Tax and the Company Car

14 February 2011

One of the most frequently asked questions we receive is in relation to the use of cars for business purposes and how this will affect the tax liability.

Here, we will look at how tax relief works on the purchase of a car for both the self employed and company director and compare this to the option of  leasing. At the outset, we should make the point that the amount of tax relief for cars is now tightly linked to the CO2 emission of the car. This is the case regardless of whether you buy or lease.

Buying a car

If you decide to purchase a car for your business, then a proportion of this will be available for tax relief. This tax deduction is known as a capital allowance. 

Under recent changes to tax legislation, those vehicles with a CO2 rating of 160g/km or less will attract a capital allowance on a reducing balance basis of 20%. 

Vehicles with higher emissions attract a reduced capital allowance of 10%. This means you get less tax relief given and it is given over a longer time period. 

Vehicles with an emission of 110g/km or less attract 100% capital allowance in the year of acquisition until 2013 provided the vehicle is new. 

Even if you are VAT registered, you cannot claim VAT on the purchase of the car. This is only possible for vans. 

If you are a company director, you need to be aware that if you buy a car through the company, you will be liable to a P11D benefit in kind. Again, the actual charge is determined by the CO2 emission with cars of 125g/km (from 06/04/11) or less attracting a charge of 15% of the list price of the car (regardless of whether it is new or not). 

All of this means that the most tax effective way for a company director to fund a car through their limited company is to buy a car with an emission of 110g/km as 100% write off of the cost is allowed and it produces the lowest benefit in kind charge. 

This is an attractive option for directors who want to purchase second cars for members of their family. There is no restriction on the number of cars that a director can purchase. 

For sole traders, the capital allowance available will be rata’d based on the split between private and business use.

Another alternative

If you don’t want to put the cost of the vehicle and the running costs through the business, the more straight forward option is to record your business mileage and then claim 45 pence per mile for the first 10,000 miles and 25 pence thereafter. 

Whether this produces a higher cost and therefore a lower tax bill than the other method will depend on the type/age of car and how you drive it. 

Your accountant will be able to advise which method is more beneficial to you. Once you choose a method, you have to apply this each year on a consistent basis until you change the car.

Leasing a car

Provided the car is under 160g/km CO2, then you will be able to offset the entire payment for tax purposes. 

For sole traders, this allowable amount would then be pro-rat’d down for the business element only based on the proportion of business miles to total miles. 

For VAT registered businesses, under the standard scheme, they are able to claim the following as input VAT on the VAT return : 

• 1.the whole amount of the VAT of each lease payment if the vehicle is used solely for business use. Make sure you can provide evidence to prove there is no private use e.g there is another vehicle that you use for non business purposes
• 2.fifty percent of the VAT if there is some private element – regardless of what that element is.

If the car has emissions of 161g/km CO2 or over then 15% of the lease cost will be disallowed for tax purposes. 

Always check with your car dealer or leasing company what the CO2 emission of your chosen car is before placing your order. If you are looking to replace your car, we recommend Bristol based Lane Pearson Automotive Group. They can help you a buy a new or used car and provide financing. http://www.lanepearson.co.uk/

 Remember that as a company director, a leased car will still be reportable and taxable as a benefit in kind.

 This means you will need to calculate the corporation tax saved on the lease costs against your personal tax bill and employers national insurance on the P11D.

Hiring a Car

 Where there is no company car, there is no benefit in kind arising on a hire car that is used by an employee providing that the car being provided for business travel with only ‘incidental’ private use.According to HMRC guidance, incidental private use is not measured by the actual number of private miles driven, but rather in the proportion of the private element of the journey when viewed as a whole.

A hire vehicle provided for a business journey which is taken home overnight to serve this purpose the following morning will be classed as incidental private use.

 A benefit in kind charge will arise where the vehicle has been used for private purposes over the weekend. The charge will be based on the normal rules of CO2 emissions, apportioned by the actual time used over the tax year.

 Where a hire car is being used say whilst the company car is being repaired, then there is no change to the main benefit in kind where for the company car providing it is not unavailable for a period of 30 days or more. There is no additional benefit arising from the use of a hire car provided it is not significantly better than the company car itself.

A Word About Fuel

Sole traders have more flexibility here as they can buy fuel through the business with the private use element being disallowed when the tax return is prepared.

Company directors as a rule should not buy fuel through the company as this incurs a benefit in kind charge of a staggering £18,000 multiplied by the same percentage as the car benefit based on the CO2 emission for the car.

Fuel can be claimed by directors at the HMRC fuel rates which are based on engine size. These rates are reviewed twice a year so do check the latest official rates here http://www.hmrc.gov.uk/cars/advisory_fuel_current.htm