How Business Leasing Affects Your Tax & Accounts

Straight answer: a business lease is treated as a rental, not a purchase. The rentals go through your profit and loss account as an operating cost, and for most businesses they're deductible against taxable profit - 100% of the rental on cars at 50g/km CO2 or below, 85% on cars above that. VAT-registered businesses normally reclaim 50% of the VAT on car rentals and 100% on vans. And from accounting periods beginning on or after 1 January 2026, most leases also appear on the balance sheet.

How does a business lease show up in your accounts?

A Business Contract Hire (BCH) lease - the standard business leasing product, where you rent the vehicle for a fixed term and hand it back - shows up as a recurring rental expense in your profit and loss account. There's no purchase, no depreciation on a vehicle you own, and no capital allowances. Just a monthly cost against profit.

In practice, three things happen in your books:

• The initial rental (the larger upfront payment, often described as "9+35" - nine months' rental upfront, then 35 monthly payments) is not a deposit and it isn't refunded. Accountants have traditionally treated it as a prepayment and spread it across the term so the cost hits the P&L evenly rather than landing in one month.
• The monthly rentals are posted as an operating expense as they fall due.
• The balance sheet now carries a right-of-use asset and a matching lease liability for most reporters - see the balance sheet section below.

Business lease prices are quoted excluding VAT, which trips people up when they compare a BCH quote against a personal lease price. Personal Contract Hire (PCH) prices include VAT; BCH prices don't. If you're weighing the two up, our guide to personal versus business leasing sets out the differences, and business car leasing explained covers the mechanics of the contract itself.

How much of the rental can you deduct against tax?

For cars emitting more than 50g/km CO2, 85% of the rental is deductible against taxable profit and 15% is added back. For cars at 50g/km or below - electric cars and a handful of long-range plug-in hybrids - the full 100% is deductible. Vans and other commercial vehicles are not affected by the restriction at all.

This is the lease rental restriction. According to HMRC's Business Income Manual (BIM47725), the disallowance is a flat 15% of the amount that would otherwise be deductible, and it applies to most cars with CO2 emissions over 50g/km where the lease began on or after April 2021. It applies to only one lease in a chain, which in practice means the business actually using the car.

A worked example (illustrative figures)

Say your company leases a petrol car emitting 120g/km at £500 a month plus VAT, over 36 months:

• Annual net rental: £500 × 12 = £6,000
• Deductible: 85% of £6,000 = £5,100. Added back: £900
• At the 25% main rate of corporation tax, the relief is worth £1,275 instead of £1,500 - a difference of £225 a year

Put the same money into an electric car at 0g/km and the whole £6,000 is deductible, worth £1,500 at 25%. That's the honest scale of it: meaningful, but rarely the thing that decides which car you take. The BiK difference for the driver is far larger.

How much VAT can you reclaim on a business lease?

If you're VAT registered, you can normally reclaim 50% of the VAT on car lease rentals. The other 50% is blocked to cover private use - and it's blocked whether or not the car is ever driven privately. VAT on a separately itemised maintenance element is recoverable in full, and van rentals used for business are normally 100% recoverable.

Under HMRC's VAT Notice 700/64 (Motoring expenses), the 50% block applies to a qualifying car leased for business purposes. Full recovery is only available where the car genuinely isn't available for private use - taxis, driving school cars, self-drive hire, or a properly run pool car. That bar is high, and HMRC tests it on evidence, not intention.

Two practical points our team sees constantly. First, ask for maintenance to be shown as a separate line on the invoice; if it's bundled into one rental figure, the whole lot falls inside the 50% block. Second, home-to-office journeys count as private use, which is why most "pool cars" fail the test the moment someone takes one home. There's more detail in our guide to reclaiming VAT on a business lease.

Does a business lease go on your balance sheet?

For most businesses, yes - and this changed. For accounting periods beginning on or after 1 January 2026, revised Section 20 of FRS 102 (the main UK GAAP standard) removes the operating/finance lease split for lessees. Almost all leases are recognised as a right-of-use asset with a matching lease liability. Micro-entities reporting under FRS 105 are not affected.

The old sales line - "contract hire keeps the vehicle off your balance sheet" - no longer holds for FRS 102 reporters, and you should be sceptical of anyone still using it. A three or four year car or van lease isn't a short-term lease (12 months or less), and a car can't be a low-value asset, so the exemptions won't rescue you.

What actually changes in the numbers?

The right-of-use asset is the value of your right to use the vehicle over the term; the lease liability is the present value of the payments you still owe. Instead of one straight-line rental expense, you book depreciation of the asset plus interest on the liability. Total cost over the life of the lease is the same - the timing and the presentation shift. Gross assets and liabilities rise, EBITDA typically rises (because part of the cost moves into finance costs), and gearing and interest cover ratios move with them.

That last bit matters if you have bank covenants, a bonus scheme tied to EBITDA, or a funding round coming. Businesses already reporting under IFRS have lived with IFRS 16 since 2019 and will recognise all of this. If you report under FRS 102, ask your accountant how the transition adjustment lands - comparatives aren't restated, and the cumulative difference goes to opening reserves.

What does a company car cost the driver and the employer?

If the vehicle is available for an employee's or director's private use, that's a taxable benefit. The driver pays Benefit-in-Kind (BiK) tax - the P11D value (list price including factory options and delivery, excluding first registration fee and VED) multiplied by an appropriate percentage set by CO2 emissions, then by their income tax rate. The employer pays Class 1A National Insurance at 15% on the same benefit value for the 2026/27 tax year.

Leasing doesn't change the P11D value. HMRC uses the list price, not what the vehicle actually cost to fund - so a keen deal doesn't reduce the driver's tax bill.

Under HMRC's published company car tax rates, the appropriate percentage for petrol and diesel cars runs roughly 15-37% of list price, scaling with CO2 emissions, with a 4 percentage point surcharge for diesels that don't meet the RDE2 standard (capped at 37%). Zero-emission cars are in a different league.

So what does that look like in pounds?

Example: a £40,000 EV in the 2026/27 tax year at 4%. Taxable benefit = £1,600. A 40% taxpayer pays £640 a year, around £53 a month. The employer's Class 1A at 15% of £1,600 is £240 a year.

Same £40,000 list price, but a petrol car at a 30% appropriate percentage: taxable benefit £12,000, income tax for a 40% taxpayer £4,800 a year, employer Class 1A £1,800. That gap - roughly £4,160 a year to the driver in this illustration - is why company car choice lists have gone electric. Our Benefit-in-Kind tax explained guide works through the calculation properly.

One more charge to watch: if the employer pays for private fuel in a petrol or diesel car, a separate fuel benefit charge applies, calculated as a fixed multiplier (£29,200 for 2026/27) multiplied by the same appropriate percentage. It's frequently worse value than the fuel itself. There's no equivalent charge for electricity.

If you're an employer weighing up a scheme rather than a single car, read what is salary sacrifice car leasing alongside company car versus car allowance. The right answer genuinely differs between a director taking one EV and a firm putting 40 people through a scheme.

How are leased vans treated differently from cars?

Vans get better treatment on every front. The 15% lease rental restriction doesn't apply, so 100% of the rental is deductible regardless of emissions. VAT on van rentals is normally fully recoverable where the van is used for business. And the driver's benefit charge is a flat rate rather than a percentage of list price - £4,170 for the 2026/27 tax year, or nil for a zero-emission van.

The catch is definitional. Whether HMRC treats a vehicle as a van or a car depends on its construction and payload, not on what it looks like or how you use it - and double cab pick-ups have been a moving target in this area. Confirm the classification of the specific vehicle before you sign, not after. Our van leasing for business guide goes into the practicalities, and you can see current van lease deals across the main manufacturers.

How does it work for sole traders and partnerships?

Broadly the same rules, with one significant difference: you must strip out private use. A sole trader claims the business proportion of the lease rentals as an allowable expense on the self-assessment return, then applies the 15% restriction on top if the car is above 50g/km. There's no BiK charge, because there's no employer and employee - you and the business are the same person for tax.

So if you use the car 70% for business, you claim 70% of the rental, and if the car emits more than 50g/km, 15% of that claimed amount is disallowed. Keep a mileage log. HMRC will ask for the basis of your split if it ever looks at your return, and "it felt about right" isn't a basis. Partnerships work the same way at partnership level.

Worth noting for the newly self-employed: funders assess sole traders and new limited companies differently from established businesses, and some will want a personal guarantee. Our guide on leasing a car as a sole trader covers what you'll need to provide.

How does the tax relief compare with buying the car?

Leasing gives you a steady deduction spread across the term. Buying gives you capital allowances against the purchase price, at 100% in year one for a new, unused zero-emission car, or through the writing-down allowance pools for everything else. Neither is automatically better - it depends on your profit position, your cash, and how long you keep vehicles.

Where buying can win: a profitable company purchasing a new EV outright can deduct the full cost in year one under the 100% first-year allowance, which is a large, immediate reduction in taxable profit. Where leasing usually wins: cash stays in the business, the residual value risk sits with the funder rather than you, and the cost is predictable and easy to budget.

And a point our team is happy to make plainly - leasing isn't cheaper for everyone. If you buy sensibly and keep a vehicle for eight or ten years, buying can come out ahead over that whole period, because you stop paying for it. Leasing tends to win where you want a new vehicle every three or four years anyway, or you'd rather not tie up capital in a depreciating asset. We've set the arguments out in leasing versus buying.

A word on the rental itself, since it affects how you read a quote: you're funding the gap between what the vehicle costs to acquire and its forecast value at the end of the term, plus interest charges. Because FVL commits to manufacturers in volume, the acquisition side of that sum starts lower while the forecast end value is set against the vehicle itself - which is the mechanism behind a strong lease price. What we won't do is publish our buying terms.

What should you give your accountant?

Send five things and most of the questions answer themselves: the signed lease agreement, the CO2 figure for the vehicle, the VAT invoices, confirmation of whether the vehicle is available for private use, and the split between rental and maintenance. That's enough for your accountant to post the entries, calculate the disallowance and get the VAT right.

Which route fits your situation?

• Limited company, driver wants a company car: an EV on business contract hire is usually the efficient answer for 2026/27 - full deductibility, 4% BiK, low Class 1A.
• Limited company, higher-emission car wanted: the 15% disallowance and a BiK charge of roughly 15-37% of list price often make a personal lease plus mileage claims the better route. Run both.
• Sole trader: claim the business proportion, apply the restriction if above 50g/km, keep a log.
• Employer with several drivers: compare a salary sacrifice scheme against a cash allowance before defaulting to either.
• Trades and delivery businesses: a van sidesteps the restriction, the VAT block and the percentage-based benefit charge entirely.

Frequently Asked Questions

Written by the guides team at First Vehicle Leasing, a UK vehicle leasing broker with over 25 years' experience arranging personal and business contract hire. FVL is authorised and regulated by the Financial Conduct Authority and is a member of the BVRLA. We arrange vehicle finance - we don't give tax advice, so please check your own position with a qualified accountant.