When it comes to buying or leasing a company van for your business, you may want to find out about how the two options will affect the way in which you can reduce your corporation tax. It’s important to note that this article will only cover the tax treatment for vans and that the rules for company cars are very different, for which you can find out more in our article ‘Should you buy a company car or personal car’. HMRC defines that a van is a vehicle which is primarily constructed for the conveyance of goods or burden and has a total weight (when fully loaded) not exceeding 3,500 kg. Vehicles such as minibuses and caravans will therefore not qualify as their intended purpose is to carry people and not goods.
What is the difference between buying and leasing a company van?
The difference between buying and leasing is that when you buy a van outright, you will need to pay the full cost upfront and then will have full ownership of the vehicle from the first day of purchase. When you choose to lease a van however, you will likely pay a monthly fee instead but have no ownership over the van. In addition to that, although you have no ownership rights, you will still have the responsibility to insure the vehicle and pay road tax, unless any of these costs are included in your monthly payment plan. Depending on the finance model you choose when leasing a company van, you may have to return the van at the end of your contract, or you may have the option to purchase it.
What taxes can you save when buying a company van?
In general, a significant advantage to buying a company van over purchasing a company car is that 100% of the cost can be claimed as a capital allowance. This means that the full value of the van is offset against your company profits thereby also reducing the amount you’ll need to pay in corporation tax. Company cars on the other hand can only partially be claimed as capital allowance at fixed rates set by HMRC dependent on their CO2 emissions.
What’s more, because company vans are classed as ‘plant and machinery’ they not only qualify as a capital allowance but fall under the ‘Annual Investment Allowance (AIA)’ regime. AIA is currently temporarily increased to £1 million until 31 December 2021 so you can invest in as much plant and machinery as needed up until this amount and offset the full cost against your profits.
If your limited company is VAT registered and you purchase a van where the cost includes VAT, then you’ll be able to reclaim on any VAT paid. This is assuming that you have purchased the van for business purposes only. HMRC are more lenient towards company vans than they are to company cars so will overlook a small amount of incidental personal usage such as picking up lunch between travelling between business locations in your van. If there are significant amounts of personal usage then you will only be able to recover a portion of the VAT paid depending on the percentage that relates to business use.
Apart from the tax savings that can be made, other practical considerations should be made before purchasing a company van. You should remember that a van will be a depreciating asset and so you are unlikely to recover the cost you paid for it if you come to sell it. Not only that but purchasing a van outright will no doubt impact your cashflow and so you should ensure that you have sufficient funds to cover all your business outgoings.
What taxes can you save when you lease a company van?
Leasing a company van can be the more attractive option to you when you may not have sufficient capital to purchase a van outright. Whilst you will not be able to claim for capital allowances as you do not own the van, the monthly cost of leasing your van will still be deductible against your profits as an allowable business expense. If any interest is charged on top of the monthly fee, the interest amount is also an allowable expense. In this sense, similar to buying a van and being able to claim capital allowance, you will still be able to offset the expense of leasing a van against your company profits which will reduce your corporation tax.
As with buying a company van, you’ll still be able to reclaim any VAT that may be added to the monthly fee of leasing a company van where you are VAT registered. Again, there should be no significant personal usage, otherwise the amount of VAT that can be reclaimed must be apportioned.
Other things that need to be thought about include what will happen if you no longer need the van. Unlike if you had purchased the van outright, you will not have the option to sell it. In many cases, ending your lease agreement early can result in additional fees. You will also need to pay attention to your mileage as going over your mileage limit also comes with added fees.
Benefit-in-kind on company vans
Regardless of whether you buy or lease your company van, if you intend to use it for personal reasons such as picking up your kids from school or going to the supermarket then this will create a benefit-in-kind (BIK). The benefit is subject to tax for both your limited company and the employee (or yourself) who has personal use of the van.
HMRC has set fixed rates of tax to be paid for BIK on company vans. For the tax year 2021/22, the company is liable to pay a fixed rate of £3,500 where a van is offered as a benefit to an employee and incurs personal usage. The employee must pay their personal income tax rate on the fixed £3,500. This means that those on basic rate will pay 20% (£700), those on higher rate will pay 40% (£1,400) and those on additional rate will pay 45% (£1,575).
Benefit-in-kind on fuel for company vans
Unless you have to supply your own fuel for any personal usage on a company van, the fuel itself is seen as a separate BIK which you will also have to pay tax on. For the tax year 2021/22 the company will need to pay a fixed rate of £669. Again, the employee will pay tax depending on their own personal income tax band – £133.80 for those on the basic 20% rate, £267.60 for those on the higher 40% rate, and £301.05 for those on the additional 45% rate.
When compared to the sliding scale BIK rate for cars, the fixed BIK rate for vans is much more generous. However, another alternative you may want to consider is buying an electric car through your limited company. Whichever vehicle you’re looking to purchase or lease, if you want more information on the tax implications for your company or your business, please get in touch via the contact form below.