Benefits of Leasing a Car for Business
Company cars are great, but is it better to lease a car for business purposes or buy one outright? Tax, financial commitments and questions of ownership all have to be taken into account.
Advantages of leasing a car
Taking a loan out to buy a car means paying back a fixed amount, even if the value of your car goes down. This means that if you damage or otherwise depreciate your car, you might be left out of pocket. With car leasing, the residual value at the end of the lease can lower the lease cost. If you get a closed lease, you can walk away without penalty.
Leasing vs. buying a car for business
If you need a car for business purposes, it can be important to make a good first impression. However, luxury cars can be costly to buy outright. With a lease, maintenance costs are lower, the monthly repayments are lower than loan repayments.
Up-front costs will be different, depending on your choice. Down payments and security deposits vary from vehicle to vehicle, so you should consider each on a case-by-case basis.
A leased car typically doesn’t provide you with any tax benefits (depreciation), while owning the car can give you depreciation deductions. To get tax benefits for business use you must be able to prove the car is being driven at least 50% of the time for business purposes.
Driving a leased car for business means you can deduct expenses, just like a normal car. Leased cars have mileage limits that you need to be mindful of. Go over the mileage limit and you can be penalised. When your lease comes to an end, you have to decide between buying the car or turning it into the dealer. If you’ve bought your car for business purchases, you can do what you like with it.
One of the business advantages of leasing a car, that is often overlooked, is that it is simply a very convenient way of getting a new car.
If you go through a vehicle broker, simply tell them what you want and what your budget is and they do all the legwork. You don’t need to do any research or comparisons yourself. They find the best deals and you simply choose the lease that is best suited to your business needs.
How do taxes and depreciation work for a leased car?
Car leasing payments are tax deductible, based on percentage use of a car for business. Only the interest on the car loan is deductible as a business expense.
If a car is purchased for business but has the potential for private use, the VAT (20% of the cost) is irrecoverable. But if the car is leased, 50% of the VAT is recoverable.
The monthly payments are fixed, and road tax is often included in the lease deal, so that’s one less thing that you have to worry about.
Both leased vehicles and owned vehicles may be eligible for depreciation, including special accelerated depreciation, depending upon the type of car and other factors. Check with your tax adviser for more information on depreciation.
If you are going to lease a business car, it makes the most tax sense to lease a car with less than 130g/km emissions. Business cars with CO2 emissions below 130g/km are exempt from corporation tax, as 100% of the amount of the lease figure can be claimed back against the taxable profits of your company. If you are over this figure you will only be able to claim the lease rate against your company’s corporation tax.
Considerations for leasing a car for business
1. Business cash flow
If you don’t have the cash for a down payment on a business car loan, consider a lease. It’s much easier to secure a lease without a down payment, compared to a car loan.
Take some time to calculate your business miles. Car leasing terms include a limit on mileage and you will have to pay more for the lease if you want additional miles covered. Car purchases, on the other hand, don’t have a limit on miles. So, depreciation aside, you can save more by purchasing if your business involves a great deal of driving.
3. Car Maintenance
Some car lease agreements include regular maintenance, including oil changes and tire rotations. This takes the hassle out of having to do it yourself. If you’re unfamiliar with car maintenance or don’t want your employees to have to worry about car maintenance, a business car lease might be the better option.
Is it worth leasing a car for business?
Ultimately, it depends on your circumstances and every business is different. At the end of the day, most cars depreciate, so in the long term, leasing a business car is the safer financial option.