for contract hire/lease rentals is based on the accounting treatment of
rentals, subject to adjustments according to CO2 output.
Where the cost of lease/hire rentals charged to the accounts
each year is based upon the actual rentals paid then the tax relief is usually also
based on the rentals paid during the accounting year.
If rental payments are
abnormally loaded into an accounting year (for example, if all the rentals for the
entire lease period are paid in the first accounting year) then an adjustment is required
to spread them over the entire hire/lease period.
Depreciation and Finance Charges Basis:
Where lease or hire rentals
are split into depreciation and finance charges for accounting purposes the tax relief
can be based on depreciation under the capital allowances rules, with a separate tax
deduction for the finance charges implicit in the lease rentals (this is an approach
used by some larger companies to follow accounting conventions for leased assets).
Tax Relief Restriction for Higher CO2 Emissions
Irrespective of the basis of tax relief, the amount allowed for tax relief purposes
each year is restricted if the vehicle's CO2 emissions exceed a set threshold. At
the time of publication the threshold is 110g/km and the restriction is 15% of the
rentals after recovered VAT.
For example, if the total rentals in a business tax year after recovered VAT are £2000
then 15% of this (£300) is not tax deductible.
This means the tax deductible rentals for the year will be £1700 (£2000 - £300).
Where the business cannot recover VAT on the rentals (for example certain banks and
insurance companies) see below.
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 are normally allowed as a 1st year cost of contract hire/leasing,
subject to the 15% 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
using the same percentage (currently 15%) as for tax relief on the rental itself.
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