When deciding between buying a vehicle outright in the business vs leasing, the corporation tax treatment varies significantly depending on the method and the type of vehicle (e.g. electric vs petrol/diesel).
Here’s a breakdown to help you compare:
Buying a Vehicle Outright
Corporation Tax Treatment
If it’s a car, you cannot claim full capital allowances upfront unless it’s fully electric (0g/km).
If it’s a van or commercial vehicle, 100% Annual Investment Allowance (AIA) may apply.
For Cars:
| Type of Car | CO₂ Emissions | Capital Allowance | Notes |
| Fully Electric | 0g/km | 100% First Year Allowance (FYA) | Deduct full cost in year of purchase |
| Low Emissions | 1-50g/km | 18% Writing Down Allowance (WDA) | Spread over time |
| Standard | Over 50g/km | 6% WDA | Slower tax relief |
Example
Buy a £40,000 electric car → full £40,000 deduction from profits → £7,600 tax saving (19% rate).
Buy a £40,000 petrol car → only 6% = £2,400 first year relief → £456 tax saving initially.
Input VAT
You cannot claim VAT on car purchases unless:
It’s 100% for business use (and provable), and
Not available for any personal use.
When deciding between buying a vehicle outright in the business vs leasing, the corporation tax treatment varies significantly depending on the method and the type of vehicle (e.g. electric vs petrol/diesel).
Here’s a breakdown to help you compare:
Buying a Vehicle Outright
Corporation Tax Treatment
If it’s a car, you cannot claim full capital allowances upfront unless it’s fully electric (0g/km).
If it’s a van or commercial vehicle, 100% Annual Investment Allowance (AIA) may apply.
For Cars:
| Type of Car | CO₂ Emissions | Capital Allowance | Notes |
| Fully Electric | 0g/km | 100% First Year Allowance (FYA) | Deduct full cost in year of purchase |
| Low Emissions | 1-50g/km | 18% Writing Down Allowance (WDA) | Spread over time |
| Standard | Over 50g/km | 6% WDA | Slower tax relief |
Example
Buy a £40,000 electric car → full £40,000 deduction from profits → £7,600 tax saving (19% rate).
Buy a £40,000 petrol car → only 6% = £2,400 first year relief → £456 tax saving initially.
Input VAT
You cannot claim VAT on car purchases unless:
It’s 100% for business use (and provable), and
Not available for any personal use.
Leasing a Vehicle
Corporation Tax Treatment
Lease payments are an allowable business expense, so you deduct the full lease cost from profits.
| Type | Tax Relief | Notes |
| Operating Lease (normal) | 100% of monthly lease cost | Deducted monthly |
| Finance Lease | More complex – interest and depreciation split | Accounted like an asset |
CO₂ Adjustment:
For cars over 110g/km CO₂, only 85% of the lease cost is deductible.
For lower emissions cars, 100% of lease cost is deductible.
VAT on Lease:
50% of VAT is usually reclaimable if the car is used personally and for business.
100% VAT may be reclaimable for commercial vehicles or business-only cars.
Summary: Corporation Tax Benefit Comparison
| Aspect | Buying (Electric Car) | Buying (Standard Car) | Leasing (Low Emission) |
| Immediate Tax Deduction | ✅ 100% of cost via FYA | ❌ Only 6–18% annually | ✅ 100% of lease payments |
| VAT Reclaim | ❌ Usually none | ❌ Usually none | ✅ 50–100% of VAT (lease) |
| Cash Flow | ❌ High upfront cost | ❌ High upfront cost | ✅ Spreads cost monthly |
| Ownership | ✅ Yes | ✅ Yes | ❌ No (unless finance lease) |
Recommendation:
Electric vehicle? Buying outright is very tax-efficient.
Short-term use or want flexibility/cash flow? Leasing is simpler and often better for higher-emission vehicles.
For vans or commercial vehicles, buying can be more beneficial as you can claim AIA and possibly VAT.
