If you had the opportunity to set all, or at least most, of your company car car costs against the business, you would probably take it, wouldn't you, asks Ralph Morton. And if there was the chance to reduce the amount of VAT you pay, that would also be worth considering, too? Especially as the June 2010 Emergency Budget announced VAT would rise from 17.5% to 20% on 04 January 2011.

Well, here's how. It's called contract hire.

Since April 01 2009, all new business car expenditure that uses contract hire as a financing method can be set against your profit and loss account. Well, virtually all – if you contract hire a business car with emissions above 160g/km of CO2, then there is a 15% restriction applied to the amount you can claim. But it still doesn't sound like such a bad deal does it?

So what is it that makes contract hire so appealing for small businesses?

From April 01 2009, the government changed the way you calculate the cost of the car against tax. This is because it wants us all to drive cars with the lowest emissions possible.

So it dispensed with the old method of half the excess rule – known as the Expensive Car Leasing Disallowance – and introduced a disallowance based on the CO2 emissions of your company car.

So there is no disallowance in place for cleaner cars on contract hire; more polluting company cars on contract hire have a 15% disallowance.

Here's how contract hire can work for you

Cars with emissions of 160g/km and below will be able to set 100% of the net contract hire rental against tax. Cars with emissions of 161g/km and above will be able to set 85% of the net contract hire rental against tax. If you lease second hand or nearly new cars, the same rules apply.

Furthermore, 50% of the VAT levied on the rental can be reclaimed by your business (the other 50% is restricted on the assumption there is some private use of your company car). And, if you take the maintenance agreement with a contract hire lease, the full amount of the VAT charged on that element can be reclaimed.

Another advantage of contract hire is that you pay just a set monthly cost for the lease, rather than paying for your business car and wrapping up your company's cash in a depreciating asset – especially when keeping cash flow liquid is essential for the survival of many small businesses.
Contract hire – it's not for everyone, that's certain. But if you've not thought about financing your business cars in this manner, then it's worth considering. You could end up driving a smarter car than you imagined; and making your business motoring more tax efficient.

Author Ralph Morton is editor & publisher of Business Car Manager magazine (www.businesscarmanager.co.uk). He was named Business Writer of the Year in the Guild of Motoring Writers Awards and can be contacted at editor@businesscarmanager.co.uk