Unlike buying a car through your limited company, buying a van can be quite tax effective.
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There will be a tax charge for an employee or director whose employer or company provides a van that is made available for private use. An additional tax charge applies where fuel is provided for private use.
No tax charge is imposed:
- When private use is insignificant or the van is only used privately for commuting.
- For tax years up until 6 April 2015 – provided that the van cannot emit CO2 by being driven.
Payments made for private use
Where the employee makes a payment for private use of the company van, the charge is reduced according to the payment. From 6 April 2014 relief is only given if the payment is made in the tax year in which the benefit is received.
The tax charge is the employee’s rate of tax times the benefit for the year in question.
|Van fuel benefit||£610||£598||£594|
For 2016/17 an employee paying tax at 20% will pay additional tax of £634.00 (£3,170 x 20%) if they drive the employer’s van and are permitted to use the van privately. An extra tax charge of £119.60 will apply if they are provided with fuel by the employer.
The employer will pay Class 1A NICs of 13.8% on the benefit £519.98 ((£3,170+£598) X 13.80%). However, the employer will receive tax relief on that amount depending on the rate of tax it pays (as a company or business).
Examples of private use which incur tax
Practical examples of private use which are considered by HMRC to be insignificant for an employee who uses a van would be:
- Taking an old mattress or other rubbish to the tip;
- Regularly making a slight detour to stop at a newsagent on the way to work;
- Calling at the dentist on the way home.
Examples of private use by an employee which are not regarded by HMRC as insignificant include:
- Using the van to do the supermarket shop each week;
- Taking the van away on holiday;
- Using the van outside of work for social activities.
Input VAT may be reclaimed by a VAT registered business on the purchase price of a van, and output VAT is correspondingly charged on the sale of a van.
A VAT adjustment for the private use of fuel may be required in cases where there is substantial private motoring in a commercial vehicle, although the VAT scale charge does not apply to commercial vehicles.
When claiming expenses related to operating the company van, these should be claimed using receipts for fuel purchased rather than mileage (which you would claim if operating a company car). All related expenses from the company – including MOT, insurance, wear and tear – may be claimed, providing invoices are in the company name and paid directly from the company bank account. This will aid in reducing the company’s corporation tax.
Zero-emissions van benefits
A taxable benefit arises when a zero-emissions van is operated for private use. The benefit is 20% of the rate payable for conventionally fuelled vans (tax year 2016-17).
This will increase annually, as shown below:
|Tax year||Zero-emission van benefit*|
*As a percentage of the rate payable for a conventionally-fuelled van
Advantages of buying or leasing a company van
Buying a van
The general tax advantages for a business using hire purchase compared to leasing are:
- If ownership is a priority (even though the business will not own the vehicle until the final payment after 3 or 4 years) hire purchase is an extremely cost-effective method of borrowing.
- With hire purchase, because the vehicle is classified as an asset, the depreciation of the van can be written off against taxable profits.
- Businesses may be able to claim tax relief on the interest charged across the period of the hire purchase contract.
Leasing a van
Leasing is different to buying, as you won’t technically own the van. You’ll just be renting its services – typically for a monthly fee.
The general tax advantages for a business using leasing (or contract hire) over hire purchase are:
- The monthly payment can be offset against taxable profits, reducing the tax a business pays.
- A vehicle on contract hire is an operating lease classified as “off balance sheet” which has accounting benefits as it improves the financial ratios for a business. With hire purchase the vehicle is treated as an asset as soon as you take possession (even though you won’t own it until the final payment).
- If the business is VAT registered, it can reclaim 100% of the VAT if the van is used exclusively for business or 50% of the finance element of the rentals if the vehicle is used privately.
Starting your own limited company
To take advantage of the tax benefits you can gain purchasing a company van through your business, you will first need to set up a limited company.
Cobia accounting specialise in helping contractors and small businesses reach their full potential by setting up hassle-free limited companies and providing a range of accountancy services.
Talk to us today to find out more.