.
Our advice: Consider how good a year you’ve had, and what’s upcoming in your business plans
If you’ve had a really good year, with high profit, then I’d say hire purchase. You’ll make the most of the tax relief in that year, but keep the nice healthy profit in your accounts for dividends.
If you don’t have enough profit to cover the full tax relief for the year, then probably a lease is a better option, so you have the tax relief as you make the payments. Capital allowances can be used and any tax loss can be carried forward to a future year.
If you’re looking to sell the company in the near future then remember a hire purchase car will be an asset of the company, so it will go with the company if it sells. That being said, a higher asset value will look better for your business on the balance sheet.
While you’re on the topic – have you thought about an electric car?
As you’re making decisions about the best choice of car for your finances, it would be foolish of us not to mention the tax benefits of opting for an electric car.
The tax year 2020/21 is the optimum time to purchase an electric car, as the government is incentivising drivers to use low or zero CO2 emission vehicles.
We’ve explained the incentives in a dedicated blog here – it’s worth checking out and factoring it into your options.
If you don’t know your numbers, it’s hard to make these decisions
If you’ve got to this point in your decision, and you’re not entirely sure how good your year has been, or you’re too overwhelmed with running the business to even think about your future plans – it could be a sign you need better data.
Your key financial numbers enable you to make these kinds of decisions for your business, because you have an accurate view of your financial position. Without them to hand, you might think you’ve had a great year because profit is high, but you might be feeling the sting of low cash at the same time.
Just know, we’re always on hand if you want to delve deeper than the company car, and figure out how well your business is really doing. We can have a good chat about which stage you’re at.
Otherwise, have fun choosing your new car! Let us know how you get on. New car pics are always welcome.