Business Lease Vs Outright purchase in the UK

[///Marty]

Hey guys,

Hoping some of the amazing financial wizards on here might be able to offer some advise on my personal circumstances as I have trawled through pages of finance / tax threads but have a slightly awkward situation.

My accountant doesn't seem to know a great deal about EV financing and hasn't really been helpful, I'm just trying to make sure that my biggest ever car commitment (first Porsche and first EV) doesn't go badly.

So I am the director of my own Ltd company which has been trading since 2011.

A few years ago a made one of my colleagues a director of the company mainly as a thank you for his hardwork and to give him the boost of the title etc. He does not sign on any of the accounts and does not draw dividends.

I take a nominal salary and top the rest up with a weekly dividend payment to myself.

We have always done OK although did have a bit of a blip last year due to not trading Jan-March due to Corona and as a result actually filed a small loss for the first time.

When we re-opened our doors we were non stop through til Christmas and actually the following three quarters made an equivalent amount of sales as I would normally expect for a 12 month period.

I've had a quote for a business lease from Porsche finance (which actually got cheaper over Christmas) and I've also been speaking with a broker regarding financing the car externally and the quote for that has come in quite a bit cheaper although due to the loss last year there have been some conditions posed such as a personal guarantee from me and my Co-director signing which I ideally wanted to avoid if possible.

I'm happy that we could cover the monthly payments as we have been paying off another company vehicle at £1500 a month for the last three years and that is now cleared and the vehicle owned fully.

We have the BBL sat in an account as a fall back, as well as enough funds to purchase a £90k spec 4S outright.

I also have £40k in personal funds which I could pay into the business as directors loan if required.

I have read that the business lease option will allow me to claim back 50% of the monthly rentals, but will essentially work out at a £40k+ spend over three years with nothing to show for it at the end.

I have also read that if purchasing outright that the corp tax offset can be split over the previous year (we don't make more than £90k profit per year) however having had a small loss on the books last year I'm not sure if outright purchase is the way to go.

Would be very appreciative of any advice or input from anyone in the know or those who have been through the same or similar situation.

I'm keen to get a decisions made and get an order placed.

Broker has a reservation for an April / May delivery and there is a potential option of getting a March / April delivery at the dealer due to someone pulling out.

Thanks in advance!

Marty

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[RG2020]

Hey guys,

Hoping some of the amazing financial wizards on here might be able to offer some advise on my personal circumstances as I have trawled through pages of finance / tax threads but have a slightly awkward situation.

My accountant doesn't seem to know a great deal about EV financing and hasn't really been helpful, I'm just trying to make sure that my biggest ever car commitment (first Porsche and first EV) doesn't go badly.

So I am the director of my own Ltd company which has been trading since 2011.

A few years ago a made one of my colleagues a director of the company mainly as a thank you for his hardwork and to give him the boost of the title etc. He does not sign on any of the accounts and does not draw dividends.

I take a nominal salary and top the rest up with a weekly dividend payment to myself.

We have always done OK although did have a bit of a blip last year due to not trading Jan-March due to Corona and as a result actually filed a small loss for the first time.

When we re-opened our doors we were non stop through til Christmas and actually the following three quarters made an equivalent amount of sales as I would normally expect for a 12 month period.

I've had a quote for a business lease from Porsche finance (which actually got cheaper over Christmas) and I've also been speaking with a broker regarding financing the car externally and the quote for that has come in quite a bit cheaper although due to the loss last year there have been some conditions posed such as a personal guarantee from me and my Co-director signing which I ideally wanted to avoid if possible.

I'm happy that we could cover the monthly payments as we have been paying off another company vehicle at £1500 a month for the last three years and that is now cleared and the vehicle owned fully.

We have the BBL sat in an account as a fall back, as well as enough funds to purchase a £90k spec 4S outright.

I also have £40k in personal funds which I could pay into the business as directors loan if required.

I have read that the business lease option will allow me to claim back 50% of the monthly rentals, but will essentially work out at a £40k+ spend over three years with nothing to show for it at the end.

I have also read that if purchasing outright that the corp tax offset can be split over the previous year (we don't make more than £90k profit per year) however having had a small loss on the books last year I'm not sure if outright purchase is the way to go.

Would be very appreciative of any advice or input from anyone in the know or those who have been through the same or similar situation.

I'm keen to get a decisions made and get an order placed.

Broker has a reservation for an April / May delivery and there is a potential option of getting a March / April delivery at the dealer due to someone pulling out.

Thanks in advance!

Marty

From purely a tax point of view I have a couple of things I can add:

As a lease the 50% you can claim back is regarding the VAT. The company can reclaim 100% of the VAT on any maintenance element of the lease, and 50% on the finance element.

The net cost after VAT reclaim is fully deductible against the profit taxable to corporation tax as it is incurred, i.e. spread over 3-4 years.

If purchasing the car, and if the car is going to have some personal use which I expect it is, then the business can't reclaim any of the input VAT on the car purchase. But 100% of the value of the car can be claimed against the taxable profit in the year it was purchased. This could create a small taxable loss, which last time I looked could be carried back to the previous year to claim a tax refund against any corporation tax paid, or can be carried forward to future years.

If the vehicle is sold at a later date, corporation tax will be payable on the full sale price, as the company would have benefitted in full from the purchase price.

So the most cost effective option for your business depends on a few things such as how long you intend to keep the car, how much it might be worth when you sell it, cashflow availability, what lease offers you've had vs purchase price and then you can work out the overall cost to the business over the life of the car, or rather that's the angle I'd be looking at it.

 

[RG2020]

I glossed over the small loss you mentioned, so you'd have to carry forward any excess loss to future years.

Sorry to hear about the trading difficulties by the way, but also good that you're catching up

 

[///Marty]

From purely a tax point of view I have a couple of things I can add:

As a lease the 50% you can claim back is regarding the VAT. The company can reclaim 100% of the VAT on any maintenance element of the lease, and 50% on the finance element.

The net cost after VAT reclaim is fully deductible against the profit taxable to corporation tax as it is incurred, i.e. spread over 3-4 years.

If purchasing the car, and if the car is going to have some personal use which I expect it is, then the business can't reclaim any of the input VAT on the car purchase. But 100% of the value of the car can be claimed against the taxable profit in the year it was purchased. This could create a small taxable loss, which last time I looked could be carried back to the previous year to claim a tax refund against any corporation tax paid, or can be carried forward to future years.

If the vehicle is sold at a later date, corporation tax will be payable on the full sale price, as the company would have benefitted in full from the purchase price.

So the most cost effective option for your business depends on a few things such as how long you intend to keep the car, how much it might be worth when you sell it, cashflow availability, what lease offers you've had vs purchase price and then you can work out the overall cost to the business over the life of the car, or rather that's the angle I'd be looking at it.

Hi Rg2020,

Many thanks for your input.

Yes apologies I should have stated 50% of the vat.

Great point about the corp tax being carried forward, I wasn't aware that was possible. We didn't pay any corp tax last year due to the loss so that is definitely beneficial if I could take it over 21/22.

Lease deal that has been offered is actually on a £100k spec (which seems to change daily at the moment!) , and is as follows:

Agreement Type	Business Contract Hire
Agreement Duration	36 months
Rental Payment Profile	9+35

Annual Mileage	10000
Total Contract Mileage	30000
Excess Mileage	33.99ppm
Excess Mileage Tier 2 (if applicable)

	Initial Rental (ex. VAT)	Subsequent Monthly Rentals (ex. VAT)
Finance Rental	£10,084.14	£1,120.46
Maintenance Rental	£0.00	£0.00
Total Rental	£10,084.14	£1,120.46
Effective Rental (Monthly Rentals inc. irrecoverable VAT)		£1,232.51

Maintenance

Driver Maintained

Cash-flow availability is reasonably healthy all things considered, but then I've also got what we may potentially have to come this year at the back of my mind too (my showroom is already closed and its looking highly likely I will need to furlough my fitting teams soon).

Thanks for your kind comments!

I'm sure we'll get out the other side with no problems by the end of this year, but have been trying take the plunge since it was first launched last year and really would like to scratch that itch right now rather than waiting another year!

 

[schwar]

Hey Marty,

I'm also director of a limited company I majority own and I was asking myself a lot of the same questions as you last December. I was fully down for the company to lease the car and take advantage of the BIK advantages, where I normally just lease privately.

While I'm not entirely happy with the idea of buying the car outright, this is what I've had recommended as the most TAX effective thing to do. On the advice of my accountant, we're going to take advantage of the 100% First Year Allowance (FYA). To ensure we could do this the car need to be purchased by the 31st March.

https://www.gov.uk/hmrc-internal-manuals/capital-allowances-manual/ca23153

Having said that, some places online say it is going to be extended beyond that point (although not on the government website as far as I can see).

My car is currently being built and should complete on the 20th, so I'm really excited, even if I'm still not entirely happy with paying out for the car in one big chunk. I have no idea how long it takes from being complete to ready at the dealership - but practically the nearer it gets to the 31st of March the better for me (although emotionally I wish I had it already).

Good luck with the decision and with your business too.

Josh

P.S. Judging by your profile, we seem to have the same taste in cars, I'm got an M4 Competition at the moment.

 

[robborover]

Similar position but approached a bit different. Went down contract hire route for same reasons as above but not overly concerned about owning the end product due to depreciation etc. Used VW finance for ease and lower initial rental amounts. Would not "invest" a ton of cash into a car at this time (in my view/context).

 

[1AX]

I agree with the advice already given and would add that the first year allowance scheme for EV's has (according to my accountant at least) already been extended by HMRC from a deadline of 31st March 2021 to 31st March 2025. You can also currently claim a first year allowance on EV chargers until 31st March 2023.

In basic terms, if you lease the car, the company can recover 50% of the VAT plus 100% of the leasing costs against the P&L and therefore corporation tax throughout the duration of the lease.

If the company purchases the car, it cannot recover any VAT but can claim the 100% capital allowance (and therefore corporation tax benefit) in year 1 and/or future or past tax years depending on your circumstances. However, the full sales value of the vehicle will also be taxable if it is sold in the future.

Your decision therefore depends on whether you are prioritising cash flow or overall cost and how long you plan to keep the car. Assuming you'll keep the car for 3 years either way then leasing should cost you less (because of the 50% VAT saving) and you're also protected against the future value of the car in the event of the depreciation being significantly higher than the lease company have predicted.

My own thinking has been to lease a Taycan for no more than 3 years back-to-back with the Porsche warranty because who would want to own one without a warranty!? This is new territory for Porsche who are already experiencing 'teething' issues and nobody yet knows how these cars will cope 3+ years and many miles down the road. Equally, who knows how values of this new tech will hold up over a similar period.

I don't fancy writing a blank cheque with Porsche's name on it to drive in years 3+!

 

[schwar]

My accountant said to be safe it should be 31st March this year, as while the extension was announced in the budget, it hasn't passed into law yet(?) or been reflected on the HMRC website. I imagine they've had more important things to update with regards to COVID and Brexit.

I habitually would rather keep money in my bank account rather than theirs... but who would bet against a Porsche when it comes to market-leading residuals? I know the Taycan is no 911 GT car, but all predictions point to it doing well in 3 years compared to the rest of the EV market (or cars like my old BMW M5).

Even if it does rather worse than the current predictions (definitely possible) you could be talking about a 3-year ownership cost of around £30K on a 4S+ which looks cheap compared to most leases I've seen (especially once the initial payment is included). With my Taycan Turbo, even if it underperforms, it will hopefully work out significantly cheaper than if I had leased it. It could be more than £20K cheaper depending on the figures. At least this is what I keep telling myself as I wait for it to arrive.

 

[Peterw]

My accountant said to be safe it should be 31st March this year, as while the extension was announced in the budget, it hasn't passed into law yet(?) or been reflected on the HMRC website. I imagine they've had more important things to update with regards to COVID and Brexit.

I habitually would rather keep money in my bank account rather than theirs... but who would bet against a Porsche when it comes to market-leading residuals? I know the Taycan is no 911 GT car, but all predictions point to it doing well in 3 years compared to the rest of the EV market (or cars like my old BMW M5).

Even if it does rather worse than the current predictions (definitely possible) you could be talking about a 3-year ownership cost of around £30K on a 4S+ which looks cheap compared to most leases I've seen (especially once the initial payment is included). With my Taycan Turbo, even if it underperforms, it will hopefully work out significantly cheaper than if I had leased it. It could be more than £20K cheaper depending on the figures. At least this is what I keep telling myself as I wait for it to arrive.

Hi, I believe there is another option that it may be worth reviewing , certainly in the UK

My accountant advised that if you buy a car using hire purchase, then 100% of the value ( if an EV) can be offest against corp tax in year 1 in the form of a capital alowance, even though as a hire purchase you have not fully paid for the car,
The HP can be set up by porsche/VW finance or similar with an agreed end balance value at end year 3 ( giving some protection on residuals) therefore you will pay an initial deposit ( say 10k ) and then monthly costs similar to lease costs

Therefore you can benefit from the 100% capital allowance against this years profit, but have only paid the deposit and X months rental ( depending when the lease starts within the year )

At the end of three years you can pay the agreed balance and keep the car or sell it either back to porsche for the agreed end value, ( or elsewhere ) in which case you then need to add this back as "negative capital allowance" in that tax year ... but if you repeat the process with another car funded in a similar way then that new capital allowance will offset the old car sale "negative capital allowance"

This way you can claim Vat back at time of purchase ... but you need an initial deposit, ( which i believe you have advised you have available) so need to review the overall costs to see which works best for you

im clearly not an accountant but this seemed to be a good route to us

peter

 

[schwar]

Absolutely worth considering.

I believe, and I could be wrong, that HP counts as a purchase, which is why you can claim the 100% First Year Allowance (FYA). But because it is counted as a purchase, you wouldn't be able to claim the VAT in that case (just like if you purchased the car)?

Furthermore, with HP, you still end up paying interest, which you would otherwise save if you purchase the car outright. Having said that, you might well have ways to use the money you keep in your pocket that make you more than the interest on the borrowed money.

 

[RG2020]

Absolutely worth considering.

I believe, and I could be wrong, that HP counts as a purchase, which is why you can claim the 100% First Year Allowance (FYA). But because it is counted as a purchase, you wouldn't be able to claim the VAT in that case (just like if you purchased the car)?

Furthermore, with HP, you still end up paying interest, which you would otherwise save if you purchase the car outright. Having said that, you might well have ways to use the money you keep in your pocket that make you more than the interest on the borrowed money.

It's a good point Peterw raised. It is classed as a purchase as the car would be on the balance sheet, along with the finance. So yes 100% FYA.

I believe the VAT position is the same as a normal purchase though, it's still going to be a purchase of a car with private use.

 

[RG2020]

By my calculations, and I'm surprised by these by the way, so I'd urge you or your accountant to check these, with your lease deal the net cost over the term will be £43,927 (taking into account VAT & CT relief).

If you purchase the car at £90k, net cost is £73k. After 3 years the car would only need to be sold at just under £36k for it to have cost the company less than the lease. This doesn't take into account time value of money, opportunity cost etc etc.

With the rumours 100% FYA being extended, in my experience if it's been published then it is likely to be adopted, but it's not certain by any stretch. So it's a gamble. I confirmed my Taycan before the 0% BIK rates had been officially announced, I was very nervous about it but thankfully they were held. Into the bargain I got in before the electric car grant was limited to less expensive cars. I consider myself lucky, it could easily have cost a lot more.

 

[schwar]

If you purchase the car at £90k, net cost is £73k.

Hang on, if you purchase the car and use the FYA, don't you have to pay the VAT? So the £90K remains £90K? I'm confused, which is pretty easy in this case.

 

[1AX]

Hang on, if you purchase the car and use the FYA, don't you have to pay the VAT? So the £90K remains £90K? I'm confused, which is pretty easy in this case.

Yes you would have to pay all of the VAT on a purchase (regardless of HP or cash payment) but can reclaim 50% of the VAT on lease payments

 

[Taycanturbolondon]

With Taycan, if you account for absolutely everything and you spec the car relatively high. Taking into account the personal usage, interest (or lease cost) etc. I have found that a 3 year HP with a big deposit is the cheapest way overall.

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