Lease Purchase/Hire Purchase

If you wish to keep vehicles as a business asset and discount the cost over a longer period of time, this can be a good option. Vehicles purchased by this method appear as an asset on the Balance Sheet of your accounts and not directly in the Profit and Loss Account (as with Contract Hire for example). Because the value and utility of the vehicle depreciates over time, the Inland Revenue allow a percentage of the cost of any capital equipment necessary to operate the business to be 'written down' by an annual percentage (the capital allowance) in order that equipment will be replaced and the productivity of the business maintained. So for example, if a vehicle costs £15,000 and the capital allowance is 25% per annum (subject to a maximum claim of £3000 per annum on cars costing £12,000 or over), then after one year the vehicle will stand on the balance sheet at £12,000 (Written down value - £3000 limit included). In the next year it will be written down by 25% of £12,000 to £9,000 (Written down value - write down matches £3000 limit). In the third year the full allowance is achieved without the £3000 limitation and the Written down value will be £6,750. In this example, assuming no private use of the vehicle, in the first and second years £3000 per annum would have been allowable against taxable profits and in the third year, £2250. If there is some private use of the vehicle, the percentage of the capital allowance shown in the Profit and Loss accounts will be a matter to be discussed with your accountant. These amounts would appear in your Profit and Loss Accounts in a similar way to other expenses, although shown separately. They have the same proportional effect on the business's tax liability as any other expense item. (For example, for a sole trader with a standard rate of income tax of 22%, the tax saving over 3 years would be £1815.) The interest element of the repayments can also usually be offset against taxable profit. The vehicle never actually reaches zero value and the benefit to your accounts diminishes over time. Nevertheless, if the maths are done carefully in consultation with your accountant and then compared with other options, this method can be of benefit in certain circumstances. This can be a matter of fine judgement where more consideration is given to the ongoing utility of the vehicle, how many years service you feel it will yield before it must be replaced and how far you regard it as important to reflect the status of the business with up to date models every three or four years. If you judge that the vehicle can be utilised without increasingly costly maintenance bills for say, eight to ten years because of its track record (more often the case with higher priced vehicles) and that mileage will be modest, there are savings to be made in the longer run. Everyone has heard of cars that have barely shown strain at 100,000 miles and which are a pleasure in themselves to own, so why change them every three years?