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Business Income Manual

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Specific deductions: travel and subsistence: cars - restriction of hiring costs: hire periods beginning on or after 1/6 April 2009: short term hiring in and long term hiring out

S50A Income Tax (Trading and Other Income) Act 2005, S58A Corporation Tax Act 2009

This guidance applies to expenditure incurred on hiring cars where the hire period begins on or after 1 April 2009 for Corporation Tax purposes and 6 April 2009 for Income Tax purposes. See BIM47775 for the election to apply the previous rules where the hire period begins on or after 1/6 April 2009 but before 1/6 April 2010.

The short term hiring in and long term hiring out rules are intended to provide that the restriction at BIM47740 applies to only one lessee in a chain of leases (in most cases the last business user). The rules are also intended to provide for the restriction to apply to a business that hires cars on short term to other persons.

So the restriction generally does not apply to intermediate lessors who incur expenditure on the hire of cars which they sub let to customers; and a business which hires a car for a short term does not usually have to apply the restriction.

The restriction does not apply to car hire expenses incurred by a taxpayer if one of two conditions (A or B) is met.

If a taxpayer incurs expenditure on the hire of a car for not more than 45 consecutive days (short term hiring in) then they do not have to restrict the deduction for the hire expenditure of that car,

If a taxpayer incurs expenditure on the hire of a car that they then lease to another person (`the customer’) for more than 45 consecutive days (long term hiring out) they do not have to restrict the deduction for the rentals they pay to the superior lessor for the car that is sub hired. It follows that if the customer is a business it will have to restrict its deduction for hire expenses if the car has carbon dioxide emissions over 160g/km, unless it sub lets the car for more than 45 days.

See BIM47755 for the linking of separate hire periods for the purposes of these conditions.

Neither condition A nor condition B is met if a car is hired under any arrangement entered into with the purpose of either circumventing or reducing the restriction or for the purpose of avoiding tax.

There are other rules to decide if Condition B is met, see BIM47765 

There are also rules to determine how the 45 day hire period for both condition A and B is counted. See BIM47755 

Replacement cars

Where arrangements for hiring a car include arrangements for the provision of a replacement car in the event the first car is not available, the first car and any replacement car are treated as if they were the same car.

Example - hire period less than 45 days

Business B (the taxpayer) hires a car from Business H from 1 June to 10 July for £25 per day. The period of hire is 40 days. The total hire cost is £1,000. Business B meets condition A. The hire period of the car is less than 45 days so there is no restriction on the deduction for hire expenses.

Allowable deduction is £1,000.

Example - hire period more than 45 days

Business C (the taxpayer) hires a car with emissions over 160g/km from Business L for four years. The annual lease rental for the car is £3,000. Business C does not meet either condition A or condition B.

The period of hire is more than 45 consecutive days so there is a restriction on the allowable deduction for the hire of the car.

The annual restriction is £3,000 x 15% = £450

The allowable annual deduction is £3,000 - £450 = £2,550

Example - hire period hire more than 45 days and car sub-let for more than 45 days

Business C (the taxpayer) hires a car with emissions over 160g/km from Business L for four years. The annual lease rental for the car is £3,000. Business C sub lets the car to Business D (the customer) for the same four years for £3,600.

Business C sub lets the car for more than 45 days so meets condition B. There is no restriction on the allowable deduction for the rentals Business C pays to Business L for the car. Business C can deduct the full £3,000 per year.

Business D hires the car for 4 years. The hire period exceeds 45 consecutive days. Business D does not sub let the car. Business D does not meet Condition A or Condition B. Business D’s deduction for the rentals is restricted by 15%.

The restriction for Business D is £3,600 x 15% = £540.The annual allowable deduction for Business D is £3,060.

Example - period of hire inwards more than 45 days and car sub-let out for less than 45 days

Business C hires a car with carbon dioxide emissions over 160g/km for four years from Business L. The annual lease rental for the car is £3,000.

Business C hires the car on short-term hire to various customers throughout the four-year period. No rental period exceeds 45 days.

Business C does not meet Condition A or Condition B. The rental Business C pays to Business L for the car is restricted by 15%.

The restriction is £3,000 x 15% = £450. The allowable deduction is £3,000 - £450 = £2,550