At a time when businesses are facing rising costs and pressure to increase wages, it’s natural for any owner to look for a way to save money. To make sure you can streamline your outgoings and become more financially agile, but without sacrificing quality or falling foul of any of the rules and regulations you need to follow, we’re going to guide you.

Let’s take a look at how entrepreneurs across the UK are paying less tax with a more strategic approach to commercial leasing.

What is commercial leasing?

You can buy a work vehicle outright or on finance and own it at the end of the agreement, or you can lease it from a commercial leasing company. This involves paying a fixed monthly amount — leasing agreements are typically 2-3 years — and then handing the vehicle back to the leasing company at the end of the agreement.

While you might think that you are losing an asset with the leasing option, it’s important to note that cars simply don’t appreciate in the way that property does. The vast majority of vehicles will halve in value in 2-3 years, leaving you with a low-value asset that will then cost increasingly more to maintain and get through its MOT. Opting for a commercial lease keeps your finances flexible and agile so that you can hand the vehicle back and then fund your next vehicle with a blank slate.

How does a commercial lease save on tax?

The good news for entrepreneurs and startups is that you can claim back up to 100% of the VAT you are charged on your monthly payments to the leasing company. While this figure falls to 50% if the vehicle is used for a mix of business and personal use, it can still add up to several thousand pounds over the lifetime of the leasing agreement.

If you combine this with the fact that leasing a vehicle for a fixed amount every month allows you to stabilise costs, you can see that it can help a great deal with your planning. Businesses also cite reduced maintenance costs and maintenance frequency resulting from driving a newer vehicle as a reason for considering a commercial lease.

Can you leverage capital allowances?

Yes, you can deduct a portion of the cost of the vehicle from your taxable profits. This is part of the Treasury’s attempts to recognise that businesses have overheads and startup costs that should not be unfairly taxed.

Another thing to consider is that you can also claim back all of the VAT on any maintenance package you take out on the vehicle. Because the vehicle will be owned by the leasing company during and after the leasing agreement, you will most likely have to choose from the range of maintenance and servicing contracts they can offer. Bundling together the cost of the vehicle and of the maintenance is another way that you can streamline your operations.

How else can you pay less tax?

If you are funding your vehicle with a lease, for example, if you’re making use of Defender commercial leasing, you can claim WDAs throughout the lifetime of the agreement. WDAs will be claimed against the remaining balance of the agreement, meaning the amount you can claim will decrease from one year to the next. Claiming them will allow you to reduce your taxable profits and reimburse yourself for some of the costs associated with running your business.

Getting independent advice on commercial leasing

Any professional car leasing company will be able to talk you through the finer points of their agreements and the tax implications for your business. That said, if you want impartial advice and a second opinion that will put your mind at ease, speaking with your company accountant will allow you to take a proactive approach to tax planning. They will be able to help you find the right fit for your business because they will also be aware of the bigger financial picture.

 Meeting your tax obligations

Combining the expertise of a car leasing professional with the wider knowledge of a trained accountant will ensure that you always meet your tax obligations. As we are sure you are already aware, doing so is a legal requirement, but one that can become increasingly difficult when you’re looking for ways to economise. Planning ahead and structuring your vehicle financing in a way that minimises your tax liability will give your business the advantage in the market that your hard work deserves.

Note: Remember to always check with your accountant or other relevant expert to confirm what works for your business; regarding leasing and tax implications before making any major decisions.