Showing posts with label operating lease. Show all posts
Showing posts with label operating lease. Show all posts

Friday, August 12, 2011

Financing a vehicle purchase

When purchasing a vehicle for your business, there are many different financing options. While they might look similar, each one has benefits and drawbacks, especially from a tax standpoint. Here are the most popular financing options. Please note that VAT on cars is recoverable only in very rare circumstances. For other vehicles (and other asset classes for that matter), the VAT is fully recoverable as per described below.

Outright Buy

Obviously this is the simplest option when you don't need any financing or when the financing is provided separately (with a line of credit for example). From an accounting viewpoint the actual cost of the vehicle is capitalised in the balance sheet and an annual charge for depreciation is shown in the accounts as an expense in the profit and loss account. This therefore has the effect of showing the asset in the balance sheet at cost, reduced by the cumulative charge for depreciation. The annual depreciation charge is calculated in accordance with accounting standards, based on the useful economic life of the asset and the residual value.

Tax wise, you will be allowed capital allowance deductions. Those depend on the type of vehicle and the tax year (as the rules tend to change quite often). Usually your accountant will do that for you. As for VAT, unless the vehicle is a car, it will be recovered in full (with a delay of four months however).