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Company car tax for business owners

What are the tax implications of buying a company car from a tax perspective? Take a look at our indepth analysis.

Clare DohertyThis Guide was written by Clare Doherty, Small Business Tax Expert at TaxKings Accountants. Clare now writes for Listentotaxman.com on matters relating to small business tax. She is very happy to speak with Listentotaxman visitors to discuss any tax questions they might have – just visit the TaxKings Accountants website for contact details.

Clare DohertyThis Guide was written by Clare Doherty, Small Business Tax Expert at TaxKings Accountants. Clare now writes for Listentotaxman.com on matters relating to small business tax. She is very happy to speak with Listentotaxman visitors to discuss any tax questions they might have – just visit the TaxKings Accountants website for contact details.

You’ve had your limited company for a while now. Things are going well. There’s some money in the bank and you’ve got to grips with all the hoops that HMRC want you to jump through, for now at least. You’ve decided to treat yourself and what better way than a new set of wheels?

Saturday morning comes and off you go to your local dealership. Let’s call them Palmer Kent. You’ve got one foot onto the forecourt when Barry - it’s always Barry, isn’t it? I’ve bought three cars and two of them off of men called Barry - approaches you to let you know he’s there if you need help.

Now, you spent all of Friday night looking up the different models and specs and you’ve decided that you want a C Class Mercedes. Perfect car for a business person, right? You tell Barry this and - after the pound signs have left his eyes - he invites you over to his desk to run some numbers. Barry tells you that because you have a limited company you can save a fortune in Corporation Tax by buying the car through your business.

Ideal, you think. You get your dream car and it’s saving you money? With an on-the-road price of £36,875 and Corporation Tax at 19% you’re saving over £7,000, right? “I’m sure my accountant could tell me”, you think to yourself...

Five minutes later, you’re in the office getting ready to sign the paperwork. However, that little voice at the back of your head has now started panicking. “Maybe I should check this out with my accountant… it seems too good to be true”

That niggling voice, my friend, has just saved you thousands of pounds.

You give your accountant a call and they tell you that although Barry is correct; you do save on Corporation Tax. However, he’s not telling you the whole story. There are some other things that you should consider.

Your accountant strongly advises you not to sign anything but to ask Barry for quotes. They ask you to get a quote for four different vehicles - your dream Merc, a car with lower emissions, a hybrid car and a pickup truck - and come back to them for a comparison.

The thing is, Barry isn’t a bad guy. I’m sure he’s lovely, but just as much as I can’t tell you the difference between a C Class and an A Class, it’s not his job to know the ins and outs of company car tax.

Luckily for you, though, it is mine. So settle in, we’re about to save you a few thousand pounds.

Corporation Tax

Corporation Tax is saved on the purchase price of the vehicle but how this is done depends on how the purchase is made:

Hire Purchase - You would claim Capital Allowances on the purchase price. The interest portion of the loan/finance agreement can also be claimed as an expense.

Outright Purchase - You would claim Capital Allowances on the purchase price.

Lease - This is slightly different; the monthly payments can be claimed as an expense, but a percentage of this is disallowed for cars with emissions of over 110g/km

The costs that you can claim as an expense are pretty self explanatory. They qualify for 19% Corporation Tax relief just the same as anything else that you’d buy for your business.

Capital Allowances, however, are slightly different.

Capital Allowances require you to spread the cost of an asset over the expected useful life of the asset. The percentage that you can claim each year is decided in advance by HMRC. For the tax year 2019/20 the rates are as follows:

For cars with emissions of 110g/km or higher

6%

For cars with emissions between 51 and 110g/km

18%

For new cars with emissions of 50g/km or less

100%

You can claim a percentage of the cost for each year that you own the vehicle, until you have cumulatively claimed the full amount.

Consider the fact that the average car finance agreement is 5 years; even at the mid range of emissions, you’re only ever getting tax relief on 90% of the price that you’ve paid.

With emissions of 138g/km that C Class isn’t looking so attractive now, is it?

With a list price of £36,875 and emissions of 152 g/km, your dream-car falls into the 6% emissions bracket. That means you can claim £2,212 per year. For a 5 year lease, that’s £11,060 of available tax relief; only 30% of the actual cost of the car.

And that’s why you don’t take tax advice from car salesmen.

VAT 

A business cannot normally recover VAT on the purchase of a new car that is bought outright. The only circumstances under which you can recover VAT is if you can prove that the car is for business use only.

Business use always disallows the commute from home to work. By that I mean, you can’t use the car to drive to the office and back and claim that as business use - that’s personal use. Similarly, branding the vehicle and driving it around as a personal vehicle doesn’t count as business use either...

As you’d expect, proving that your vehicle is solely for business use is a bit more difficult than just telling HMRC that it is.

Typically, car dealers and leasing firms are the only businesses which are able to recover VAT on vehicles purchased.

The only way around that is if the car is a pool car. Pool cars seem like an attractive option as they are not treated as a 'perk' of employment, and therefore employees are not liable to BIK payments. And of course, this also means that the limited company doesn't have to pay employees' NICs.

To qualify as a pool car however, the business must be able to prove that the car or cars are shared by employees for business purposes, kept on business premises overnight and not available to employees for private use.

A word of warning: wrongly describing a company car as a pool car can be an expensive mistake, with a fine of up to £3,000 per annum, per employee, plus further penalties for 'potential lost revenue' to HMRC. These penalties could include unpaid tax backdated for four years, unpaid national insurance going back six years and lost interest, as well as the late payment penalty.

If a car is leased, normally you can reclaim 50% of the VAT paid on the lease payments. Up to 100% can be claimed but again, this is only possible if you can prove to HMRC that it is for business use only.

Personal Tax

This is the big one.

It’s the bit that Barry probably won’t tell you about. As the director (or an employee) of a limited company, if you are provided with a company car, you will pay Personal Tax on what’s known as a “Benefit in Kind”. We say BIK for short.

The amount of tax you’ll pay depends entirely on the car that you have. And unfortunately, it will more than likely change each year.

Because HMRC tax this through your pay-as-you-earn tax code, they’re almost always at least a year behind. This means you may find yourself owing tax if you complete a self assessment tax return. If you’re not sure about this, speak to your accountant; they should be able to explain the calculation to you.

Anyway… back to BIKs.

Much like capital allowances, they’re calculated on the emissions of the vehicle. Each emission range has an appropriate percentage allocated to it. This percentage is then applied to the list price of the vehicle, which gives you what is known as the “cash equivalent” of the vehicle.

Did you miss the important bit? You probably did. I bet it went straight over your head.

I said the percentage is applied to the list price of the vehicle. That means the calculation is not based on what your actually paid for the vehicle.

Suppose the company acquired a one of a kind Rolls Royce for you at the mere cost of £1. If the list price is a trillion pounds, then I’m afraid the calculation is still based on the list price.

Obviously no car is listed at a trillion pounds. Unless you count Apple Inc as a car. Which it isn’t.

So the cash equivalent of the vehicle is what you would pay personal tax and on, as if you’d received this amount in actual cash. You won't pay national insurance on a benefit in kind as an employee, but as an employer you will pay type 1a contributions at 13.8% of the cash equivalent.

For the year 2019/20, the following appropriate percentages apply:

CO2 emissions

Appropriate percentage

CO2 emissions

Appropriate percentage

0 (electric cars)

16%

130 – 134g/km

30%

1 – 50g/km

16%

135 – 139g/km

31%

51 – 75g/km

19%

140 – 144g/km

32%

76 – 94g/km

22%

145 – 149g/km

33%

95 – 99g/km

23%

150 –154g/km

34%

100 – 104g/km

24%

155 – 159g/km

35%

105 – 109g/km

25%

160 – 164g/km

36%

110 – 114g/km

26%

165 – 169g/km

37%

115 – 119g/km

27%

170 – 174g/km

37%

120 – 124g/km

28%

175 – 179g/km

37%

125 – 129g/km

29%

180g/km and above

37%

But wait… there’s more

Diesel cars are also subject to an additional 4% on top of the percentage above, up to a maximum of 37% unless they meet Euro standard 6d.

However, HMRC have stated that they do not expect any vehicles to meet this standard until at least after this tax year, so it’s best to assume that a surcharge will be payable on diesel cars.

So what does all this really mean?

Well remember the comparative quotes that you asked Barry for earlier? Let’s do some proper sums.

I know it’s entirely unrealistic, but let’s assume that all three of the vehicles cost the same amount. Because this is the internet - there are websites out there that’ll tell you that the earth is flat, I’m not really pushing the boundaries.

We’ll call it £30,000 for ease.

Let’s compare.

The Merc - MERCEDES-BENZ C-Class Coupe C 200 AMG Line 9-speed G-Tronic
Petrol. 138g/km CO2 Emissions.

Corporation Tax 

Capital Allowance - £30,000 x 6%

£1,800 

Corporation Tax - £1,800 x 19%

£342 saving

Saving on Employers’ NI - £1,283 x 19%

£243 saving

Benefit in Kind 

£30,000 x 31%

£9,300 cash equivalent

Basic rate tax at 20%

£1,860 to pay personally

Class 1a National Insurance

£1,283 to pay by the company.

Total to pay

Total saved

Real Cost/Saving

£3,143

£585

£2,558 Cost

The Lower Emissions car - FORD Fiesta 1.5 TDCi ST-Line 120PS

Petrol. 98g/km CO2 Emissions.

Corporation Tax 

Capital Allowance - £30,000 x 18%

£5,400 

Corporation Tax - £5,400 x 19%

£1,026 saving

Saving on Employers’ NI - £1,283 x 19%

£181 saving

Benefit in Kind 

£30,000 x 23%

£6,900 cash equivalent

Basic rate tax at 20%

£1,380 to pay personally

Class 1a National Insurance

£952 to pay by the company.

Total to pay

Total saved

Real Cost/Saving

£2,332

£1,027

£1,305 Cost

The Hybrid - TOYOTA Prius Plug-In 1.8 VVT-i Business Edition Plus Auto

Petrol Hybrid. 28g/km CO2 Emissions.

Corporation Tax 

Capital Allowance - £30,000 x 100%

£30,000

Corporation Tax - £30,000 x 19%

£5,700

Saving on Employers’ NI - £622 x 19%

£118 saving

Benefit in Kind 

£30,000 x 16%

£4,800 cash equivalent

Basic rate tax at 20%

£960 to pay personally

Class 1a National Insurance

£662 to pay by the company.

Total to pay

Total saved

Real Cost/Saving

£1,622

£1,140*

£482 Cost

I’ve divided the Corporation Tax for this one by 5. For each of the previous examples, you would get the same benefit for each year that you owned the car (up to the maximum amount), whereas with this one you only get that saving once.

Scores on the doors

Car

Cost vs buying personally

The Merc

£2,558

The Ford

£1,305

The Toyota (Hybrid)

£482

What about that pickup?

No, not a dodgy line you’d get on Tinder. If you’ve been paying attention, you’ll notice that I asked you to get a price from Barry for a pickup truck. Sounds a bit mad, given that I’ve been going on about benefits in kind doesn’t it? Well you see, as long as it has a payload of at least one tonne, a pickup is classed as a commercial vehicle. As a result, it is taxed completely differently.

Commercial vehicles are eligible for 100% Capital Allowances against Corporation Tax (the same as new cars < 50g/km CO2 emissions), but - pay attention, this is important - they do not generate a Benefit in Kind charge if they are solely for business use.

You may also remember from above, that if it’s solely for business use then VAT can also be reclaimed on the price paid on the vehicle. Another tick for commercial vehicles.

So if you pay £30,000 for a pickup you’ll save £5,700 in the first year. No complicated calculations required.

Conclusion

Hopefully you’ll take from the above that buying a car through your limited company, in most circumstances, is going to cost you more in tax personally than it saves the company, even though the cost does diminish as the emissions reduce. This is assuming that you, as the director, are the one paying the benefit in kind.

There are alternatives available, like buying a commercial vehicle to claim 100% tax and VAT relief. If you’d rather have that dream car, we always recommend buying it personally and claiming back mileage for business journeys.

Either way, you should definitely haggle with Barry. He'll love it.

The Alternative

For the first 10,000 miles you can claim 45p/mile from the company, reducing to 25p/mile after that. Not only can you withdraw that money from the company without paying any personal tax, the company saves Corporation Tax on the mileage amount at 19%. Who doesn’t love a double tax saving?

For larger businesses - or even sometimes for small companies with employees - company cars can be an efficient way to save tax. But for owner managed businesses it's often just not worth it. Why not check out this article for some better ideas to save you and your company tax?

Clare DohertyThis Guide was written by Clare Doherty, Small Business Tax Expert at TaxKings Accountants. Clare now writes for Listentotaxman.com on matters relating to small business tax. She is very happy to speak with Listentotaxman visitors to discuss any tax questions they might have – just visit the TaxKings Accountants website for contact details.

This article was published in our Guides section on 29/07/2019.

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