Should I purchase a car through my limited company?
If you’re trading through your limited company, on the surface of it you might think it’s a good idea to get your company to pay for a new car. However you’ll need to weigh up all the costs involved, together with the tax implications, before you decide to go ahead with a purchase.
Please note that for the purposes of this blog all rates are in respect of the 2016/17 tax year.
As a starting point the kind of questions you should be asking yourself are as follows:-
1 Am I going to use the car exclusively for business or will there be some private use?
This is vital when considering the VAT on your car - especially if you’re considering an outright purchase by your company. Ordinarily you can only reclaim the VAT on a car if it is used exclusively for business and is not available for private use by yourself.
However VAT can be reclaimed on a pool car which is kept on site overnight and used by a number of different employees throughout the working day – even if some of that use is personal.
VAT may also be reclaimed on a car when it is used primarily as a taxi, for driving instruction or self-drive hire.
And you must remember that driving to and from your regular place of work is regarded as ordinary commuting (we've got a business travel guide which details out what's regarded as business travel - just email us if you'd like a copy). So if you use the vehicle solely to travel to and from your workplace, you cannot reclaim the VAT.
Where your company car is leased (as opposed to purchased outright), unless there is exclusive business use (see above) then the company will only be able to recover 50% of the VAT charged on any lease payments.
You’ll also need to remember that if your company car is available for private use then this will result in a taxable benefit in kind. This is what HMRC deem to be the cash equivalent of having the ‘perk’ of a company car which can be used privately.
2 How do the CO2 emissions on the car affect the cost to the company and me?
The amount of CO2 emissions produced by the car correspond directly to the deemed cash benefit of having the ‘perk’ of a company car which you can use privately - and on which you will be taxed personally. So the higher the CO2 emissions, the higher the benefit in kind on which you will be taxed personally.
If the company buys the car (either outright or though some form of hire purchase) then the level of CO2 emissions will also determine the percentage rate at which the company can write-off the cost of the car for tax purposes. Again, the higher the CO2 emissions the less write-off the company will get each year.
If the company only leases the car, then the CO2 emissions will determine the proportion of rental payments that can be claimed. The higher the CO2 emissions, the lower the proportion which can be claimed.
3 How is the deemed cash benefit in kind calculated?
The deemed cash benefit of private use of your company car is calculated by multiplying the list price of the car by the CO2 emissions percentage of the car. The list price used for the calculation should include any accessories fitted before the car was first made available and also any accessories which were fitted later and which cost more than £100.
The CO2 emissions percentage can be found here.
Essentially, the higher the CO2 emissions produced by the car, the higher the percentage that is applied to the list price. Therefore a low emission car will have a low deemed cash benefit and a high emission car a high cash benefit.
BMW 320i SE - manual
List price: £27,740
In this example the relevant CO2 emissions percentage is 22%, therefore the deemed cash benefit will be:
£27,740 x 22% = £6,102.80 per annum
Depending on your marginal tax rate, your annual tax bill for having this particular company car (which is available for private use) could be anything from £1,220.56 to £2,746.26.
The company will also have to pay Class 1A National Insurance on the deemed cash benefit of the private use of the company car. Using the example above, the company would have a Class 1A tax bill of £842.19 each year.
4 How does my company claim for the cost of the car?
Any assets bought by the company (eg motor vehicles) are treated differently for accounting and taxation purposes.
For accounting purposes the asset will be written off each year based on its estimated useful life. So if you buy an asset which will last 4 years for £20,000, then a charge of £5,000 will be made each year in the accounts.
However the tax treatment of the asset will be different and from a tax perspective there are also different rules for specific assets.
As far as cars are concerned, the greater the level of CO2 emissions the car produces, the less tax relief you can claim each year. The percentage of the car's cost which you can claim against your taxable profit each year is known as a Capital Allowances claim. Essentially there are three categories of car to consider for Capital Allowances claims.
- If the car’s CO2 emissions are 75g/km or less, you can deduct 100% of the cost of the car from the company's profits in the year that you buy the car, provided that the car is purchased brand new.
- If the CO2 emissions are between 76g/km and 130g/km then 18% of the price of the car (on a reducing balance basis) can be deducted from your company’s profit each year.
- For CO2 emission levels above 130g/km then 8% of the price of the car (on a reducing balance basis) can be deducted from your company’s profit each year.
From the benefit in kind example, the BMW would fit into the third band, so Capital Allowances would be claimed at 8% per annum. Clearly the company would need to retain ownership of your car for a number of years in order to obtain any significant tax benefit for the original purchase price. You could also end up paying more tax than the cost of the car itself because the benefit in kind is based on your company car’s price when new not it’s second hand value.
Therefore from your own and the company’s perspective, in order to save the greatest amount of tax, your company would need to purchase an environmentally friendly car (either electric or low emission).
5 What if my company leases the car?
The rules for you personally are exactly the same as if your company purchased the car outright. This means you will be subject to a benefit in kind which will be calculated in the same way as our BMW example in section 3.
However, as far as the company is concerned, the rules are much more straightforward - if the car’s emissions are in excess of 130g/km then the company can only claim 85% of the total leasing costs otherwise the company can claim 100% of the annual lease costs against its corporation tax bill.
6 What’s the tax position on fuel paid for by my company?
Firstly you need to distinguish whether any fuel paid for by your company relates to business or personal journeys.
As mentioned previously you should be aware that HMRC consider ordinary commuting from home to a fixed place of business as private mileage.
If your company does pay for any of your private fuel costs then HMRC will consider you to have received a cash benefit based on the CO2 emissions of your company car.
The benefit is calculated by multiplying the appropriate percentage (which can be found here) to £22,200 (2016/17).
So if we use the BMW 320i example from section 3, the taxable benefit would be £4,884 (£22,200 x 22%).
The £22,200 is a fixed amount, regardless of how much fuel has actually been paid for by your company for your private mileage.
Where fuel is only paid for business use, then there is no cash benefit and so no additional tax to be paid. However, HMRC will require proof that no fuel was used for private purposes - you should therefore keep accurate mileage records to be able to demonstrate that you only had the cost of business fuel reimbursed.
7 What about VAT on private fuel paid for by my company?
Essentially the position is as follows:
a) If fuel paid relates exclusively to business use then all of the VAT on fuel can be recovered.
b) If private fuel is also paid for by your company then an adjustment to your VAT return needs to be made. The company claims for all of the VAT on fuel costs and then pays an appropriate fuel scale charge to HMRC to make up for the estimated private use element.
The fuel scale charge is based on the CO2 emissions of your car. The latest fuel scale charge can be found here.
If we use the BMW 320i in section 3 as an example, if your company claimed all of the VAT on your fuel costs (including private mileage), the fuel scale charge to be added to the company's total VAT liability each quarter would be £31.
8 What’s the alternative to a company car?
Weighing up the pros and cons of buying a car and paying for travel through your company isn’t always straight forward.
So rather than having the complications associated with having a company car, you may prefer to have the company reimburse you for business travel where you use your own car. If you use HMRC’s approved mileage rates there will be no tax to pay. HMRC’s rates are currently 45p per mile up to 10,000 miles and 25p per mile over 10,000 miles – these are annual allowances.
So if you travel 10,000 business miles in a year, the company can pay you £4500 with no benefit in kind for you. The company can also deduct this payment in its accounts as an expense.
This payment is to cover both the fuel cost of any business mileage you do together with the wear and tear on your personal car. However you must keep accurate mileage records showing the business mileage which you have done during the year.
If you have a company car and pay for all your fuel costs, it is possible for your company to reimburse you for business fuel, using the advisory fuel rates provided by HMRC here.
If the appropriate rate is paid, then this will not give rise to an additional tax charge.
We very seldom see a situation where a company car is tax effective. But if you do want to have a vehicle owned by the company, why not think about a van instead? Buying a van through your company can be a far more tax efficient solution.
We hope this has clarified some of the issues surrounding the purchase of cars and business travel in general. However, if you do have any questions relating to any of the points raised simply email our friendly tax adviser, [email protected], or give us a call on 01202 048696.