for contract hire/lease rentals usually follows how you treat the payments in your business accounts.
Where the cost of lease/hire rentals recorded in the accounts is based on the actual rentals you pay during the accounting year, the tax relief is usually also based on the rentals paid during the accounting year.
This is subject one major potential adjustment: If car or van rental payments are abnormally loaded into an accounting year (for example, if a deposit of six months of rentals is paid at the start of a lease), an adjustment is required to spread the rentals over the entire hire/lease period.
Depreciation and Finance Charges Basis:
Where lease or hire rentals are split between depreciation and the interest/finance charges for accounting purposes then the tax relief can be based on depreciation (under the capital allowances rules), with a separate tax deduction for the interest/finance charges in the lease rentals (this is an approach used by some larger companies to follow accounting conventions for leased assets).
Leased Car Tax Relief Restriction for Higher CO2 Emissions
The amount allowed for tax relief is restricted if the vehicle's CO2 emissions exceed a set threshold.
Up to April 2021, the threshold was 110G/PKm, so a car with a CO2 output of over 110G/PKm would be restriced and only 85% of the lease rentals in a year (after recovered VAT) would be tax deductible.
From April 2021, the threshold was reduced to 50G/PKm, so a car with a CO2 output of over 50G/PKm would be restriced and only 85% of the lease rentals in a year (after recovered VAT) would be tax deductible.
For example, if the total rentals in a business tax year after recovered VAT are £5,000, only 85% of this (£4,250) is tax deductible.
Where the business cannot recover VAT on the rentals (for example, certain banks and insurance companies) see below.
You can see a list of the cars affected by the lease disallowance by clicking on this link).
If a "with maintenance" hire/lease is used the maintenance must be in a separate agreement to avoid the above restriction on tax relief applying to maintenance.
Documentation Fees charged for a lease agreement are normally allowed as a 1st year cost of contract hire/leasing, subject to the 85% restriction above if the CO2 emissions exceed the threshold.
VAT on passenger car rentals
Tax relief on any unrecoverable VAT on rentals is restricted for cars with CO2 emissions exceeding the threshold detailed above.
The restriction on tax relief on the unrecoverable VAT is the same percentage (currently 85%) for tax relief on the rental itself.
For example, if the rentals are £6,000 a year including VAT, only 85% of the non-recoverable VAT on the lease rentals is tax deductible.
This means that businesses which can't recover VAT (such as banks and insurance companies) can only get tax relief for 85% of the VAT inclusive rentals in an accounting year for cars with a CO2 output of over 50G/PKm.
For the self-employed where the vehicle is used partly for non-business purposes, tax relief is apportioned according to the ratio of annual business miles to total annual miles.
For example, if the total miles travelled in a year is 10,000 and only 5,000 of these (50%) are for business miles, the tax deduction is 5,000/10,000 (or 50%).