The easiest option to understand is a lease. You pay a monthly fee to basically rent the car for a set amount of time. At the end of the period you give the car back. With a lease you can claim back 100% of your monthly payments. You can also claim back any motoring costs such as fuel, insurance, and maintenance (although some leases include the maintenance in the price). So, as you can see, every cost can be deducted off your end of year profits, which makes it easier to budget. However, as you never actually own the car, leasing tends to be more expensive than buying on a monthly basis.
For example, a lease car (of value of around £15,000) may cost you £400 per month, with fuel costs of £250 and insurance of £50 – monthly total £700. So at the end of the year you would be able to deduct £700 x 12 = £8400 from your profits before tax.
Now, if we take a look at how a purchase works. When you make any long term purchase (typically to stay in your business for 1 year or more) then this becomes an asset. Assets are not deductable from your profits. Instead you can claim the interest on the monthly payments, and then claim depreciation on the purchase value of the asset. The amount you can depreciate may be affected by the emissions of your car, but typically you can claim 18% of the purchase price of the vehicle each year. You can also still claim back the running costs of your car as above.
So if we use the same figures as the first example. 18% of the £15,000 = £2700. Add to that fuel of £250 a month, £50 for insurance, and an estimate of £40 a month for interest, brings us to £6780 to deduct for the year. When you come to sell your car, if your sale price is less than the Net Book Value (the purchase price – depreciation) then you can claim back the difference on that years set of accounts. If the sale price happens to be higher than the Net Book Value then that difference would be added to your profits meaning you’re tax liability for that year would be higher.
There’s pros and cons to both options and sometimes it’s down to personal preference of risk or security with the maintenance options. These figures are purely an example and are to be used to help you understand the different accounting methods used. To discuss your own personal requirements in more detail then please get in touch and I’d be delighted to help you out – Dave Shannon – 01782 906001