— BVRLA Guide to Vehicle Funding —
Tax and accounting treatment of hire purchase
A hire purchase arrangement must be accounted for as a finance lease in order for the lessee/purchaser to be entitled to claim capital allowances for a vehicle. Other requirements include the need for capital expenditure to be incurred, eg for rentals to include a capital element which may be indicated by a nominal value purchase option. The capital expenditure on all business cars is treated in one of three ways for capital allowance purposes, depending on the CO2 emissions of each vehicle.
Business Car Taxation Purchase Cost How much of the capital cost of the car can a business claim against its taxable profits?
Ultra Low CO2 Car Car emitting 110g/km or less
Low CO2 Car Car emitting between 111g/km and 160g/km
High CO2 Car Car emitting 161g/km or more
(95g/km for cars registered from April 2013)
(96g/km & 130g/km for cars registered from April 2013)
(131g/km for cars registered from April 2013)
100%
18% each year
8% each year
on a reducing balance basis with the expenditure included in the main pool
on a reducing balance basis with the expenditure included in the special rate pool
in the first year (This incentive expires with cars purchased after 31 March 2015 and is not available for leased or rented cars.)
With hire purchase the user should be able to deduct the ‘interest’ element of each monthly instalment in full against taxable profits. For VAT purposes, hire purchase is treated as a supply of goods provided that the agreement clearly states that ownership of the vehicle will pass to the customer at some time in the future. This means that VAT is due on day one on the full value of the supply. The VAT payable on the supply of goods is calculated according to the total amount payable over the term of the agreement, net of interest charges, 23