I wonder if anyone can shed some light on the following
My wife is self employed and is looking to lease purchase a new van What if anything can she offset against her tax ? Is it all of the monthly payments as its purely a business vehicle ? I have tried looking on HMRC website but too no avail
Not necessarily. It depends upon her earnings. For instance, if she earns £5,000 in the tax year, then buying a van isn't going to reduce her tax bill, as £5,000 is below the PA threshold and she won't have a tax bill.
In fact, if she bought a van which cost, say £5k, then all she could really do is 'waiver' the allowances, i.e. not claim then. All well and good, she still has £5k to claim. However, the rules are that you only get 100% Annual Investment Allowance (AIA) in the year that the asset is bought. After that, only 20% writing down allowance is available. So in this scenario:
Van purchased £5,000 Allowances taken NIL Balance c/f £5,000
Next year Balance b/f £5,000 Allowances £5,000 x 20% = £1,000 Balance c/f £4,000
The next year after that, the allowance would be £4,000 x 20% = £800. You can see how it's going to take a few years to get the tax relief on that van! NB the situation will get worse, as the 20% rate is due to reduce to 18%.
This is why it is a good idea to get advice BEFORE buying something like this; if your year end is 5 April, it may be better for you to buy the asset before that date, but as the scenario above shows, it may also be wise to delay.
Consideration of whether to buy outright, finance lease (like HP) where you take ownership with the final payment, or operating lease (where you effectively rent and hand back to the lessor at the end of the lease agreement). Shouldnt necessary come down to tax considerations but also what deal you can get on each.
In summary
On outright purchase you would have to fork out the money the now but you would get 100% tax relief on the cost provided you hadnt used your AIA in the year. Currently £100k for tax year 2010/11
If you HP then you will of course have to pay interest on the payments made. But gives you longer to pay, say over 2 or 3 years, so improves cashflow compared to outright purchase, but you still get the same tax benefit ie 100% tax relief on the cost when the agreement is signed. Alos get tax relief on the interest in the relevant accounting year
If you pure lease then you only get tax relief on the payments made in the year. So will get your tax relief spread over the period you make the payments.
Other issue to consider is the personal/business use split of the van. You will only get tax relief for the business element though given a van probably nearly all if not all can be argued is business use (though you have to be careful that you dont use for personal reasons eg going to the shops).
So in summary will get 100% relief of the cost when you buy for outright purchase/hp. Will also get tax relief on the interest on hp when it is spread across the accounting years. Will get tax relief on the yearly payments made under operating lease. Assuming is 100% business use.
Thank you for the reply, I have been doing the sums which come out very similar: Basing it on 100% business use:
Outright purchase, no loan, no cash flow hardship, =£20k, includes part ex for existing van @£6k. Being VAT registered can claim the VAT at £3.3K.
Claiming 100% in first tax year sounds okay but leaves a tax payable liability when I come to sell it. So I was thinking of claiming 50% in year 1 and 20% of the remainder in years 2+3, which is some £11k claimed, after 3 yrs the van would be worth about £6k so no tax payable.
By my calcs this means I have spent £17k over 3 years and have the residual value of £6k so £11k out of pocket, and the benefit of £11k set against my 40% tax liability.
Going down the Contract hire route would cost some £12k +VAT of £2.4K (VAT not reclaimable as I use the flat rate scheme). No residual value of van and £12k set against my tax liability.
Whether I have missed something or not I do not know but reading through the above seems to shout out ...BUY... and save £3K!
If the above is correct then thank you and the forum for the opportunity of getting it down on paper.
Without more details of your level of income it is difficult to say the best solution is.
From what you are saying the van you are buying is £26k including VAT but you are getting £6k including VAT against an existing van being sold. Therfore you would have a purchase of £21.7k + £4.3k VAT and a sale of £5k + £1k VAT. Therefore net VAT reclaimed of £3.3k. I assume the original van is already in the accounts in the general capital allowances pool so will be a disposal of £5k and you will have a purchase of £21.7k. If for example your opening capital allowances general pool is £20k then will look like this
£20k + £21.7k - £5k. Can claim £21.7k AIA and claim £3k WDA which will leave £15k to carry forward. In the first year you are claiming nearly £25k relief which if all at 40% will save you £10k in tax. I would claim the relief in the first year and worry about the van when you come to sell it.
As said it is difficult to look at when you dont have all the figures.
Would advise you to seek professional help to look through the scenarios and what you want to achieve.
The existing van is the only item in my capital allowances pool, the reducing value is about £5k, with that gone there is only the new van to claim for. Unhappily my income is not high enough for the whole sum of the AIA to provide tax relief at 40% if claimed in the 1st year, reducing it would leave a bigger pool for next years WDA to go against the 40% portion.
It is the 40% level that I am thinking about when I come to sell the van, not having it as tax liability that is.
I assume that the purchase is more tax advantageous than the Contract Hire route.
If you are on van lease and want to stop your van leasing or want to lease other vans you should talk first with the company and maybe they have some rules with your problem because i think it really depends on the policy of the company. Then ask for a legal opinion if things won't workout between you and the company.
