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This blog will summarise the obvious, and perhaps not so obvious, implications to aid you in making this decision and also to touch on some of the other important points to consider around business travel.
Standard and flat rate VAT
If you buy a car through your company you can reclaim 50% of the VAT paid unless the car is used, and available only for business journeys. This applies to both schemes – standard and flat rate – but demonstrating the car is not available for private use can be time consuming and often challenged by HM Revenue & Customs (HMRC). In addition, if you buy a second-hand car you can only reclaim VAT if this is specifically charged and shown on your invoice.
If you lease a company car, you can usually claim for 50% of the VAT you pay on the lease (up to 100% on servicing and maintenance) provided you are on the standard VAT scheme. If you are on the flat rate scheme, you are unable to claim the VAT.
If you decide to buy or lease the car through your company, the company pays for all the running costs. These costs will reduce the company’s profit (less dividends available) and the corporation tax therefore payable.
If you lease a car through your company that emits over 130g/km, a flat rate disallowance of 15% of the car’s lease payment applies (including VAT), which means no tax relief can be claimed on this proportion of the payment.
The CO2 emissions produced by the car directly affect the percentage at which capital allowances can be claimed on the vehicle expenditure. The value of the car will be added in a special pool and you will be allowed a deduction of 8% – 18% from your profit for corporation tax.
|Description of car||CO2 emissions||Deduction type||Percentage|
|New and unused||75g/km or less (or if an electric car)||First year allowance||100%|
|New and unused||75g/km – 130g/km||Main rate allowances||18%|
|Second hand||130g/km or less||Main rate allowances||18%|
|New or second hand||Above 130g/km||Special rate allowances||8%|
This can be illustrated more clearly in an example:
CO2 emissions: 123g/km (diesel)
List Price: £20,500
Assuming this is a new car, you will be allowed to claim 18% (£20,500 x 18% = £3,690) of the list price each year against corporation tax. This leaves a corporation tax saving of £738 (£3,690 x 20%).
Personal use (Benefit in Kind)
If you use (or simply have a company car available) for personal use then a benefit in kind charge applies to you personally. The benefit in kind is reported on Form P11D each year by your business which also has to pay Class 1A NIC (at 13.8%) on the P11D value.
‘Private use’ includes your journeys between home and work, unless you are travelling to a temporary place of work but as mentioned above, simply having the option to use the car for private journeys is enough to trigger the benefit charge in full.
The value of this benefit in kind will depend on the car’s CO2 emissions and fuel type. It will also depend on when you first acquired the car in the tax year. You will pay personal tax on the benefit which is determined by the CO2 emissions and the list price of the vehicle including any accessories.
The amount of tax you will pay then depends on your highest tax band: 20%, 40% or 45%.
Car fuel benefit
If you also use the business to pay for fuel and use this on private journeys, there is an additional car fuel benefit in kind charge levied on you, which for 2016/17 is calculated by applying the CO2 based car benefit percentage to the car fuel benefit charge multiplier of £22,200. The £22,200 is a fixed amount, regardless of how much fuel has actually been provided to you for private mileage.
Carrying on from the previous example for the tax period 2016/2017:
If you are driving a diesel car with a list price of £20,500 and CO2 emission of 120, the P11D percentage of the vehicle would be 24%.
- Taxable benefit in kind for car: £20,500 x 24% = £4,920
- Taxable benefit on fuel: £22,200 x 24% = £5,328
These benefits will then be calculated using the appropriate tax rate.
|Basic rate at 20%|
|£984 (£4,920 x 20%)||£1,065.60 (£5,328 x 20%)||£2,049.60|
|Higher rate at 40%|
|£1,968 (£4,920 x 40%)||£2,131.20 (£5,328 x 40)||£4,099.20|
|Additional rate @ 45%|
|£2,214 (£4,920 x 45%)||£2,397.60 (£5,328 x 45%)||£4,611.60|
|Employer’s Class 1A NI|
|£678.96 (£4,920 x 45%)||£722.84 (£5,328 x 13.8%)||£1,401.80|
The company will pay class 1A NIC of £679 (£4,920 x 13.8%) on the benefit in kind amount. This is NI on total cash value of the benefit, which is usually the amount it cost you, the employer, to make the benefit available to the director/employee during the tax year.
The class 1A NIC is payable to HMRC by 19th July each year.
HMRC advisory mileage rates at the time of the Budget for employee private mileage reimbursement or employer reimbursement of business mileage in company cars are listed in the table below.
|1400cc or less||11p||9p||8p|
|1401cc – 2000cc||13p||11p||10p|
Summary: buying a car through your limited company
Company cars can represent an excellent business investment as well as an efficient benefit in kind but the considerations are numerous and not without hazards.
What is clear is that higher emission, less efficient vehicles are penalised more heavily from both a company and personal tax perspective. Caution should be shown when considering how to best secure your next vehicle as depending on the circumstances, a company purchase may not always be the best option.
Cobia Accounting can help reduce your tax bills through our range of accounting and taxation services for individuals and small businesses. We’ll help you identify the relief you can claim so your business is compliant and profitable. For a free no obligation consultation, call 01582 390 100 or complete our enquiry form.