Hire Purchase (HP) 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.
Purchase of a van
Qualifies for annual investment allowance (AIA). AIA gives 100% first-year allowance for investment up to £200k. Above this limit, the company can get 18% relief each year.
Purchase of a car
The amount of relief depends on CO2 emissions and whether the car is new or not:
| Description of car | What 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/km | Main 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/km | Special rate allowances – 6% tax relief |
Purchase of an estate vehicle
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 the transaction or in the relevant tax year). So the construction requirement will depend on the make of the vehicle etc.
Is my vehicle classed as a car or van?
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.
