Should I Lease or Purchase a Vehicle Outright for my Ltd Company?

In this article I will be discussing the benefits and drawbacks associated with the different ways a Ltd company can purchase a commercial vehicle. If you’re considering purchasing a company car via your Ltd company that will allow some private use, then this guide (click here) may be more appropriate.

When purchasing a true commercial vehicle or pool car that’s wholly and exclusively for the business, tax deductions such as capital allowances and claiming back VAT are an incentive to the Ltd company. Until 31st March 2023 there is even the 130% super-deduction (click here) that can be used when purchasing a commercial vehicle outright. How the Ltd company purchases a vehicle will naturally impact its tax and accounts, so should the Ltd company lease or purchase the vehicle?

Purchasing Outright or Hire Purchase

If you purchase the vehicle outright or via a hire purchase agreement the total cost of the vehicle will show on your balance sheet, therefore showing a higher asset total. In the first year you will get full tax relief for the whole vehicle, but no further relief in the following years that you still own the vehicle, even though you may still be making payments if you choose the hire purchase route. Owning the vehicle via either of these methods won’t impact the accounting profit, only the tax calculations. Good profits will still show, which can mean more profits are available for dividends to be declared, which may be a separate consideration.

Lease or Hire

Going down the contract lease or hire route will mean the Ltd company does not own the vehicle. Therefore, the asset won’t be visible on your balance sheet and the monthly costs simply go through your P&L as a business expense. You will receive tax benefits for each year that you’re making payments, but as this route affects your accounting profit by reducing it, you’ll have less available for a dividend pay-out.

Summary

Deciding which option is best for you depends on your situation. If you’ve had a strong year with high profits then the hire purchase route may be appropriate. You make the most of the tax relief available for that year, but still keep a healthy profit in your accounts available for dividends. Alternatively, if your profits aren’t high enough to cover the full tax relief available for the year then leasing the vehicle will be a better option, so you gain the tax relief as you make the payments.

This article is designed as a brief introduction to the topic and everyone’s situation is always unique. If you’re not sure how good your year has been or you’re too busy focussing on the day-to-day running of the business to think about future projections and plans, it could be a sign that you need better data and information available. Your key financial numbers enable you to make these kind of material decisions for your business because you have a correct view of your financial position. If you have any questions or would like some advice on your own situation, please submit a message on the contact page (click here) and I will be happy to help.