When determining whether a limited company should purchase a car, several key factors need to be considered, including your overall financial circumstances and whether the vehicle will be used for personal travel in addition to business purposes. One of the most important aspects of this decision is understanding the tax implications, as each option—whether leasing, purchasing outright, or using it for both personal and professional use—carries different tax consequences.
At Venton Accountants, we specialise in helping limited companies navigate these complexities to ensure the most tax-efficient approach is adopted. By assessing your specific situation, we can provide tailored advice on whether to purchase or lease a vehicle through the company, how to manage personal use, and which expenses can be claimed as tax-deductible. This holistic view ensures that your decision maximises both financial savings and compliance with tax regulations.
Our expert accountants are here to guide you every step of the way, ensuring your business stays on the right financial track while minimising your tax liabilities.
Advantages of Buying a Car Through Your Limited Company
When considering purchasing a car through your limited company, it’s important to evaluate the potential tax savings. Here are some of the key benefits:
Claim Corporation Tax Deductions
Owning a company car comes with various expenses, including the purchase cost, maintenance, insurance, fuel, and road tax. These expenses can be claimed as tax deductions, reducing the company’s taxable profits and helping save on corporation tax. This is a significant financial advantage, as it allows the business to offset a portion of its operating costs.
Capital Allowances
A limited company can also claim capital allowances on the cost of a car purchased for business use. The rate of capital allowances depends on factors such as whether the car is new or used, and its CO2 emissions. These allowances reduce the company’s taxable profits, leading to a lower tax bill.
The capital allowance rates for cars purchased from April 2021, as outlined by HMRC, are based on the car’s CO2 emissions:
0g/km CO2 emissions: 100% first-year allowance (FYA)
1-50g/km CO2 emissions: 18% writing down allowance (WDA)
Above 50g/km CO2 emissions: 6% writing down allowance (WDA)
These allowances help to balance out the company’s profits, effectively reducing its tax liabilities while incentivising the use of environmentally friendly vehicles.
By leveraging corporation tax deductions and capital allowances, purchasing a car through your limited company can provide substantial tax relief, improving the financial efficiency of your business.
VAT Recovery
If your company is VAT-registered and the vehicle is used solely for business purposes, you may be able to reclaim the VAT on the purchase of the car. While it can be difficult to reclaim VAT on cars used for both personal and business use, businesses that use vehicles solely for business purposes (like pool cars) can recover 100% of the VAT. Even if the car is partially used for business, you may still be able to reclaim the VAT on fuel and maintenance costs.
Efficient Cost Structuring
When a vehicle is owned by the company, it allows for clearer cost structuring in terms of separating personal and business-related expenses. Costs such as insurance, servicing, and fuel can be claimed as legitimate business expenses, allowing the company to more efficiently allocate resources. This reduces the overall burden on personal finances for the business owner.
No Initial Personal Financial Outlay
Purchasing a vehicle through the company means the initial outlay comes from company funds rather than personal savings. This can help preserve your personal cash flow while still allowing you access to a company vehicle. The company can either purchase the car outright or finance it through a business loan or lease arrangement, depending on what works best for cash flow management.
Employee Benefit
If the company provides a vehicle to employees, including directors, it can be seen as a valuable benefit, enhancing employee satisfaction. While there are personal tax considerations (such as Benefit-in-Kind taxes), the overall business can benefit from increased employee loyalty and productivity when offering a company car as part of an employee package.
Disadvantages of Buying a Car Through Your Limited Company
Before deciding to purchase a car through your limited company, particularly if the vehicle will be used for both business and personal purposes, it’s crucial to thoroughly assess the various tax implications. Several taxes and considerations should be carefully evaluated to ensure you make the most financially sound decision. The primary taxes to take into account include:
Benefit-in-Kind (BiK) Tax
If a company car is used for personal travel, including commuting, it is considered a Benefit-in-Kind (BiK) and subject to personal taxation. The tax amount is calculated based on the car’s CO2 emissions, the type of fuel it uses, and its list price. Cars with higher CO2 emissions attract higher BiK rates, which can significantly increase the personal tax burden for directors or employees. This could reduce the overall financial advantage of owning a company car, particularly for high-emission vehicles.
Example
List Price: £40,000
CO2 Emissions: 50 g/km
BIK Percentage (based on CO2 emissions): 13%
Employee’s personal tax rate: 40%
Steps to calculate BiK tax:
Determine the List Price: £40,000
Find the BiK Percentage: Since the CO2 emissions are 50 g/km, the BiK percentage for this car is 13%.
Calculate the Taxable Value of Car Benefit:
Taxable Value = List Price × BiK Percentage
Taxable Value = £40,000 × 0.13 = £5,200
Apply Personal Tax Rate:
BiK Tax = Taxable Value × Personal Tax Rate
BiK Tax = £5,200 × 0.40 = £2,080
In this case, the employee will pay £2,080 in BiK tax annually for the use of the company car. Lower CO2 emissions result in a lower BiK percentage, making this vehicle more tax-efficient for the employee, even with a higher personal tax rate.
Limited VAT Recovery
If the car is used for both personal and business purposes, it can be difficult to reclaim VAT on the purchase price. HMRC only allows full VAT recovery on cars that are exclusively used for business. In cases where there is personal use, only the VAT on fuel and maintenance can be partially reclaimed, which limits the potential savings.
Class 1A National Insurance Contributions
When a company provides a Benefit-in-Kind (BiK) such as a company car to its employees, the company becomes liable for Class 1A National Insurance Contributions (NICs) on the value of the BiK. This means the business must pay NICs based on the taxable value of the benefit, adding an extra cost for the employer.
One advantage for employees is that they do not have to pay National Insurance on the value of the BiK. This is a benefit of having a company car, as the tax burden for National Insurance lies solely with the employer.
The Fuel Benefit Tax Charge
If the company also provides fuel for personal use of the company car, an additional tax charge known as the fuel benefit charge will apply. This tax is based on the car’s CO2 emissions and is calculated by multiplying the BiK percentage (derived from the vehicle’s CO2 emissions) by the fuel benefit charge multiplier.
For the 2023/2024 tax year, the fuel benefit charge multiplier is set at £27,800. This means that to calculate the fuel benefit tax, you would multiply the applicable BiK percentage by this multiplier. The resulting amount is added to the employee’s taxable income for the year and taxed accordingly.
This extra fuel charge can significantly increase the tax liability for both the company and the employee, so it’s important to carefully assess whether this benefit is worth the associated costs.
Increased Taxable Profits
Although capital allowances and corporation tax deductions can reduce taxable profits, the vehicle’s depreciation may not always align with the company’s tax year. This means that the company may be required to report higher taxable profits, particularly if the car has a lower capital allowance rate due to higher CO2 emissions, reducing the overall tax benefit over time.
BiK Tax on Fuel
If your limited company provides fuel for personal use, this too will be subject to Benefit-in-Kind taxation. The tax can be significant, particularly for high-mileage or less fuel-efficient vehicles. For many, the personal BiK tax on fuel can outweigh the financial benefit of having fuel provided by the company, making it a costly perk.
Higher Insurance Premiums
Company cars often attract higher insurance premiums than personal vehicles due to the perceived increased risk of both business and personal use. In addition, commercial vehicle insurance typically costs more than personal auto insurance, which can erode some of the tax savings achieved through the purchase.
Depreciation
Cars are depreciating assets, and purchasing a vehicle through your company may tie up capital in an asset that loses value over time. Unlike investments in equipment or technology that may directly benefit your business, the rapid depreciation of a vehicle can result in reduced financial gains, especially when combined with maintenance costs.
Complex Paperwork and Administration
Managing a company car comes with additional administrative duties, such as keeping accurate records of business vs. personal mileage, tracking expenses, and staying up-to-date on tax and legal obligations related to company vehicles. The additional paperwork may increase the complexity of running the business and consume time or resources that could be spent on core operations.
Potential Impact on Cash Flow
Purchasing a vehicle through the business can have a direct impact on the company’s cash flow, particularly if the car is purchased outright or through a costly finance agreement. This could limit available funds for other important business investments or operations.
Proper Documentation and Record-Keeping
It is crucial to clearly distinguish between business and private mileage to comply with HMRC’s requirements. Detailed records of the car’s usage, along with the associated benefits, must be reported accurately. For employees, these details are submitted via P11D forms, while employers must use P11D(b) forms to calculate Class 1A National Insurance contributions and any relevant tax liabilities.
Electric Cars
The government incentivises the use of environmentally friendly vehicles, such as low-emission and electric cars, by offering lower tax rates and BiK percentages, as mentioned earlier. These vehicles can significantly reduce both the company’s and employees’ tax liabilities, making them a cost-effective choice for businesses.
Leasing vs. Buying
When considering whether to lease or buy a company car, there are important tax implications to keep in mind. Buying a car outright allows you to claim capital allowances, offering more tax relief over time compared to leasing. While lease payments can be deducted as a business expense, they do not allow for capital allowances unless the lease includes an option to purchase, such as in a hire purchase agreement.
Starting from April 2021, monthly lease payments for vehicles not owned by your company can still be claimed as business expenses. However, for cars emitting over 50g/km CO2, a 15% disallowance applies, meaning that portion of the lease payment will not be tax-deductible.
Professional Image
A company car can enhance your business’s professional image, particularly when meeting clients or traveling for work-related purposes. It can serve as a practical asset for both day-to-day operations and business presentations.
Approved Mileage Option
If your business requires frequent travel, you may want to consider HMRC’s approved mileage allowance scheme. Under this option, the company can reimburse you for business-related travel using your personal car at the approved rate of £0.45 per mile for the first 10,000 miles, and £0.25 per mile thereafter. This allowance is designed to cover both fuel costs and the wear and tear on your personal vehicle. To qualify, you must keep detailed mileage records throughout the year, ensuring accurate tracking of business-related travel.