Do you know the company and personal tax implications of buying a company car?
Common questions we receive regarding tax efficiency and buying a company car are:
- Can I buy a car through my limited company?
- What are the tax benefits of buying a car for business?
- Will buying a company car reduce my vat bill?
- Should I buy or lease a company car?
To determine this, we must take into consideration:
- Your personal tax rate
- The CO2 emissions of the car
- Whether you chose to lease or buy
A limited company cannot claim VAT on the purchase of a car but it can claim tax relief in the form of capital allowances. This means you can deduct part of the value from your profits before you pay tax.
For your car to be eligible for capital allowances it must be:
- Suitable for private use (this includes motorhomes)
- A vehicle that most people use privately
- A non-transporting goods vehicle
Use writing down allowances to work out what you can claim. This is claimed as a percentage of the cost of the car.
Furthermore, the rate you can claim depends on the CO2 emissions of your car and the date you bought it. The main and special rates apply from 1 April for limited companies, and 6 April for sole traders and partners. The first year allowances rate applies from 1 April for all businesses.
Cars bought from April 2015
|Description of car||What you can claim|
|New and unused, CO2 emissions are 75g/km or less (or car is electric)||First year allowances|
|New and unused, CO2 emissions are between 75g/km and 130g/km||Main rate allowances|
|Second hand, CO2 emissions are 130g/km or less (or car is electric)||Main rate allowances|
|New or second hand, CO2 emissions are above 130g/km||Special rate allowances|
Note that whilst cars do not qualify for annual investment allowance (AIA), lorries, vans, trucks and motorcycles purchased before 6 April 2009 are not considered to be cars and therefore do qualify for AIA.
Sole Traders and Partners
Sole traders and partners can claim simplified mileage expenses on business vehicles instead of capital allowances, if they haven't been claimed previously. If a sole trader or partner uses their car outside their business, they must calculate how much can be claimed based on the amount of business use.
If an employer provides a car for an employee or director they can claim capital allowances on the full cost. However, if the employee uses the car for personal use it may need to be reported as a benefit.
Whilst employees cannot claim capital allowances for any business vehicles, they can claim for business mileage and fuel costs.
A company can claim corporation tax relief on the full annual lease payment of a car as well as reclaim 50% of the VAT on the lease payments.
If you purchase a car through the company and do not only use it for business trips and do not always leave it at the business premises, you will be taxed as having a 'benefit in kind' of the private use of the car. The value of the benefit in kind is based on a percentage of the list price of the car. Note that this is the list price of the car when it was new. Therefore, it does not take into consideration the actual price you paid or if you bought it secondhand.
Unlike company tax, for personal tax it is irrelevant if you purchase or lease the car through the company. Furthermore, the amount of private use is not taken into consideration. If there is any private use it will automatically be considered a benefit in kind, regardless if the car is used privately once a month or everyday. ‘Private use’ includes employees’ journeys between home and work, unless they’re travelling to a temporary place of work.
You pay tax on the value to you of the company car, which depends on things like how much it would cost to buy, the type of fuel it uses and the CO2 emissions (this can range from 7% to 37%).
This value of the car is reduced if:
- You have it part-time
- You pay something towards its cost
- It has low CO2 emissions
Therefore, it is often more tax efficient to claim business mileage through the company instead of purchasing the car through the company. Business mileage is tax deductible for the company and tax-free for the employee claiming it. Check HMRC's company car and fuel benefit calculator to assess how much tax you could pay.
Essentially, if you are going to purchase a fuel guzzler it is recommended to not buy the car through the company. However, low emission cars are very tax efficient when purchasing through a company, with companies making massive saving on their corporation tax bill.
Therefore, it is recommended you speak with your accountant and they will be able to advise the best route for you and your car purchase. We'd be happy to help, book in for a free consultation.
[Ensure you are as tax efficient as possible and read How Limited Companies Can Save Through the Employment Allowance]
Ensure you are being as tax efficient as possible by downloading SRK's free A-Z guide of common business costs and expenses for Limited Companies. This guide is designed to answer the questions small business owners have regarding - what expenses can I claim through a limited company?
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