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What Every Business Owner Should Know About Buying a Company Car
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Company cars remain one of the most important employee benefits that they look forward to. One of the most important reasons is that the company cars are the symbols of status and professionalism.
Moreover, these factors make them an attractive addition. However, purchasing or leasing a company car is not a simple task; it is an important financial commitment that one has to make.
But to make the right decision, one needs to understand the tax implications, cost structure, and benefits. To help you, this guide by MMBA Accountants sheds light on the aspects that you must know.
If your business is making steady growth but fuel and tax costs are increasing, then it is the right time to consider purchasing or using a current vehicle as a company car.
To help you more, HMRC introduces generous company car tax schemes. In this regard, environmentally conscious businesses have more incentives to invest in low-emission vehicles.
Table of Contents
Leasing vs. Buying a Company Car
Let’s have a look at the difference between leasing and buying a car:
What Is Leasing?
Leasing a company car is an arrangement where you pay fixed monthly lease payments that allows you to use a vehicle for a predetermined period.
This period is typically between 24 and 48 months. Nonetheless, this option is often more tax-efficient and cost-effective for businesses looking to manage cash flow and avoid the high upfront purchase cost of a new car.
However, it comes with the caution that the business won’t own the car at the end of the lease term. There are other aspects as well such as capital allowances, interest payments and the instructions that one must know if he is liable to pay tax.
So, even if your business mileage is increasing or is falling, you must know the pros and cons of a business car lease
Buying a Company Car
For businesses that prioritise ownership, buying a car outright or through financing options like hire purchase or contract purchase can be a viable option.
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Capital Allowances and Tax Deductions
One can claim the purchase price of a company car as a capital allowance, reducing the company’s taxable income. The extent of tax deductions depends on the car’s CO2 emissions, with electric cars offering the highest tax savings.
No Mileage Restrictions
Unlike leasing, owning a car means there are no mileage limits, making it ideal for businesses with high annual mileage.
Company Asset
A purchased vehicle becomes a company asset, contributing to the company’s balance sheet and potentially enhancing its financial standing.
Pros and Cons of a Business Car Lease - Buying a company car
There are following pros and cons associated with a business car lease:
Pros of Leasing a Company Car
Lower Initial Costs
Leasing allows small businesses to drive premium vehicles without the hefty purchase price. This can be particularly useful for making a positive impression on clients and business partners who own car personally.
Tax Benefits
Lease payments for business use are often a tax-deductible expense. They reduce the company’s taxable profit. Additionally, if the company is a VAT-registered business they can reclaim VAT on the lease payments if the car is used for business purposes.
Predictable Running Costs
Leasing agreements often include maintenance, road tax, and sometimes even insurance costs. This allows for predictable monthly expenses and simplifies budget management.
Access to Low-Emission Vehicles
Many leasing options focus on low-emission or electric cars, which can reduce Benefit in Kind (BIK) tax rates and additional tax relief.
Cons of Leasing a Company Car
Mileage Restrictions
Leasing agreements come with mileage limits. Exceeding these can result in hefty penalties, and this impacts your overall cost savings.
No Ownership
At the end of the lease, you must return the vehicle and leave the business without an asset on its balance sheet.
Higher Monthly Costs Without a Deposit
Businesses unable to put down a deposit may face higher monthly lease payments, which could strain cash flow.Our guide about tax on online businesses further clarifies the other dimensions of taxation when it comes to online business.
Tax Implications of Buying a Car Through Your Limited Company
Purchasing a car through your limited company can have financial advantages, but it also comes with complexities, particularly in tax treatment.
Understanding factors like income tax, CO2 emissions, and benefit-in-kind (BIK) is essential for making an informed decision. Here’s a detailed look at the key considerations and benefits of buying a car through your limited company.
Buying a Car Through Your Limited Company
If you’re contemplating whether to purchase a car for business purposes through your company, start by assessing how the car will be used.
Cars bought through a limited company are typically used for both personal and business purposes. However, the dual-purpose nature of such vehicles has significant tax implications.
Claiming Capital Allowances
One of the major tax benefits of purchasing a car through a limited company is the ability to claim capital allowances. These allowances enable you to offset the cost of the vehicle against your company’s profits for tax purposes. However, the rate at which you can claim these allowances depends on the car’s CO2 emissions:
· 0-50g/km emissions: 100% first-year allowance (tax relief in the first year).
· 51-110g/km emissions: 18% annual writing-down allowance.
· Above 110g/km emissions: 6% annual writing-down allowance.
The lower the CO2 emissions, the greater the tax savings. For example, electric cars with zero emissions are highly tax-efficient.
Benefit in Kind (BIK) Tax
When a company provides a car for personal use, it is considered a taxable benefit. The BIK tax rate depends on the car’s CO2 emissions, list price, and fuel type.
Electric and low-emission vehicles attract significantly lower BIK rates, making them a tax-efficient choice.
If a car is made available for personal use, it becomes a taxable benefit in kind. BIK tax is calculated based on:
- The car’s value (list price, not purchase price).
- Its CO2 emissions.
- The BIK percentage rate assigned to its emissions category.
For instance, low-emission vehicles (like hybrids and electric cars) attract lower BIK rates, making them more tax-efficient.
The BIK tax is added to the employee’s salary for income tax purposes, and the company must also pay national insurance contributions (NICs) on the taxable benefit.
Fuel Scale Charge
If the company covers private mileage fuel costs, it incurs a fuel scale charge, which is taxable. Calculating whether this is cost-effective depends on the employee’s private mileage and fuel costs. Fuel Benefit
If the company provides fuel for personal use, an additional fuel benefit tax applies. For most vehicles, the fuel benefit outweighs the actual savings of providing fuel, so it’s often better for the employee to pay for their private mileage and claim business miles back.
For tax purposes, the company can reimburse business mileage at HMRC’s approved rates, which are currently:
- 45p per mile for the first 10,000 miles.
- 25p per mile thereafter.
Drawbacks of Buying a Company Car
There are various drawbacks of buying a company car, such as:
Upfront Costs
Buying a car outright requires significant capital, which is not feasible for smaller businesses.
Depreciation
Cars depreciate in value over time, and the company will bear the full cost of this depreciation.
Higher Running Costs
The business is responsible for all running costs, including maintenance, road tax, and insurance.
Corporation Tax and Road Tax
When a limited company buys a car, it pays corporation tax on its profits, but the cost of the car can be deducted through capital allowances, reducing taxable profits.
Additionally, the company is responsible for paying road tax, which is determined by the vehicle’s CO2 emissions. Electric and ultra-low emission vehicles are often exempt or attract minimal road tax, adding to their financial appeal.
National Insurance Contributions (NICs)
Both the company and the employee bear NICs when a car is provided as a benefit. For the company, Class 1A NICs are payable on the taxable value of the car and any fuel benefit. Ensuring the car’s tax efficiency can reduce this liability.
Tax-Free Alternatives
For individuals seeking tax-efficient options, considering vehicles with zero emissions can be advantageous. These cars often qualify for tax-free benefits or reduced tax liabilities.
Charging facilities provided at the workplace for electric vehicles are also tax-free, further incentivizing green choices.
Considerations for Business Purposes
If the car is used solely for business purposes, such as client visits or delivery services, it may be treated differently for tax purposes. Keeping accurate records of mileage and usage is crucial to justify claims and avoid penalties.
How Much Tax Will You Pay?
The amount of tax you or your company pays depends on various factors, such as the car’s emissions, list price, and how much private use is involved.
By choosing a low-emission or electric vehicle, you can significantly reduce both income tax and national insurance contributions.
Tax Relief on Running Costs
Running costs such as maintenance, road tax, and insurance are tax-deductible expenses and they reduce the company’s taxable profit.
Claiming Business Mileage Allowance
If an employee uses their personal car for business purposes, they can claim a business mileage allowance. However, this approach requires careful record-keeping and might not be as tax-efficient as using a company car.
Exploring Financing Options
When it comes to exploring finance options, it includes:
Business Contract Hire
This is a popular leasing option where the company pays for the use of the car over a fixed term. It allows businesses to avoid depreciation costs and frequently upgrade to newer models. However, there is no option to purchase the car at the end of the contract.
Business Contract Purchase
This financing option is ideal for VAT-registered businesses that want the flexibility to own the car at the end of the term. Monthly payments are VAT-exempt, and the business has the choice to either buy the car or return it at the end of the contract.
Hire Purchase
Hire purchase allows the company to spread the cost of a new car over several years. Once all payments are made, the company owns the vehicle. This method combines the benefits of ownership with manageable monthly payments
Environmental Considerations
With increasing emphasis on sustainability, HMRC’s company car tax schemes encourage businesses to invest in electric and hybrid vehicles. The tax savings on low-emission cars include:
- Lower BIK Rates
Electric cars attract 2% BIK tax rates, compared to 25% or higher for conventional vehicles.
- First-Year Allowances
Businesses can claim 100% first-year allowances on electric cars, significantly reducing their corporation tax liabilities.
- Reduced Running Costs
Electric cars are more cost-efficient in terms of fuel and maintenance, offering long-term savings.
Moreover, to know about important UK tax year dates, follow the link and understand another significant concept related to tax implications.
What Business Owners Need to Keep in Mind
Business owners need to keep in mind the following aspects:
Understand Tax Treatment
Evaluate the tax implications of leasing versus buying. Claiming capital allowances on purchased cars or reclaiming VAT on lease payments can lead to substantial tax savings.
Assess Your Mileage
High business mileage might favor purchasing or hiring a car outright, while lower mileage makes leasing more attractive.
Choose Tax-Efficient Vehicles
Opting for electric or low-emission cars can significantly reduce your tax bill and align with sustainability goals.
Incorporate Tax Planning
Work with an accountant to understand how a company car fits into your overall tax strategy. Proper planning ensures you maximise tax benefits while minimising liabilities.
Conclusion
Investing in a company car is a significant decision for any business.
By weighing the pros and cons of leasing versus buying and understanding the associated tax implications, business owners can make informed choices that align with their financial and operational goals.
Whether you’re looking to improve employee benefits, reduce business expenses, or take advantage of tax-efficient schemes, there’s an option that fits your needs.
FAQs About Buying a Company Car
What are the tax implications of buying a company car?
There are several tax implications of buying a company. You can claim the purchase price as a capital allowance, this reduces your company’s taxable income. However, the extent of this relief depends on the vehicle’s CO2 emissions. Low-emission or electric cars often qualify for 100% first-year allowances, offering significant tax advantages. However, providing a company car for personal use may attract Benefit in Kind (BIK) tax, increasing your overall tax liabilities.
Is leasing a company car more tax-efficient than buying one?
Yes, leasing a company car is a tax-efficient alternative to purchasing a car outright. For limited companies, lease payments are generally treated as a tax-deductible expense, reducing the company’s taxable profit. Additionally, VAT-registered businesses can reclaim VAT on the monthly lease payments if the car is used for business purposes. However, leasing does not allow you to claim capital allowances, and mileage limits may apply.
How does a company car affect personal tax?
A company car provided for personal use is considered a taxable benefit, and the employee will need to pay income tax on the BIK tax value. This value depends on the car’s list price, CO2 emissions, and fuel type. Choosing a low-emission or electric car can reduce personal tax liabilities due to lower BIK tax rates. Additionally, any private mileage covered by the company incurs a fuel scale charge, which is also taxable.
Can I claim tax relief on other running costs of a company car?
Yes, you can claim tax relief on other running costs of company car. Also, tax-deductible expenses are expenses such as fuel costs, insurance costs, road tax, and maintenance for business use. These costs reduce the company’s taxable profit and can help minimise its overall corporation tax bill. However, careful records must be kept to separate business mileage from personal use to ensure accurate tax treatment.
Are there specific benefits to using electric cars as company vehicles?
Yes, electric cars offer several tax benefits for businesses and employees. They attract a low BIK tax rate (currently 2%), qualify for first-year allowances, and reduce the company’s taxable profit. Additionally, fuel expenses for electric vehicles are generally lower than for petrol or diesel cars. For environmentally conscious businesses, using electric cars demonstrates a commitment to sustainability while providing significant tax savings.
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