Hire Purchase agreement is the most tax efficient option when it comes to the purchase of any equipment, including cars and vans. Here’s why

HP advantages

  • You can get tax relief in the initial year of hire purchase
  • If you are VAT registered – you can reclaim VAT at the purchase date (subject to restriction if you buy the car)
  • At the end of the contract you have an option to acquire the vehicles
  • Fixed monthly instalments

HP disadvantage

  • Initial deposit is required.

Tax relief on the purchase of the vehicle is given in the form of capital allowances. It means that you can deduct some or all of the value of the item from your profits before you pay tax.

  1. Purchase of the van qualifies for annual investment allowance (AIA). AIA gives 100% first year allowance for investment up to the £200k limited. Above the limit the company can get 18% relief each year.
  2. Purchase of the car – amount of the relief depends from CO2 emissions and whether the car is new or not:

    3. Description of carWhat you can claim
    New and unused, CO2 emissions are 50g/km or less (or car is electric)First Year allowance – 100% tax relief
    New and unused, CO2 emissions are between 51g/km and 110g/kmMain rate allowance – 18% tax relief
    Second hand, CO2 emissions are 110g/km or less (or car is electric)Main rate allowance – 18% tax relief
    New or second hand, CO2 emissions are above 110g/kmSpecial rate allowances – 8% tax relief
  3. Purchase of the estate – this is not an easy matter as the tax treatment depends on the construction of the vehicle at the particular time in question (time of transaction or in relevant tax year). So the construction requirement will depend from the make of the vehicle etc.
    Also, there are several tax areas which rely on being able to determine whether a particular vehicle is classified as a car or a van:

    • • Benefits in kind – car and fuel benefits are linked to a scale of CO2 emissions, whereas vans are on flat rates
    • • Capital allowances – vans qualify for annual investment allowance, whereas cars enter the main or special pools and qualify for writing down allowance only. Cars with qualifying emissions not more than 50g/km are entitled to 100% first year allowance
    • • VAT where input tax can be claimed on vans but not on cars (except in some very specific circumstances)

If you have any further questions please don’t hesitate to contact one of the team.