Tax reliefs on a PCP car purchase

A. For accounting purposes, a PCP is typically classified as either a ‘finance lease’ or an ‘operating lease’ depending on the relevant accounting standards. The tax treatment aligns with the accounting treatment. In contrast, a Hire Purchase agreement that meets the requirements of s.67 CAA 2001 qualifies for capital allowances. Notably, for a new or unused electric vehicle, this allows for 100% first-year allowances.

A finance lease may still qualify for capital allowances under s.67 CAA 2001 for tax purposes. If  there is an optional balloon payment at the end of the main hire period to take full ownership, and this amount is below the vehicle's expected future market value then it would meet the requirements of s.67 CAA 2001, as outlined in BLM39010:

“A lease contract with an option for the lessee to acquire the asset falls within CAA01/S67 if the option to acquire the asset is below the expected market value of the asset at the date the option is exercised. This is because, following the principle in Darngavil, the payments under the lease contain an element that is regarded as capital.”

PCPs generally involve payments during the primary hire period that reflect the vehicle's expected depreciation over that period. As a result, they do not usually meet the "below the expected market value" requirement.

To summarise, if the PCP meets the requirements of s.67 CAA 2001 then capital allowances will be available. If not, then the finance lease or operating lease rules will apply. So, if it's classified as a finance lease, the lease interest costs and depreciation will be allowed. If it's an operating lease, only the lease rentals will be allowed.