Purchasing A Car Through Your Business
Many of my clients are either the sole directors/shareholders of their limited companies or just have one or two fellow directors. Quite often, once the company is set up and running, one of the first questions I’m asked is “Can I buy a car through the company?”. My answer is usually a somewhat unhelpful “Yes, but….”. The following explains where the “but” comes from!
If you are thinking of buying a car, van or motorcycle, you have a choice of purchasing the vehicle personally or through your limited company. You should understand the available options so you can make an informed choice based on the tax liabilities and tax relief available with both.
Whether you buy your vehicle personally or you buy it through your limited company, you will need to know your “qualifying business mileage”.
What counts as business mileage for you depends on your particular circumstances and how you operate your business. You are not allowed to include your normal journey to work, but beyond that you can include any mileage solely and directly related to your business. It does not just have to be travel to customers, a journey to see your accountant would count, as would a trip to purchase materials.
Purchasing a vehicle personally
Regardless of the method used to purchase the vehicle, the initial cost or finance costs are not tax deductible when you acquire a vehicle personally. Additionally, you will not be able to claim tax relief on running costs such as road tax, insurance, fuel and servicing.
You are entitled to claim a tax-free allowance from your company for any qualifying business mileage. The mileage rates below are calculated to include all costs associated with the vehicle, including purchase and running costs.
For a car or van you can charge your company a reimbursement expense of 45p a mile for the first 10,000 business miles that you travel in each tax year and 25p per business mile thereafter. These are HMRC approved rates and are not subject to personal pax. The limited company claims corporation tax relief on the amounts reimbursed.
As an example, for a journey of 100 business miles the limited company pays you 100 x 45p = £45. Your pay no tax on this and the limited company’s taxable profit is reduced by £45. At the current rate of corporation tax (19%) this results in a gross saving of £8.55 to the limited company.
When calculating whether you have exceeded 10,000 business miles, therefore having to use the 25p rate, you need to look at the business mileage done in the 12 months from 6 April to 5 April of each year. The mileage clock starts again at 6 April each year.
The mileage rate for a motorcycle is 24p per mile for all business miles travelled.
If the limited company pays more than the approved mileage rates as shown above, tax and NI will need to be paid on the excess as this will be classed as income. Only excess mileage will be shown on the form P11D, with the relevant tax due being calculated during the preparation of your tax return. Conversely, if the limited company pays less than the approved mileage claim, you can make a Schedule E claim on your tax return for the difference and have this reduce your overall tax bill.
Purchasing a car through your limited company
The tax treatment of the purchase costs depends on how the vehicle is financed. If a loan is taken out to purchase the vehicle or the vehicle is purchased on hire purchase, only the interest payments are an allowable company expense. Your company is also able to claim capital allowances to gain relief for the cost of the vehicle, which reduce the company’s taxable profits.
The capital allowances available for cars is dependent on the CO2 emission levels for 2017/18 and for 2016/17 as follows:
- Vehicles with CO2 emissions of 130g/km or below are entitled to an annual 18% allowance.
- Vehicles with CO2 emissions above 130g/km are entitled to an annual 8% allowance.
- First year allowances for electric cars are available at 100% if CO2 emissions are 75g/km or lower.
If the vehicle is leased so your limited company does not own it, the monthly lease payments can be claimed by your limited company as a business expense. However, there is a flat rate disallowance of 15% of relevant payments which applies only to cars with CO2 emissions above 130g/km. This means 15% of the expense is not allowable for tax purposes.
Your limited company will also pay for the running costs of the vehicle such as insurance and tax. These will be deductible expenses for corporation tax.
Regardless of how the vehicle is purchased, the use, or availability to use the vehicle, will create a taxable benefit in kind on you as an individual. This is calculated as a percentage of the market list price of the car, based on the CO2 emissions. The list price is calculated as the market list price of the car when new, not the price you pay for the car, together with any extras added to the car. Some dealers sell new cars for less than the nationally recognised list price so you should be aware of this when making the purchase. This also applies if you buy a car second-hand, i.e. you will be taxed on the cost of the car when new and not on the second-hand price you paid for it.
There will be an additional benefit in kind if your limited company pays for your private fuel costs. This is calculated as £22,600 for 2017/18 (£22,200 for 2016/17) multiplied by the percentage used to calculate the taxable benefit of the car for which the fuel is provided. The charge does not apply to certain environmentally friendly cars.
Your limited company must then pay additional national insurance on these benefits at a rate of 13.8% for 2016/17 and 2017/18 and a P11D form must be completed. This discloses the car details and the value of the benefit(s). Taxable benefits are treated as income and are therefore included in your total earnings for the tax year. In most instances, this can mean that you are paying tax at 40% on benefits you receive if you are a higher rate taxpayer.
Purchasing a van through your limited company
Vans are classified as plant and machinery for tax purposes. As such they qualify for 100% allowances under the annual investment allowance regime. This means you get a deduction of 100% of the cost to reduce your company’s taxable profits.
The assessable van benefit if it is used regularly for private use is £3,230 in 2017/18 (£3,150 in 2016/17) and the relevant fuel benefit is £610 in 2017/18 (£594 for 2016/17). The van benefit exemption for zero emission vans has now been phased out and represents 20% of the van benefit charge for 2017/18 and 2016/17. Where there is an “insignificant” level of private use HMRC acknowledge there is no benefit arising and these amounts do not apply.
How does this affect me?
As you can see, running a car through your limited company will result in extra paperwork and, if you have purchased the car through your limited company, will inevitably increase your personal tax bill.
If your limited company is paying you a mileage rate, it is important that you retain accurate records of your business mileage. Please remember, as mentioned at the beginning, business mileage does not include your journeys from home to your place of work. Many cloud accounting packages, such as Xero and QuickBooks, now have apps for your mobile phone to help you keep a record of your business mileage.
What is our view?
Historically it can be seen that tax rates on company owned vehicles have increased as successive governments have sought to discourage the practice of company car ownership. There is no reason to suppose that these rates will not continue to rise in the future.
If you are operating a “one man” company, then as the director and 100% shareholder of your own company you are effectively financing the car yourself, so if your own company takes ownership of the car you are not only spending your own money (or the company’s money, which is effectively your money) on purchasing, maintaining and running the vehicle (unlike an employee of a large organisation) but in return you are being taxed heavily for doing so, i.e. you as an employee are paying tax on the benefit-in-kind charges and your company as an employer is paying the Class 1A national insurance charges.
Taking all this into account, our general view is that in most cases you will be better off owning the car privately. You would then charge your business tax free mileage of 45p per mile for the first 10,000 business miles and 25p per business mile thereafter.
As ever, there are a few exceptions to this general rule which might still make it advantageous to own the car through the company:
- If the car is a highly depreciating vehicle, it may pay for the company to own it for a period of six months, following which you can purchase the car from the company for its much reduced market value. In these circumstances the company would bear the substantial loss arising in the short period of ownership, which may well be greater than the tax and Class 1A charges arising.
- If the car costs more than average to maintain and service, tax relief gained by putting the running costs through the company may be greater than the tax and national insurance charges.
- If the car is a “classic car” as defined by HMRC, then special rules apply which may make company car ownership attractive, particularly if the maintenance costs are high.
How can we help you?
If you are thinking of buying a company car for the first time, we have specialised software that will give you a detailed report showing the various options and the tax impact they will have on both you and your limited company.
If you already have a company car, there would be nothing lost in running the details of the car and its related costs through our software to see if you are making best use of the options available to you.
If you would like to do either of these, then please call us on 01869 222830 or email us on