Leasing a van through your limited company

 

Question:

“I run a small limited company and am planning to get a company commercial vehicle (van) through my business, but I am unclear on how the tax works, can you explain what tax relief I will get as well as any other tax issues to consider?

The van will be rented through a lease for 3 years, after which we have to give the vehicle back to the lease company.”

 

We hope you enjoy this article from our archives. As tax rules change a lot over time, the information in this post may not be current, but we hope you still find it interesting.

 

 

 

Answer, April 2019 – based on the 2019/20 tax year

Running a van through a limited company can often be quite tax efficient, but the tax side of things can be difficult to understand – it can also vary depending on the type of purchase / lease agreement.

 

Van lease, tax and accounting treatment

As you are leasing the vehicle and you have to give the vehicle back at the end, it means that there is no effective ownership by your business of the vehicle throughout the term of the lease – this means it cannot be treated as a fixed asset of your company.

Instead, the lease cost will get booked directly to the profit and loss account, like with any other typical monthly running cost you may have (e.g. telephones, rent).

The expense will reduce the profit, giving an effective corporation tax saving of 19% (the corporation tax rate for the UK for 2019/20), assuming your company is profitable and pays corporation tax.

This means the accounting and tax treatment are in line with each, which helps keep things simple.

If you instead purchased the van outright or through a lease where your company has effective ownership of the vehicle upfront, the tax and accounting treatment would be more complicated.

From an accounting perspective the vehicle would then be treated as a capital asset and depreciated over it’s useful life, and from a corporation tax perspective the van would likely qualify for the ‘annual investment allowance’ which would allow it to have full tax relief in the year of purchase. This can be quite difficult to understand as the accounting profit will be quite different to the taxable profit. It can also mean tax liabilities further down the line if you sell or part-exchange the vehicle.

 

Benefit in kind

HMRC will assume that your company vehicle is available for personal use – if you believe you do not have any personal use (or potential use) you will need to have some robust documentation in place to prove to HMRC that the vehicle cannot or has not been used personally  – typically this will include making sure that the vehicle insurance does not allow personal use and also keeping the vehicle locked up at business premises (not your home) during non work time.

In reality, it is usually very difficult to prove to HMRC there is not any personal use, in which case it means that your company will need to file an annual P11d benefit in kind form with HMRC after the end of each tax year, disclosing the P11d value of the van.

Van’s have a fixed benefit in kind value, which for the 2019/20 tax year is £3,430 (assuming the vehicle emits Co2). Your company will pay national insurance on this calculated at 13.8% (£3,430 x 13.8% = £473, rounded). This national insurance will be a tax allowable business cost.

You will have to declare this benefit in kind of £3,430 on your personal tax return – assuming you are a basic rate tax payer, the tax cost to you will be 20% x £3,430 = £686.

Bear in mind any impact on your overall personal tax planning – for example, if you are maximising your basic tax band with optimised salary and dividends you will need to factor in the P11d value when working out how much dividend headroom you have – without doing this you could find that some of your dividends get pushed into the higher tax band (dividends are taxed last in the order of personal taxation).

If you don’t have the company vehicle for the whole tax year, the calculation will be apportioned.

The company van benefit in kind tax rates are likely to increase each year, in line with what has happened in recent years.

Also, if your company pays for all the fuel you will also have to account for the benefit in kind on the personal use of the fuel, which for 2019/20 is calculated as a fixed rate of £655 x your income tax rate, again these rates are likely to increase each year.

Like with the vehicle benefit in kind, your company will pay national insurance at 13.8% on this benefit, but it will be an allowable company expense for corporation tax purposes.

Your company doesn’t have to pay for the fuel, you could instead purchase all fuel personally and then claim back mileage from the company for business travel at the HMRC approved mileage rates.

You will need to calculate the two different options for your circumstances to see which route is likely to be better – if you choose to claim the mileage instead you will need to make sure you keep detailed mileage records for your business travel, this may itself be a good enough reason to pay for fuel through your business instead!

 

VAT

If your business is VAT registered, assuming you are not on any special type of VAT scheme (such as the flat rate scheme), you will be able to reclaim the VAT element of the lease cost.

If you were on a different type of lease where effective ownership belongs to your business up front , the VAT treatment can be quite complicated, but in your example where you are simply renting a vehicle and giving it back at the end, you can reclaim the VAT on your monthly lease payments.

 

In summary

The above article is specifically about vans – if you purchase a car through a company the tax treatment can be more complicated and usually it is less tax efficient than a van.

Make sure you ask the vehicle dealer to confirm that the vehicle is a van for tax purposes and if you are unsure you can check with HMRC.

Finally, an obvious, but sometimes overlooked, piece of advice is to make sure that the van lease agreement is in the name of your limited company, not your personal name, and to make sure the payments are going through the business bank account, rather than a personal account.

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