By Richard Lawton 13 February 2012
Under most circumstances the rentals a company pays during the year on a contract hire or lease car are fully off-set against taxable profits. This means that the company cannot also claim capital allowances as well.
Contract hire rentals may not be fully offset against profits however if one of these criteria comes into play:
To see how this works in practice, consider these two similar examples.
Example One
A company takes out a contract hire agreement for a car with CO2 emissions of 129g/km over three years and for the purposes of the illustration we will assume the agreement starts at the beginning of the company’s financial year. The terms of the contract hire agreement are 3 payments upfront followed by 35 payments of £300.
Year One: The company pays 14 rentals (3 plus 11) 14 x 300 = £4,200 which can be offset against taxable profits. Assuming the company has a 26% tax rate this equates to tax relief of £1,092.
Year Two and Three: Over the remaining two years of the contract hire deal the company pays 12 monthly rentals. 12 x 300 = £3,600 which can be offset against taxable profits.
Assuming the company has a 26% tax rate this equates to a tax relief of £936 in each year.
Total tax relief over the 3 year contract hire agreement = £2,964.
Example Two
For cars with emissions above 160g/km 15% of the rental will not receive any tax relief. Or to put it another way only 85% relief on the rental is available.
A company takes out a contract hire agreement for a car with CO2 emissions of 199g/km over three years and for the purposes of the illustration we will assume the agreement starts at the beginning of the company’s financial year. The terms of the contract hire agreement are 3 payments upfront followed by 35 payments of £300.
Year One: The company pays 14 rentals (3 plus 11) 14 x 300 = £4,200 which can be offset against taxable profits. Assuming the company has a 26% tax rate this equates to tax relief of £928.20. (£4,200 x 26% x 85%)
Year Two and Three: Over the remaining two years of the contract hire deal the company pays 12 monthly rentals. 12 x 300 = £3,600 which can be offset against taxable profits.
Assuming the company has a 26% tax rate this equates to a tax relief of £795.60 in each year. (£3,600 x 26% x 85%)
Therefore, companies are encouraged to take out contract hire agreements on more eco-friendly cars. Comparing the two examples, the car with emissions below 160g/km creates an aggregated tax relief figure of £2,964 compared to a tax relief figure of £2,519.40 for cars with emissions above 160g/km a difference of £444.60 over the 3 year contract.
Categories: Fleet news , Features
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