Not too long ago, the mark of corporate success was a big, shiny company car parked on your driveway for all to see. Nowadays, if you’re thinking of owning a car through your limited company, you have a lot more to consider than simply which model will look flashiest parked outside your house! You’re going to want to weigh up the costs involved, the finance options and the tax implications before you go ahead with a purchase.

We’re asked questions about this a lot, especially about electric cars, so we’ve put together a list of our FAQs and answered them as best we can, to give you the information you need to help make your decisions.

If I use the car personally, what happens with tax?

This is a good question to ask when considering whether to buy a company car for two main reasons: VAT and Benefits in Kind tax charges.

Generally, VAT can only be reclaimed on the cost of purchasing a car if it is exclusively used for business – which doesn’t include driving to and from work as this is regarded as ordinary commuting. VAT can however be reclaimed if the car is kept on site overnight and used by many different employees throughout the working week, ie it meets the conditions of a genuine pool car. Note that offices based at home do not count as a workplace, HM Revenue & Customs (HMRC) would argue that the vehicle is kept on personal premises and not business.

If you decide to lease your company car instead, the lease payment is fully tax deductible and you will be able to recover 50% of the VAT charged on any lease payments, unless there is exclusive business use in which case this increases to 100%.

VAT can also be recovered on the cost of installing charging equipment at employer premises.

In terms of Benefits in Kind, if the company car is deemed available for private use by an employee or director of the business it will be considered a taxable ‘perk’ by HMRC, officially called a Benefit In Kind (BIK). HMRC treat the value of BIKs as an addition to your taxable income, because the car is paid for by an employer on top of annual salary. As with all earned income, you will have to pay tax on it and as the employer your company has to pay Class 1A National Insurance on its taxable value.

How is the Benefit in Kind calculated?

The amount of tax and NI you will pay depends on the BIK value of the company car.  This is calculated on the basis of how much the vehicle would cost to buy brand new (not necessarily what you pay), its CO2 emissions and the type of fuel it uses, as well as the rate at which you are due to pay tax based upon other income.

The value of the car will only be reduced if you have it part-time due to it being specifically unavailable to you, not just left unused, or if you pay something towards the annual cost.

Calculating a BIK is fairly straightforward; you need to do is find the official list price of the vehicle (the P11D value), then find its CO2 emissions and use this calculator available on the HMRC website to work out the BIK value and the tax that would be due on you personally.

Electric vehicles or those with low emission figures will be cheaper BIK wise.  When looking for the right vehicle for your business and employees, you can easily compare CO2 emissions using the GOV.UK website, along with fuel consumption and vehicle tax costs.

Can I avoid being taxed as benefit in kind?

If you drive a petrol or diesel car the only way to avoid a BIK completely is to own the car in your personal name instead and claim business mileage from the company at 45p per mile for the first 10,000 miles per year, 25p per mile thereafter. You would however need to consider how you intend to finance the purchase cost, if this is through drawings from the business it could result in tax charges so these funding should be considered.  Some cars are also significantly more expensive to run nowadays than they were before as the rates for payments per mile permitted before a BIK is incurred have not changed in many years, this may not be the most beneficial choice for all vehicles.

For a company car, whilst the BIK charges can be reduced if you only have the car on a part time basis or if you’re paying an amount back to the company for use of the car, if a company car is provided to an employee or director a tax charge of some sort cannot be avoided.

Electric vehicles and low emission vehicles are no longer BIK tax free.  A new fully electric company car (like a Tesla or a Jaguar iPace) does however have a very low tax charge with the rates starting from 2% and 1% increases over the next few years.  The cost of the vehicle can also often be set against business profits in the year of purchase, so whilst a tax charge is involved, an electric car can still result in a much lower overall charge than a petrol or diesel car.

Where an employer has an electric car charging station at the place of business there is no BIK charge for any employee using it to fuel their company car.  There is also no requirement to reimburse the employer for private miles travelled on that fuel (although the employer may view it otherwise as it still represents a cost!).  Electricity provided for a privately owned car is instead a BIK so who owns the vehicle is important to the level of tax due.

Electric cars

Electric cars recently became more attractive, not only for environmental reasons but also because of the lower benefit in kind cost to the employee and the tax relief available for the company if brand new. When choosing a company car, the fuel type and possible tax saving for the company is therefore an important issue to consider.

If the car is brand new i.e. it is unused, and it has 0g/km emissions, the company gets to claim the full cost of the vehicle in the year of purchase, reducing the taxable profit for the business.  In other cases a percentage of the reducing value would instead be claimed each year as detailed further under Can I claim the cost of the vehicle against tax in the year of purchase?

With BIK tax charges increasing company cars are more expensive than they used to be and therefore any decision should be considered carefully, even if an electric car is chosen.  Some example BIK rates for electric cars are shown below:

2022/23 P11d rates on electric cars
  
0g/km2% Benefit In Kind charge
1-50 g/km with a mileage range of >130 miles2% Benefit In Kind charge
1-50 g/km with a mileage range of 70-129 miles5% Benefit In Kind charge
1-50 g/km with a mileage range of 40-69 miles8% Benefit In Kind charge
1-50 g/km with a mileage range of 30-39 miles12% Benefit In Kind charge
1-50 g/km with a mileage range of <30 miles14% Benefit In Kind charge

If you find the right car for you, the tax charges might not be the deciding factor but it should be considered as part of your overall decision making process.

Can I claim the cost of the vehicle against tax in the year of purchase?

A Capital Allowance claim is a percentage of the car’s purchase cost that you can claim as a deduction against the company’s taxable profit each year. As with the BIK calculation, the higher the CO2 emissions, the less tax relief you can claim each year.

  • If the car is purchased brand new (unused) and the car’s CO2 emissions are 0g/km or less (or the car is electric), 100% of the cost of the car can be deducted from the company’s profits in the year of purchase
  • If the CO2 emissions are between 0g/km and 50g/km, then 18% of the reducing balance can be deducted each year
  • If the CO2 emissions are above 50g/km, then 6% of the reducing balance can be deducted each year.

This means that unless the company buys a car with very low emissions, you will have to keep the car for a fairly long time to achieve the full benefit, although if you sell the car then an adjustment can be made.

Costs of purchasing and installing new electric vehicle charging points at the place of business also currently qualify for a first year allowance, meaning the full cost can be deducted in the year the cost is incurred.

If your company leases the car instead, then it falls into one of two categories:

  • If the CO2 emissions are below 50g/km, 100% of annual lease costs can be claimed
  • If the cars emissions are above 50g/km, then the company can only claim 85% of annual lease costs

Remember if the vehicle is owned by the business the general running costs (e.g. insurance, tyres) can also be claimed against the business profits.

What are my finance options?

You have two finance options:

  • Buy the car outright and deal with all the costs it may incur
  • Lease the car, spreading the cost over a period

For tax purposes, leasing can be an attractive option, as many businesses are able to claim back all or part of the VAT, depending on the use of the car. Also, if money is tight, leasing is your best option. You’ll incur a relatively low initial payment, regular monthly payments (which may even include maintenance of the car) along with all the benefits of running a new vehicle. Just bear in mind, the more miles you do, the more expensive the monthly payments will be.

Buying a car outright has its advantages too: you have a better opportunity to negotiate the price of the car than with leasing, you own the asset so can decide to sell it at any time. The downsides include that if owned by you it can be taken to pay for an outstanding debt and that depreciation begins as soon as you drive away with the car. According to the AA, a new car will have lost around 40% of its value by the end of the first year alone! You also need to have large amount of capital available to purchase the car outright, which you are tying up in a deprecating asset rather than investing in other parts of your business.

Should the company be paying for fuel costs?

If the company is going to pay for fuel (petrol or diesel), you’ll need to distinguish whether the journeys are for business or personal use. If your company pays for any private fuel costs including commuting, then HMRC will consider it a further Benefit in Kind, increasing the tax cost for the company and the employee. If the company is going to pay for fuel only for business use there will be no taxable benefit, but proof of mileage and business journeys should be retained.

For a company owned electric car it doesn’t matter if travel is business or private miles, electric is currently not considered ‘fuel’ and so no BIK charge arises on its cost where provided by the employer.  If employees are allowed to charge the vehicle at or near work premises, the cost of this for any electric vehicle, including privately owned ones, are free from BIK as long as facilities are actively made available to all employees.

In terms of VAT, if the fuel paid for relates wholly to business use, then all VAT on fuel can be recovered as long as you are VAT registered. However, if private fuel is also paid for by the company, then a fuel scale charge will need to be paid to HMRC. The fuel charge is based upon the CO2 emissions of the car and can be calculated on GOV.UK.

What if I am a partner in a partnership or a sole trader?

You can still buy a car through the business, but the tax treatment is different if the car will be used by you and not a salaried employee.  If you would like to know how it works please get in touch.

So is a company car worth it?

Whilst tax is due on the benefit value of a company car instead of paying the full cost personally, the company is still paying for the cost of the car. The type of vehicle you choose, its CO2 emissions, fuel type, how you intend the car to be used, who will be using the car and how you will purchase it are all key factors to consider before this seemingly simple question can be answered!

The relevant factors and their importance will be specific to each individual business and so there is no single right or wrong answer, but we can help you decide what would work best for you.  An Ultra Low Emission Vehicle (ULEV) may be more tax efficient but perhaps you just want to incentivise your employees and the costs of a more expensive vehicle are deemed worthwhile.

In some cases it may be more tax efficient to draw the money out of the company as dividends and pay for the car personally, in other cases it may be more tax efficient for the company to buy or lease the car, it is again all dependent on the vehicle you buy, the fuel type, the CO2 emissions and what the intended use for the vehicle is.

With BIK tax and other costs increasing, company cars are more expensive than they used to be and any decision should be made carefully.  If you have a car in mind and would like to know the best route to take please get in touch for a personalised calculation and advice.

A company car may sound like a great perk, but it could also be a great expense. Think carefully about all of the factors mentioned above. Talk to our Tax Manager to work out your personal circumstances and whether it’s the right option for you. Email enquiries@a4g-llp.co.uk, call 01474 856 853 or complete the form below to request a call back. 

Janice Offer

Contact me today!

Janice Offer

ATT CTA

Personal Tax Specialist

01474 853856

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