This is often a question that our clients ask when they are considering purchasing a van for their business use.
The options available when buying a van include outright purchase, leasing, bank loan or hire purchase (HP).
The good news is that the tax treatment in respect of the acquisition of a van (or any other commercial vehicle) is the same whether you purchase it outright, or buy it using either HP or a bank loan.
In these instances, the actual cost of the van (excluding VAT – assuming your business is VAT registered) can, in most cases, be deducted in full from your company’s taxable profits in the year of acquisition.
This means that even if you purchase the vehicle on the last day of your company’s financial year, the company will still attract tax relief on the full cost of the vehicle; despite the fact that you could possibly end up not finishing paying for it until several years down the line.
For example, if you were to buy a van costing £20,000 on the 30th March and your year end is the 31st March, your company’s taxable profits can be reduced by a full £20,000. Using the current rates of Corporation Tax at the time of writing this blog, this will save your company £3,800 of tax in the year in question.
Even though you may be spreading the financing of the vehicle over two or three, four or maybe five years the company will still obtain tax relief in the year of acquisition.
Obviously, this is a very helpful tax initiative for growing businesses.
There are, however, important criteria to meet and limits that must not be exceeded in order for this to apply to your business. Therefore, we always recommend you seek out expert, appropriate advice before taking any action.
What if I lease the van instead of purchasing it?
The tax treatment of leasing of a commercial vehicle is different than purchasing one.
If you were to lease the vehicle at, say, £300 plus VAT per month and the lease period is for two years, then the company will only obtain tax relief on the lease payments you make during the period in question. In this illustration, by paying twelve monthly lease payments during the first year the company will only receive Corporation Tax relief on the £3,600 resulting in a tax saving of £684 in that year. The same saving will also be made in the second year.
Every business is different and each has their own exclusive tax position. Therefore, before forging ahead and making a decision with regards to the acquisition of any commercial vehicles it is important that you consider the options available to you carefully.
Remember, although saving tax is important, it is even more important to make the correct commercial decisions that suit your company best. Don’t ever fall into the trap of “letting the tax tail wag the commercial dog”!
The success of your business must always come first, and any potential tax saving second.
Please feel free to get in touch with Sarah Salton, our tax partner, on 01925 761600 or firstname.lastname@example.org who will gladly help you decide which route to take.