Cars – Should you buy via HP or lease a car? And how to understand the agreement you have.
Most importantly, it depends on the deal. So get your calculator out! But do watch out for excessive mileage penalties in lease agreements.
Tax treatment varies depending on the method used to acquire a car – but it is often not tax efficient for a Company to own/lease a car because of high benefits-in-kind on company cars.
Car on HP (if the invoice is addressed to you/your company, it is an HP agreement or outright sale)
You can claim capital allowances on the purchase value of a car (dependent on the list price, CO2 emissions and type of fuel, possibly 18%, or 8% per year, even 100% for electric cars).
When selling the car, Sole Traders/Partnerships can get full tax relief on the car’s loss in value; Companies can’t claim this so have to keep claiming the appropriate annual Writing Down Allowance (8% or 18%).
You cannot recover any VAT back on the cost of the car (excepting taxi and car hire businesses)
You get tax relief on the HP interest element of HP payments.
Leased cars (if the invoice is addressed to a third party such as a finance company, it is a lease agreement)
At the end of a lease period (for (say) three years), you either hand the car back, or buy it. Commonly there is a large down-payment followed by monthly payments.
If you are VAT registered, you can claim back 50% of the VAT on the lease payments (100% for taxi and hire firms) – which is a major advantage over HP agreements;
You get tax relief on the lease payments net of any VAT claimed back, but you need to spread the tax relief over the period of the lease rather than match it against the payments made in a period.
For cars with CO2 emissions over 130g/km, only 85% of the net lease costs obtain tax relief.