Newly Self Employed - Buying a Van
Discussion
Basically I started self employment back in April as a plumber working out of my car and its now got to point where I need a van.
What I'm asking is what is the most tax efficient way of buying a van these days? I have searched extensively but without much luck as what you can claim back appears to have changed.
Say I make about 26000 this year, that puts my taxable profit at 19525, which will result in a tax bill of 3905, I think I've got that right.
Now I'd much rather that was used on business assets like a van and such than go to the tax man. I believe 100% is claimable through AIA?
Say I went a bought a van cash for £2000 with a receipt ect, would that be claimable or does it have to be bought out of my business income?
I looked at leasing a van, roughly 200 per month which seems attractive especially if i can claim 100% back.
I'm just trying to weigh up all my options here, I don't want to go splashing out and not get tax relief for it!
Many thanks to anyone who can help.
What I'm asking is what is the most tax efficient way of buying a van these days? I have searched extensively but without much luck as what you can claim back appears to have changed.
Say I make about 26000 this year, that puts my taxable profit at 19525, which will result in a tax bill of 3905, I think I've got that right.
Now I'd much rather that was used on business assets like a van and such than go to the tax man. I believe 100% is claimable through AIA?
Say I went a bought a van cash for £2000 with a receipt ect, would that be claimable or does it have to be bought out of my business income?
I looked at leasing a van, roughly 200 per month which seems attractive especially if i can claim 100% back.
I'm just trying to weigh up all my options here, I don't want to go splashing out and not get tax relief for it!
Many thanks to anyone who can help.
Depreciation and Capital Allowances are two different things,
Depreciation is the accounting method of writing off the cost of an asset over its expected life.
Capital Allowance is the tax method of doing the same.
You will see a Depreciation Charge in a set of accounts
You will see a Capital Allowance claim in a tax computation.
Capital Allowances are, at the end of the day, what matters when you are looking at the tax implications of buying an asset.
For a business to be able to claim Capital Allowances on a particular asset it must
buy the asset outright
or
buy the asset using a bank loan
or
buy the asset using an HP agreement
A business CANNOT claim Capital Allowances on an asset if it acquiring or using the asset using a Lease Agreement or a Rental Agreement
At the moment there are VERY generous Capital Allowances available on certain types of assets INCLUDING VANS. A van costing £2,000 would definitely be elligible for the 100% Annual Investment Allowance AIA) - but only if it bought outright or purchased using a bank loan or HP. You CANNOT claim the AIA if you lease the van or rent it.
If you DO lease the van, tax relief is claimable but in a different way.
If the lease is a Finnace Lease (which looks a bit like an HP but is NOT an HP, you will be able to offset the annual finance costs (the interest, not the full repayment) against your annual profits. You will also be able to offset the annual accounting depreciation charge (one of the very few cases where HMRC allows depreciation as a tax deductable cost).
If the van is being paid for on a monthly rental scheme, you offset the monthly rental costs against the annual profits.
As you can see, with leases and rentals, the tax relief will be spread over the length of time you are making the monthly payments to the finance company. If you buy outright or buy using a bank loan or HP, you will get instant tax relief in the first year - which might be more beneficial to a start-up business.
If buying with a bank loan or HP, you will also get tax relief on the monthly loan interest or HP charges.
Depreciation is the accounting method of writing off the cost of an asset over its expected life.
Capital Allowance is the tax method of doing the same.
You will see a Depreciation Charge in a set of accounts
You will see a Capital Allowance claim in a tax computation.
Capital Allowances are, at the end of the day, what matters when you are looking at the tax implications of buying an asset.
For a business to be able to claim Capital Allowances on a particular asset it must
buy the asset outright
or
buy the asset using a bank loan
or
buy the asset using an HP agreement
A business CANNOT claim Capital Allowances on an asset if it acquiring or using the asset using a Lease Agreement or a Rental Agreement
At the moment there are VERY generous Capital Allowances available on certain types of assets INCLUDING VANS. A van costing £2,000 would definitely be elligible for the 100% Annual Investment Allowance AIA) - but only if it bought outright or purchased using a bank loan or HP. You CANNOT claim the AIA if you lease the van or rent it.
If you DO lease the van, tax relief is claimable but in a different way.
If the lease is a Finnace Lease (which looks a bit like an HP but is NOT an HP, you will be able to offset the annual finance costs (the interest, not the full repayment) against your annual profits. You will also be able to offset the annual accounting depreciation charge (one of the very few cases where HMRC allows depreciation as a tax deductable cost).
If the van is being paid for on a monthly rental scheme, you offset the monthly rental costs against the annual profits.
As you can see, with leases and rentals, the tax relief will be spread over the length of time you are making the monthly payments to the finance company. If you buy outright or buy using a bank loan or HP, you will get instant tax relief in the first year - which might be more beneficial to a start-up business.
If buying with a bank loan or HP, you will also get tax relief on the monthly loan interest or HP charges.
Edited by Eric Mc on Sunday 25th July 08:35
http://www.efllimited.com/unlimitedmileage_vans.ph...
Contract hire is the way to go if you are a sole trader and do not want to plump a huge amount of cash into a Van.
We have a Transit Connect through these, £180 a month + vat. They were very good to deal with. We claim the vat back and i think the contract hire amount goes through at 85% or 100% tax deductable.
Big difference between lease and contract 'hire' as per Erics post.
Contract hire is the way to go if you are a sole trader and do not want to plump a huge amount of cash into a Van.
We have a Transit Connect through these, £180 a month + vat. They were very good to deal with. We claim the vat back and i think the contract hire amount goes through at 85% or 100% tax deductable.
Big difference between lease and contract 'hire' as per Erics post.
The OP is particularly interested in the Capital Allowance situation. Any sort of Lease or Rent gives you the worst Capital Allowance scenario.
However, I always advise clients that they look for the best deal, rather than just look at the tax implications.
The "problem" at the moment is the introduction of the AIA two years ago which has certainly skewed the tax decision towards buying outright, bank loan or HP rather than Leasing or Renting. A Contract Hire arrangement would normally be in the form of a Lease or Rent agreement and would therefore prevent the AIA being claimed.
However, I always advise clients that they look for the best deal, rather than just look at the tax implications.
The "problem" at the moment is the introduction of the AIA two years ago which has certainly skewed the tax decision towards buying outright, bank loan or HP rather than Leasing or Renting. A Contract Hire arrangement would normally be in the form of a Lease or Rent agreement and would therefore prevent the AIA being claimed.
Edited by Eric Mc on Sunday 25th July 09:05
Thanks for the comprehensive replies.
The buying outright/loan/hp option I understand fully, I take it the only downside to doing this compared to leasing is the depreciation?
As for leasing/contract hire ect, this still confuses me somewhat...
I had a quote from Peugeot which was a finance lease, £200 pm inc vat for 46 months + deposit of £600 and then a final balloon payment of £3800.
So with that I'd only be able to get tax relief for the interest on the monthly payments?
After paying that balloon payment, do I own the van or not? I am assuming I don't as that would be a lease purchase?
Its all a bit confusing at the moment, I'm keen on the idea of having a new van and not a second hand old one but I'm still at a bit of a loss as to what my best option is!
The buying outright/loan/hp option I understand fully, I take it the only downside to doing this compared to leasing is the depreciation?
As for leasing/contract hire ect, this still confuses me somewhat...
I had a quote from Peugeot which was a finance lease, £200 pm inc vat for 46 months + deposit of £600 and then a final balloon payment of £3800.
So with that I'd only be able to get tax relief for the interest on the monthly payments?
After paying that balloon payment, do I own the van or not? I am assuming I don't as that would be a lease purchase?
Its all a bit confusing at the moment, I'm keen on the idea of having a new van and not a second hand old one but I'm still at a bit of a loss as to what my best option is!
If you go down the leasing route, you NEVER own the van at any point during the lifetime of the primary leasing period. That is why you cannot make any Capital Allowances claims. The leasing company own the asset and they make the claims.
During this period, if it is a Finance Lease/Contract Hire, all you can claim is the interest on leasing payments and the accounting depreciation of the asset (usually around 25% per annum but it must be in line with normal accounting principles). If it is a straight Rental situation,. you will claim the monthly rental costs.
When the primary leasing period comes to an end, you are usually given a number of options -
you can hand the vehicle back to the leasing company
you can go into a secondary lease at lower monthly amounts
you can buy the asset from the leasing company
If you go for the second option, the situation from the original position won't change, except that the amounts will be lower.
If you go for the third option, i.e. buying it from the leasing company, the asset becomes yours from that point and you can start claiming Capital Allowances from that moment on. Obviously, this will be a number of years after the original lease commenced so the capital value of the van will be a lot less than originally so Capital Allowances will also be lower.
During this period, if it is a Finance Lease/Contract Hire, all you can claim is the interest on leasing payments and the accounting depreciation of the asset (usually around 25% per annum but it must be in line with normal accounting principles). If it is a straight Rental situation,. you will claim the monthly rental costs.
When the primary leasing period comes to an end, you are usually given a number of options -
you can hand the vehicle back to the leasing company
you can go into a secondary lease at lower monthly amounts
you can buy the asset from the leasing company
If you go for the second option, the situation from the original position won't change, except that the amounts will be lower.
If you go for the third option, i.e. buying it from the leasing company, the asset becomes yours from that point and you can start claiming Capital Allowances from that moment on. Obviously, this will be a number of years after the original lease commenced so the capital value of the van will be a lot less than originally so Capital Allowances will also be lower.
Edited by Eric Mc on Sunday 25th July 12:35
I keep reading everywhere that finance lease and contract hire are 100% claimable?
Like here for example: http://www.crusadervans.co.uk/van-leasing-explaine...
And here: http://www.vansales.com/van_sales_blog/index.php/v...
Like here for example: http://www.crusadervans.co.uk/van-leasing-explaine...
And here: http://www.vansales.com/van_sales_blog/index.php/v...
Ask them if they are claiming capital allowances on those vehicles. If they are, you can not. Conversely, if they are not, you can.
Here's what HMRC say -
CA23310 - PMA: Hire purchase: Notional ownership
CAA01/S67
A person may pay for an asset in instalments. If so the seller may keep ownership of the asset until the last instalment has been paid. A hire purchase contract is a contract like that. Another name for such a contract is a lease purchase contract.
When a person buys an asset under a hire purchase type contract the person cannot satisfy the ownership condition CA23010 that has to be satisfied for the expenditure to be qualifying expenditure for PMA while the payments are being made. That is because ownership does not pass until the last payment is made.
The legislation in Section 67 treats the person making the payments under the contract as the owner of the asset as soon as that person is entitled to the benefit of the contract. It also stops anyone else, even the actual owner, being treated as the owner of the asset for CA purposes. This means that when the buyer / lessee becomes entitled to the benefit of the contract the seller has to bring a disposal value to account.
The legislation in Section 67 is very generous. It also lets the person claim allowances on payments that have yet to be made as soon as the asset is brought into use. This means that the person can claim PMA now on payments that will be made in the future.
Example Bob enters into a contract on 24 May 2001 to buy a computer from Robbie. He pays £5,000 on 24 May 2001 when he enters into the contract and then there are five payments of £1,000 at yearly intervals. He brings the computer into use on 4 July 2001. Bob is treated as owning the computer from 24 May 2001 onwards; the date of the contract, and Robbie is treated as ceasing to own it. Bob can claim PMA on the initial payment of £5,000 then. He can claim PMA on the five payments on £1,000 each of which he has still to make when he brings the computer into use on 4 July 2001.
Extra rules for lease purchase contracts
There are extra rules where the contract is a lease purchase contract.
The person buying the asset under the lease purchase contract (the lessee) is not treated as the owner of the asset during the duration of the contract unless that person would treat the contract as a finance lease in accordance with generally accepted accounting practice.
For example, a contract that contains an option for the lessee to buy the asset for market price at the end would not be treated as a finance lease by the lessee. This means that the lessee is not treated as the owner of the asset until they actually buy the asset and so it cannot get PMA until it pays the option price.
If the contract would not be treated as a finance lease by the lessee, the lessee is not treated as the owner and cannot claim PMA but the legislation that stops anyone else being treated as the owner still applies. So if the seller has claimed PMA the seller has to bring a disposal value to account.
Two or more agreements
A person may enter into two or more agreements that taken together satisfy the requirement that a person shall or may become the owner of an asset on performance of the contract. For example, a person whose religion forbids paying interest may buy an asset using alternative finance arrangements. These may involve two or more contracts that taken together give the buyer ownership of the asset on performance of the contracts. If so you should treat the agreements as a single contract to which the hire purchase legislation applies.
Cessation of entitlement to the benefit of the contract
If the person stops being entitled to the benefit of the contract without ever becoming the real owner of the asset the person is treated as ceasing to own the asset. This means that the person has to bring a disposal value to account CA23330.
Here's what HMRC say -
CA23310 - PMA: Hire purchase: Notional ownership
CAA01/S67
A person may pay for an asset in instalments. If so the seller may keep ownership of the asset until the last instalment has been paid. A hire purchase contract is a contract like that. Another name for such a contract is a lease purchase contract.
When a person buys an asset under a hire purchase type contract the person cannot satisfy the ownership condition CA23010 that has to be satisfied for the expenditure to be qualifying expenditure for PMA while the payments are being made. That is because ownership does not pass until the last payment is made.
The legislation in Section 67 treats the person making the payments under the contract as the owner of the asset as soon as that person is entitled to the benefit of the contract. It also stops anyone else, even the actual owner, being treated as the owner of the asset for CA purposes. This means that when the buyer / lessee becomes entitled to the benefit of the contract the seller has to bring a disposal value to account.
The legislation in Section 67 is very generous. It also lets the person claim allowances on payments that have yet to be made as soon as the asset is brought into use. This means that the person can claim PMA now on payments that will be made in the future.
Example Bob enters into a contract on 24 May 2001 to buy a computer from Robbie. He pays £5,000 on 24 May 2001 when he enters into the contract and then there are five payments of £1,000 at yearly intervals. He brings the computer into use on 4 July 2001. Bob is treated as owning the computer from 24 May 2001 onwards; the date of the contract, and Robbie is treated as ceasing to own it. Bob can claim PMA on the initial payment of £5,000 then. He can claim PMA on the five payments on £1,000 each of which he has still to make when he brings the computer into use on 4 July 2001.
Extra rules for lease purchase contracts
There are extra rules where the contract is a lease purchase contract.
The person buying the asset under the lease purchase contract (the lessee) is not treated as the owner of the asset during the duration of the contract unless that person would treat the contract as a finance lease in accordance with generally accepted accounting practice.
For example, a contract that contains an option for the lessee to buy the asset for market price at the end would not be treated as a finance lease by the lessee. This means that the lessee is not treated as the owner of the asset until they actually buy the asset and so it cannot get PMA until it pays the option price.
If the contract would not be treated as a finance lease by the lessee, the lessee is not treated as the owner and cannot claim PMA but the legislation that stops anyone else being treated as the owner still applies. So if the seller has claimed PMA the seller has to bring a disposal value to account.
Two or more agreements
A person may enter into two or more agreements that taken together satisfy the requirement that a person shall or may become the owner of an asset on performance of the contract. For example, a person whose religion forbids paying interest may buy an asset using alternative finance arrangements. These may involve two or more contracts that taken together give the buyer ownership of the asset on performance of the contracts. If so you should treat the agreements as a single contract to which the hire purchase legislation applies.
Cessation of entitlement to the benefit of the contract
If the person stops being entitled to the benefit of the contract without ever becoming the real owner of the asset the person is treated as ceasing to own the asset. This means that the person has to bring a disposal value to account CA23330.
So HP doesnt qualify for AIA then?
That article says many times that a lease purchase does not qualify, yet the example they give does? Nothing appears to be different in my eyes, unless I am missing something?
I may have read this wrong, but is it also trying to say that with a finance lease the lessee is treated as the owner for the duration of the contract?
Sorry if it seems like I'm going on here, I'm just trying to gain a clearer understanding.
Basically Eric, if you were in my situation, which route would you take? I'm kind of leaning to buying one for a couple of grand private sale, at least its clear cut that way.
That article says many times that a lease purchase does not qualify, yet the example they give does? Nothing appears to be different in my eyes, unless I am missing something?
I may have read this wrong, but is it also trying to say that with a finance lease the lessee is treated as the owner for the duration of the contract?
Sorry if it seems like I'm going on here, I'm just trying to gain a clearer understanding.
Basically Eric, if you were in my situation, which route would you take? I'm kind of leaning to buying one for a couple of grand private sale, at least its clear cut that way.
I stick to the principles I set out in my first post -
the business can claim normal Capital Allowances if the asset is -
bought outright
bought with a simple bank loan
purchased using an HP agreement
if it is being acquired under a Finance Lease arrangement, I don't claim the Capital Allowances but instead claim the annual depreciation charge and the finance costs
if it being acquired under an Operating Lease, I just claim the monthly repayments
the business can claim normal Capital Allowances if the asset is -
bought outright
bought with a simple bank loan
purchased using an HP agreement
if it is being acquired under a Finance Lease arrangement, I don't claim the Capital Allowances but instead claim the annual depreciation charge and the finance costs
if it being acquired under an Operating Lease, I just claim the monthly repayments
Therre IS a difference but it can be open to interpretation.
Many Finance Leases will contain a clause which indicates that there is an option at the end of the Primary Lease Period to either retain the asset and continue to lease it in what is called the Secondary Lease Period. Another option is that the leassee can actually buy the asset for a one-off payment AFTER the Primary Lease Period has ended. That one-off additional payment can be a large "balloon" payment or as little as £1. The important thing is that legal title to the asset passes on that payment.
Operational Leases/Rentals do not have this set of options.
At the end of the day, the individual responsible for accounting for the asset and the related lease needs to scrutinise the technical aspects of the lease and make up their mind as to what type of lease they are looking at. In my experience, the LAST person to consult is the person you are dealing with at the van/car showroom as they are only interested in striking the deal with you and maximising their commission.
Many Finance Leases will contain a clause which indicates that there is an option at the end of the Primary Lease Period to either retain the asset and continue to lease it in what is called the Secondary Lease Period. Another option is that the leassee can actually buy the asset for a one-off payment AFTER the Primary Lease Period has ended. That one-off additional payment can be a large "balloon" payment or as little as £1. The important thing is that legal title to the asset passes on that payment.
Operational Leases/Rentals do not have this set of options.
At the end of the day, the individual responsible for accounting for the asset and the related lease needs to scrutinise the technical aspects of the lease and make up their mind as to what type of lease they are looking at. In my experience, the LAST person to consult is the person you are dealing with at the van/car showroom as they are only interested in striking the deal with you and maximising their commission.
CaptainSlow said:
Under most interpretations of Finance Leases the lessee is not able to take ownership of the vehicle. The contract can be extended with a nominal lease or sold to a third party. Any balloon is settled with the funder with excess or shortfall taken by the lessee.
I think you are agreeing with me 
No - that's not what I said.
What I was saying is that SOMETIMES there is an option that allows the lessee to buy the asset from the lessor for an agreed sum. This transaction is nothing to do with the original lease in that the old lease has now finished and the lessor is free to do what he likes with the asset, after all, he still owns it - including selling it to the former lessee if both parties are in agreement.
What I was saying is that SOMETIMES there is an option that allows the lessee to buy the asset from the lessor for an agreed sum. This transaction is nothing to do with the original lease in that the old lease has now finished and the lessor is free to do what he likes with the asset, after all, he still owns it - including selling it to the former lessee if both parties are in agreement.
So if there is no option to buy the van in the contract at the end of the finance lease, this can be seen as an operational lease?
The same would apply to contract hire then?
I sorted myself out an accountant earlier and he basically said the same thing, no option to purchase = effectively renting = claim 100% of the payments.
The same would apply to contract hire then?
I sorted myself out an accountant earlier and he basically said the same thing, no option to purchase = effectively renting = claim 100% of the payments.
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