Understanding Car Finance and Its Impact on Taxes for Business Users

When businesses invest in vehicles, understanding how car finance affects taxes can save money and simplify accounting. Business owners often face questions about how to handle expenses related to business car finance or business van finance. This guide explains the key tax implications of motor finance for business users, helping you make informed decisions.

Business van parked outside a commercial building

How Car Finance Works for Businesses

Car finance allows businesses to acquire vehicles without paying the full amount upfront. Options include hire purchase, leasing, and personal contract purchase (PCP). Each method affects tax treatment differently.

• Hire Purchase: You own the vehicle after all payments. You can claim capital allowances on the vehicle’s value.

• Leasing: You rent the vehicle for a fixed period. Lease payments are usually deductible as business expenses.

• PCP: Similar to leasing but with an option to buy at the end. Tax treatment depends on whether you keep the vehicle.

  
  

Choosing the right finance method depends on cash flow, tax goals, and how long you plan to keep the vehicle.

Tax Deductions and Allowances for Business Motor Finance

When you use business motor finance, you can claim tax relief on certain costs. The rules vary depending on the vehicle type and how it’s used.

Capital Allowances

For vehicles bought outright or through hire purchase, capital allowances let you deduct part of the vehicle’s cost from taxable profits.

• Cars with low CO2 emissions (usually under 50g/km) qualify for 100% first-year allowances.

• Cars with higher emissions get writing-down allowances at 18% or 6% per year.

• Vans and other commercial vehicles often qualify for full capital allowances because they are considered business assets.

  
  

Lease Payments

If you lease a car or van, you can usually deduct the lease payments as business expenses. However, if the vehicle emits more than 110g/km of CO2, only 85% of the lease cost is deductible.

Running Costs

Costs such as fuel, insurance, servicing, and repairs can be claimed as business expenses if the vehicle is used for business purposes. Keep detailed records to separate personal and business use.

Business car dashboard with finance documents

Specific Considerations for Business Car Finance and Business Van Finance

Business users should understand the differences between cars and vans for tax purposes.

• Business Car Finance: Cars used for business but also personal use require careful record-keeping. Only the business portion of expenses is deductible.

• Business Van Finance: Vans are often treated as commercial vehicles, allowing full tax relief on finance and running costs, even if used partly for personal reasons.

  
  

For example, a delivery company using van finance can claim full tax relief on lease payments and maintenance, reducing taxable profits significantly.

VAT and Motor Finance

VAT treatment depends on the finance type and vehicle use.

• If your business is VAT-registered, you can reclaim VAT on lease payments for vans and cars used exclusively for business.

• For cars with private use, VAT recovery is limited.

• When buying a vehicle through hire purchase, VAT is usually reclaimed upfront on the purchase price.

  
  

Understanding VAT rules helps avoid unexpected costs and ensures compliance.

Calculator and tax documents with business van key

Practical Tips for Managing Business Motor Finance and Taxes

• Keep detailed mileage logs to separate business and personal use.

• Choose the right finance option based on your tax position and cash flow.

• Consult a tax advisor to understand specific rules for your vehicle type and business structure.

• Review CO2 emissions of vehicles before financing to maximise tax benefits.

• Maintain all receipts and contracts related to vehicle finance and running costs.

  
  

FAQs

Can I claim tax relief on a car financed through hire purchase?

Yes, you can claim capital allowances on the vehicle’s cost, spreading the deduction over several years depending on emissions.

Are lease payments fully deductible for business vans?

Generally, yes. Lease payments for business vans are fully deductible, even if there is some personal use.

How does CO2 emission affect tax relief on business car finance?

Lower emission cars qualify for higher or full first-year allowances, while higher emission cars have reduced capital allowances and lease payment deductions.

Can I reclaim VAT on a financed vehicle?

If your business is VAT-registered and the vehicle is used solely for business, you can reclaim VAT on finance payments or purchase price. Mixed-use vehicles have limited VAT recovery.

What records should I keep for tax purposes?

Keep finance agreements, payment receipts, mileage logs, and records of running costs to support your tax claims.

Understanding how car finance affects taxes helps businesses save money and avoid surprises. Whether you need business car finance or business van finance, knowing the tax rules lets you plan better and keep your accounts clear. For tailored advice and competitive motor finance options, contact Hawkstone Motor Finance today. Their experts can guide you through the best finance solutions for your business needs.

Before making any decision, it is advised that you speak with a chartered accountant. The information provided in this article is not advice.