Lease rental restrictions
IF you contract hire your business cars, then those business car lease rentals are an allowable expense against income tax or the firm’s corporation tax.
However, certain lease rental restrictions apply, depending on your car’s CO2 exhaust emissions.
New lease rental restriction bands from April 2018
- If your car has CO2 emissions of 110g/km or less, 100% of the lease costs can be offset against taxable income.
- Business cars with emissions of 111g/km or more have a 15% restriction (ie only 85% is claimable against taxable income).
How do the lease rental restrictions apply to the self-employed?
For self-employed sole traders and for partnerships, the same restrictions apply minus any private element – usually about 20% (HMRC will want to see detailed records if you are claiming for more).
How does this work in practice? For example, if 20% of your motoring is private, then 80% of the business car lease rental can be set against tax if the car has CO2 emissions below 110g/km.
So if your personal contract hire lease was £250 a month, then you would reduce the £250 figure by 20% = £200, which would be the amount you could offset against taxable income. As long, of course, as the car was below 130g/km CO2.
The current system for calculating car lease rental restrictions has been in place since March 2009; it replaced the expensive car leasing disallowance – a complicated formula which the current system happily simplifies.
From April 2018 the lease rental restrictions were changed from 130g/km being the key emissions break to the current 110g/km break.
The lease rental restriction applies to the lease plus any blocked VAT – the ‘effective rental’ as it is sometimes called in the industry.
That means for most businesses, 50% of the VAT cannot be claimed since there is a private use element of the car.
Lease rental restriction only apply to cars; they do not apply to vans.
Lease rental restrictions – news story on the April 2018 changes
- The current lease rental allowances changed in April 2018.
- For details of the lease rental restrictions changes click here.
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