Should your business buy or lease a company car?

Offering your employees a company car is a great incentive but deciding whether to lease or buy a company vehicle involves careful consideration.

The decision you make will impact which tax reliefs you can claim, so you need to know what your options are.

Buying a company car 

When buying or leasing a company car, there are lots of things you need to consider.

If you buy a company car, will you benefit financially?

Or will it result in increased tax obligations?

There are multiple benefits to buying a company car:

• Business-use only – if the company car is used by employees for business-use only, you will not have to pay a Car Benefit In Kind on the vehicle, which decreases the amount of tax owed. Your Car BIK is a fixed fee you must pay annually, but only if the company car becomes privately used. The tax you pay depends on how much value the car is worth to you; this is determined based on factors such as how much it would cost to buy and what fuel it uses (diesel, petrol, or electric)
• Capital Allowances – if you purchase an electric car, you can claim 100 per cent First Year Allowances. You can deduct the cost of the car from your profits before tax during the accounting period in which you purchased the car.
• VAT – you can only claim VAT on an electric car if the car is VAT registered and the vehicle is used strictly for business

However, there are potential drawbacks when buying a company car.

For example, if fuel is included with your company car, you will have to pay Fuel Benefit tax.

The fuel provided for a company car means you take a portion of the flat rate figure, which depends on your vehicle’s CO2 emissions.

Paying the Fuel Benefit tax could further impact your business’ funds, or your employees’ wages if you provide them with the company car.

Leasing a company car

There are two types of leases:

• Operating lease
• Finance lease

An operating lease is where your business will pay a rental payment to the legal owner of an asset, e.g. the car.

All expenses incurred can be offset against your business profits.

A finance lease is where your business is required to treat the lease as if you had bought the vehicle using a loan.

Your business will depreciate the asset over its life and will charge depreciation and interest payments against your business profits.

As the car is being borrowed from someone else, no capital allowances can be claimed.

Vehicles, leased or bought, must also appear on your business accounts as a liability; this can limit the ability to borrow funds if you need investments to grow.

Electric cars

Leasing an electric car means you can deduct the cost of the lease from your taxable profits, in proportion to your business use.

This route allows you to spread the cost, but you do lose significant tax benefit that comes with first-year Capital Allowance.

Leasing an electric car means you avoid the issue of replacing its battery every few years, which can significantly contribute to the cost of your vehicle.

Electric vehicles are also exempt from the vehicle excise duty (VED), so it is currently free to tax them; electric cars will only be taxed VED from April 2025.

However, BIK still applies to electric vehicles, with the rate increasing to two per cent in 2023/24 and a further one per cent for electric vehicles in 2025/26.

The maximum BIK rate will be five per cent for electric vehicles by 2028.

Electric cars are also exempt from congestion charges in London and emission zones in major cities, meaning your business won’t have to pay the fee if they are travelling in and out of cities all the time.

If you would like advice as to whether your business should buy or lease a company car, or if you should switch to an electric company car, please contact us today.