In my previous article on this subject, I explained the opportunities and pitfalls in a employer providing a car to an employee. I explained the taxation effect of acquiring the vehicle either by outright purchase or on hire purchase.
One other commonly used option is for the employer to take out a lease contract to provide the car to the employee. Again, tax relief depends on a vehicles CO2 emissions and there are some changes planned for future years.
Currently, a business can deduct 100% of contract hire costs against business profits provided that the car’s Co2 emissions are 160g/km or less. There is a disincentive to taking out a lease for a car with higher emissions as legislation states that only 85% of the leasing cost of these cars is allowed against tax. This adjustment is made on the Corporation Tax computation. Please be aware that this restriction with apply to cars with emissions over 130g/km for leases signed after 1st April, 2013.
You will be aware that VAT is charged on contract hire charges. Where the vehicle is used for business purposes, 50% of the VAT (not all of it) can be reclaimed. Again, this is a common area of confusion. There is no distinction for VAT regarding CO2 emissions.
A common question about company cars is which is the best way of providing one to an employee – buy, take out an HP agreement or contract hire it. It is usually important to review a number of aspects of the business’s tax affairs in order to provide a clear answer.
I hope this article has given you some useful pointers on this subject. We would be happy to advise further.
In my next article, I will talk about the taxation of cars owned and used for business by sole traders and partners.
