Lease or Instalment Sale?
I often I get asked whether to “buy” on a Lease or buy on Instalment Sale and then whether the firm should own the vehicle or the Director.
The answer to the first does depend on the answer to the second, so let’s tackle the second one first. (How confusing is that?!)
If the object is to minimise the combined tax bill of the company and the director, then it is worth while doing the numbers. But the chances are that, if the vehicle is in the middle to upper bracket and the director does a fair amount of business as opposed to private travel (remember driving to the office is private not business), it is better to pay the director a travel allowance sufficient to cover the repayments on the vehicle and let her or him buy the car. She/he will have to keep a logbook. Take care that the travel allowance exceeds the travel claim because the latter is limited to the former.
Now, if you decide that the company must own the vehicle (and this would usually be the case when there is more than one director/shareholder as the one who is not getting the new car would probably want the company to gain the maximum tax benefit), then you should buy on Instalment Sale. The reason is that the wear and tear allowance (which is a tax deductible expense that eventually writes the vehicle down to zero value in the books) is fully deducted in half the time compared to purchase under a lease agreement. So you get the tax allowance quicker if you buy on instalment sale. Of course that pre-supposes that you are making or expect to make soon, sufficient taxable income that tax savings become an issue.
This is even more relevant if your company is a Small Business Corporation as defined for tax purposes because SBCs are allowed to write a new car off over 3 years instead of 5, whereas under a lease it will take 10 years.
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