Is it tax efficient to purchase or lease a car
through the business?
This is a complex area and there are several factors to consider. But as a general rule, unless the car has very low CO2 emissions or can be classed as 100% business, it is unlikely that it would be beneficial running the car through the business. However this is not always the case and it does depend on the Individual's circumstances. So let's discuss this in more detail and look at some of the issues in a worked example. Below are the relevant areas that generally need to be considered:
- Type of vehicle and CO2 emissions
- Lease or buy
- Annual mileage
- Taxation both personal and company
- Availability of car full or part-time
- Paying something towards its cost
Let's firstly look at purchasing a car
The first point to make is that you can claim a taxable expense each year. The amount you can claim depends on the CO2 emissions. The expense is referred to as the WDA (writing down allowance). You cannot claim the VAT and cars do not qualify for annual investment allowance (AIA).
As an example if you purchase a vehicle for £25,000 with CO2 emissions of 100g/km you can claim the rate of 18%. Therefore the tax relief you can claim would be £25,000 x 18% = £4,500. Applying the corporation tax rate at 20% this would reduce your company's annual tax bill by £900.
However, the car will be taxed as a BIK at 19% of the P11d value. Assuming 40% tax bracket you would pay 19% x 25,000 x 40%. That gives a personal tax liability of £1,900. So although you saved £900 in corporation tax you ended up paying £1,900 in personal tax.
Secondly leasing a car
If your company leases a car, it can claim corporation tax relief on the full annual lease payment and additionally it can claim 50% of the VAT on the lease payments.
If the company leases the same £25,000 car as above at say £400/month plus VAT the company can claim back 50% of the VAT which is £4,800 x 20% x 50% = £480. The expense for corporation tax is £4,800. Applying the corporation tax at 20% this would reduce your company's annual tax bill by £960.
However, the car will be taxed as a BIK at 19% of the P11d value. Assuming 40% tax bracket you would pay 19% x £25,000 x 40%. That gives a personal tax liability of £1,900. So although you saved £960 in corporation tax you ended up paying £1,900 in personal tax.
Thirdly paying the fuel
HMRC views fuel in the same way as it does a company car and treats it the same as a BIK. The company can reclaim the VAT on all fuel and claim an expense for corporation tax relief on the net cost of the fuel.
So let's assume that you spend £6,000 a year on fuel. We will use the same car details as the previous example. You would be able to reclaim £1,000 in VAT and put through an expense of £5,000. This would reduce your tax bill by £5,000 x 20% = £1,000.
However, the car will be taxed as a BIK at 19% of the fuel benefit which for 2017/18 tax year is fixed at £22,600. Assuming 40% tax bracket you would pay 19% x £22,600 x 40%. That gives a personal tax liability of £1,718. So although you saved £1,000 in corporation tax you ended up paying £1,718 in personal tax.
- Generally you can claim 100% business use on pool cars provided they are used only for business and are never assigned to an individual. The car would need to be parked at the office premises in the evenings unless away on a business trip.
- For low emission cars it may be beneficial to run the car through the business.
- If you do a lot of business miles it may be more beneficial to claim the fuel through the company.
- It can be more tax efficient to purchase the car yourself and charge the company for business mileage. HMRC allowable rates are detailed below.
- It comes down to specifics about mileage, CO2 emissions and individual circumstances that will determine the most tax efficient solution.
- Always consult an expert and work out the tax issues. Simple calculations before you make the decision could save thousands of pounds.
|Tax: rates per business mile|
|Type Of Vehicle||First 10,000 miles||Above 10,000 miles|
|Cars & Vans||45p||25p|
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