Michael Lansdell discusses the factors behind the decision.
One of the questions that accountants are asked most frequently when one of our clients is buying a new car is whether to buy or to lease.
To “buy” means that ownership passes from a seller (usually a dealer) to a purchaser (you/your company). This can either be paying in cash (paying the whole purchase price upfront) or taking finance in which ownership passes. These types of finance have different names, the most common ones being hire-purchase agreements or lease-purchase agreements.
As long as ownership passes, to the extent that any tax allowances involved in the purchase are available, these can be claimed by the purchaser, generally in the first year, because you own the vehicle.
To “lease” means that ownership does not pass from a seller to a purchaser. The payments that you make each month are effectively rentals and at the end of the lease term, you return the car to the leasing company, or have options to purchase or re-lease. At no time during the lease term do you have any investment/equity/ownership in the vehicle.
If ownership doesn’t pass, any capital tax allowances involved in the purchase cannot be claimed by the purchaser, these are instead claimed by the leasing company as the owner of the vehicle. You as the renter of the vehicle, to the extent that tax allowances are available, claim a tax deduction just on the lease rentals as they are paid each month.
It can be difficult to work out whether you are buying the vehicle or renting it. Questions that you can ask to understand the answer include:
- “Does ownership pass to me/my company at the beginning?” If yes, you’re generally buying the vehicle.
- “What happens at the end of the finance term?” If the answer is “The vehicle is yours”, you’re generally buying the vehicle. If the answer is that you’ll need to return the vehicle, or look at new financing options, that would generally indicate that you’re renting the vehicle.
So, what’s the best thing to do? From a tax point of view, measured over the whole period of use of the vehicle, the tax allowances end up being about the same. However, if you “buy” the vehicle you’ll get greater tax allowances at the beginning, and less later on; with a “lease” the allowances are more evenly claimable over the lease term.
The question, really, isn’t so much one about tax; it’s more about how a car fits in with your lifestyle.
If you “buy” a car, it’s yours. You take it where you like, you have no guarantee of its value, and you sell it or trade it in when you want another car. If you have financed it via a hire-purchase agreement, when that agreement comes to an end, you can either sell or trade in the vehicle, or keep driving it for another year – or 10! People with a strong independent streak tend to favour buying.
If you “lease”, you are stuck with that car for the lease term; there are penalties if you want to change it. At the end of the term, unless you buy the vehicle from the leasing company, you have to return the vehicle, and generally start again. If you want to take the car out of the country (maybe a weekend in Paris), you need to get the permission of the leasing company. You have no investment in the vehicle, and in almost all respects, you are effectively renting the car. People who are looking for maximum convenience – to rent a car for three years and then get another (usually new) car and rent that for three years – generally prefer leasing.
Dealers want you to lease so that they are supplying a new car every three years or so, forever. If you buy, you may be happy to replace it less often, and be open to using a different dealer and/or finance company when you do. A salesperson will almost certainly “advise” you to lease and if you’re the kind of person who wants to change their car every three years with minimum hassle and be in the “leasing loop” indefinitely, they’re giving you the correct advice. However, if you’d like to deal with your vehicle(s) without the lifetime involvement of a leasing company, buying may be the better decision.
The decision to buy or lease is an entirely different aspect to the vehicle acquisition process, and nothing to do with the other big question – should your company take on this car (and claim the tax, taxing you on the private use of the vehicle as a benefit in kind), or should you take it on personally (and claim business mileage from the company). That’s the first decision. The next is whether you buy or lease; these options are available to companies and individuals.
Finally, a dealer may tell you that a car is “VAT qualifying”. If your business is not VAT registered (medicine and dentistry are both exempt) then this is irrelevant. There may be a benefit if your business is VAT registered, and files quarterly VAT returns.
Love your car(s) and want to look at the facts in relation to your own situation before you hit the showroom? Talk with the experienced, knowledgeable team at Figurit, who can help you.
For more information call Figurit (formerly known as Lansdell & Rose) on 020 7376 933.