When deciding between buying a vehicle outright in the business vs leasing, the corporation tax treatment varies significantly depending on the method and the type of vehicle (e.g. electric vs petrol/diesel).
Here's a breakdown to help you compare:
Buying a Vehicle Outright
Corporation Tax Treatment
If it's a car, you cannot claim full capital allowances upfront unless it's fully electric (0g/km).
If it's a van or commercial vehicle, 100% Annual Investment Allowance (AIA) may apply.
For Cars:
|
Type of Car |
CO₂ Emissions |
Capital Allowance |
Notes |
|
Fully Electric |
0g/km |
100% First Year Allowance (FYA) |
Deduct full cost in year of purchase |
|
Low Emissions |
1-50g/km |
18% Writing Down Allowance (WDA) |
Spread over time |
|
Standard |
Over 50g/km |
6% WDA |
Slower tax relief |
Example
Buy a £40,000 electric car → full £40,000 deduction from profits → £7,600 tax saving (19% rate).
Buy a £40,000 petrol car → only 6% = £2,400 first year relief → £456 tax saving initially.
Input VAT
You cannot claim VAT on car purchases unless:
It’s 100% for business use (and provable), and
Not available for any personal use.
Leasing a Vehicle
Corporation Tax Treatment
Lease payments are an allowable business expense, so you deduct the full lease cost from profits.
|
Type |
Tax Relief |
Notes |
|
Operating Lease (normal) |
100% of monthly lease cost |
Deducted monthly |
|
Finance Lease |
More complex – interest and depreciation split |
Accounted like an asset |
CO₂ Adjustment:
For cars over 110g/km CO₂, only 85% of the lease cost is deductible.
For lower emissions cars, 100% of lease cost is deductible.
VAT on Lease:
50% of VAT is usually reclaimable if the car is used personally and for business.
100% VAT may be reclaimable for commercial vehicles or business-only cars.
Summary: Corporation Tax Benefit Comparison
|
Aspect |
Buying (Electric Car) |
Buying (Standard Car) |
Leasing (Low Emission) |
|
Immediate Tax Deduction |
✅ 100% of cost via FYA |
❌ Only 6–18% annually |
✅ 100% of lease payments |
|
VAT Reclaim |
❌ Usually none |
❌ Usually none |
✅ 50–100% of VAT (lease) |
|
Cash Flow |
❌ High upfront cost |
❌ High upfront cost |
✅ Spreads cost monthly |
|
Ownership |
✅ Yes |
✅ Yes |
❌ No (unless finance lease) |
Recommendation:
Electric vehicle? Buying outright is very tax-efficient.
Short-term use or want flexibility/cash flow? Leasing is simpler and often better for higher-emission vehicles.
For vans or commercial vehicles, buying can be more beneficial as you can claim AIA and possibly VAT.
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