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 company 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, so we’ve put together a list of our FAQ’s and answered them as best we can, to give you all the information you need to decide:

If I use the car for personal use, 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.

Generally, VAT can only be reclaimed on a car if it is exclusively used for business (which doesn’t include driving to and from work – this is regarded as ordinary commuting). However, VAT can be reclaimed if the car is kept on site overnight and used by many different employees throughout the working day even if some of that use is personal.

If you decide to lease your company car, you will only be able to recover 50% of the VAT charged on any lease payments, unless there is exclusive business use.

If your company car is deemed available for private use it will be considered as a taxable ‘perk’ by HMRC; officially called a Benefit In Kind (BIK). HMRC view BIK as an addition to your income, because the car is paid for by your employer on top of your salary and as with all earned income, you will have to pay tax on it. The tax you will pay depends on the value of the company car to you, i.e. how much it would cost to buy and the type of fuel it uses. The value of the car will only be reduced if you have it part-time, you pay something towards the cost or if it has low CO2 emissions. You can easily compare CO2 emissions using the GOV.UK website, along with fuel consumption and vehicle tax costs.

How is the Benefit in Kind calculated?

Calculating a BIK is fairly straightforward; you can do it yourself quite easily. All you need to do is find the official price of the vehicle (the P11d value). Then find its CO2 emissions and refer to this table to find the percentage of the P11d value you will pay. Now multiply the P11d value by the BIK percentage. Then multiple this figure by your income tax rate. If you find the right car, this annual tax figure needn’t be such a burden.

Can I make a Capital Allowances claim?

A Capital Allowance claim is the percentage of the car’s cost that you can claim against your 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 75g/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 the car is bought
  • If the CO2 emissions are between 76g/km and 130g/km, then 18% can be deducted each year
  • If the CO2 emissions are above 130g/km, then 8% can be deducted each year.

This means, unless the company buys a car with very low emissions, you will have to keep that car for a very long time to see any benefit.

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

  • If the CO2 emissions are below 130g/km, 100% of annual lease costs can be claimed
  • If the cars emissions are above 130g/km, then the company can only claim 85% of annual lease costs

Recap

  • VAT can only be claimed on a car being used exclusively for business
  • If used privately, it will be deemed a Benefit in Kind, and you will pay tax on it, as you would your salary
  • The tax you will pay depends on the cost of the car and the type of fuel it uses
  • Unless the company buys a car with very low emissions, you’ll have to keep the car for a very long time to see any Capital Allowances benefit

Should the company be paying for fuel costs?

If the company is going to pay for fuel, you’ll need to distinguish whether the journeys are for business or personal use. If your company pays for private fuel costs, then HMRC will consider it a Benefit in Kind. If the company is going to pay for fuel only for business use, there will be no taxable benefit, but proof will be required.

In terms of VAT, if the fuel paid for relates wholly to business use, then all VAT on fuel can be recovered. 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.

Can I avoid being taxed as benefit in kind?

Car Tax can be reduced if you only have the car on a part time basis, or you’re paying an amount back to the company for using the car. This doesn’t mean that you can avoid paying tax for having a company car. An electric company car (like a Tesla) still has company car tax to pay, albeit a much lower rate than a petrol or diesel car. The best way to save on tax would be to own the car in your personal name. That way you can claim back mileage at 45p per mile for the first 10,000 miles per year and 25p per mile thereafter.

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 get 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 list price of the car than with leasing, you own the asset so can decide to sell it at any time and it can be taken to pay for an outstanding debt. The downside is 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.

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, and if you need any further advice, give us a shout.

Want to find out more?

Call us on (01474) 853856 and we will put you in contact with one of our advisers, or send us an enquiry by clicking below.

Send us an enquiry

Share this article