New van required - Tax efficient way to purchase?

[carpmaster]

My business really needs to aquire a new van, as the current one has served us proud for 5 years but has really seen better days. Am either looking at going for the new VW Transporter (102ps) SWB or possibly the new Transit SWB if the original reliability problems have been sorted out.

What's the most tax efficient way to purchase this new vehicle. I quite like the idea of monthly payments which helps with cashflow, but there are so many different options (PCP, finance lease, operating lease, hire purchase, etc) I can't make head nor tail or which ones apply to me. Obviously the more tax efficient the better! If I went down this route I would ideally like to lease for 2 years and at the end just hand the vehicle back. More like hiring the van basically and keeps it simple for writing down. One complication is the van needs to have certain items like racking, roof rack with ladder roller and possibly A/C.

I've now heard about the 100% writing down allowance for a new vehicle, but this would mean stumping up the full amount from company coffers which although possible, isn't ideal from a cashflow point of view. I could also borrow the purchase price from a bank, purchase the vehicle outright, write down the full 100% in the first year (and possibly the interest amount on the loan)?

We aren't VAT registered, as current turnover is just below the VAT threshold.

Assuming vehicle outright purchase cost would be about £13,000 and monthly lease about £200 p/m, what is the most tax / cost efficient way to aquire a van like this.

Thanks in advance.

[Eric Mc]

Since 6 April 2008, HMRC allows the complete write off against profits of the purchase cost of plant and machinery up to an overall total of £50,000 in any one year. Vans and other commercial vehicles (but not ordinary motor cars) are included in their definition of "Plant and Machinery".

Therefore, BUYING the vehicle would allow you to write its cost off against this year's profits. Whether that is tax efficient or not may depend on the overall profit levels of the buisiness, availability of allowable trading losses etc.

The Revenue (and accounting convention) treats the following methods of acquiring an asset as being the equivalent of "buying outright" -

purchase for cash
purchase by bank
purchase on on normal supplier credit terms
purchase using credit card
purchase using bank lending
Hire Purchase

Therefore, using any of the above methods, the 100% Capital Allaowance rule outlined above will apply. The Revenue also allows the finance costs (the interest and fees elements of any borrowings) to be offset against profits.

The Revenue DO NOT treat acquiring by Finance Leases or Operational Leases as proper purchases. Therefore, the Revenue will NOT allow the business to claim Capital Allowances on an asset acquired this way (the leasing company will be claiming these allowances instead).
There are alternative tax reliefs available however-

operational leases (i.e. renting) - the monthly rental costs
finance lease - the monthly finance charges (NOT the full repayments) and the the normal accounting "depreciation charge" on the asset.

Which of the above scenarios works out best for the business depends on all sorts of factors. However, I would imagine that with the new 100% allowances up to £50,000 of expenditure now available, leasing is not as attractive from a tax point of view as it was in previous years.

[carpmaster]

Many thanks for the reply Eric. I've just been revisiting this whole new van scenario, and would just like to clear up a few final points regarding leasing versus buying, before I take the plunge.

My business can't afford to pay for a new van from it's own coffers in one lump sum, so some kind of finance / leasing is required in order to aquire a new van.

So, given that I could either

1) Lease (particular deal I'm interested in has NO balloon & NO option to keep at end so presumably all monthly payments can be offset against taxable income)
2) Buy outright

Why would I lease, when I can take out a bank loan, and offset the 100% cost iof the van plus the interest payments, against taxable income.

The buying outright option is more per month, but the advantages of doing it this way seem to outweigh the disadvantages.

Am I missing something obvious here?

Thanks in advance

[Eric Mc]

I think that's a record for "length of reply"

You don't have to buy outright to get the good Capital Allowances. I listed above all the methods of acquisition which the Revenue will accept as being the equivalent of "buying outright" but which are forms of finance.

"Leasing" is the only area where you will NOT be able to make this "Investment Allowance" claim.
So, if you want to avoid losing out on this capital allowance, I would keep clear of any finance arrangement whioch has the word "lease" or "rent" in the title or the small print.

Edited by Eric Mc on Tuesday 3rd March 16:22

[carpmaster]

Thanks Eric for your help once again! This is obviously bread & butter stuff for you so can hardly be looked upon as keeping your knowledge up to date, but just so you know it's really appreciated that you give your time to answer posts like mine on PH!

It doesn't help that the van I am after (VW Transporter) has recently been slashed pricewise on lease deals, so that it's now less than half the monthly payment that buying a new one would cost monthly if I financed it with a loan.

I do like the idea of buying outright, so I can kit out the van to my own specification and not worry about exceeding the mileage quota, but it would take >5 years to pay off and I'd probably be looking to replace it by then anyway.

I'll have to get my accountant to run the numbers and decide which route is the the best for my business.

Cheers!

[Eric Mc]

There is never a simple answer vto any of these questions. Certainly, the ability to effectively write off the entire cost of the van in the year of purchase is very attractive. However, this is also dependent on the profitability of your business and the rates of tax you might be paying.