Buying a car through your limited company seems like a great idea as you can claim relief for the purchase but other finance options may be more tax-efficient.
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One of the first things we are usually asked by new clients is if they can buy a car through their limited company. The answer is usually yes but this isn’t always the most tax-efficient option for running a company car.
While you can claim expenses and mileage as business-related expenses, you still need the capital to pay these running costs upfront – so you may not be able to afford that Aston Martin or Ferrari you’ve had your eye on!
Our guide to buying a car through your limited company
This guide will focus on five keys areas, which you can skip to by clicking the links below.
- Determining business or personal use
- Selecting the most tax-efficient payment method
- Calculating Benefit-in-kind for company car drivers
- What you can claim for mileage and expenses
- Company car tax examples and further resources
Please note, while the examples and information we’ve provided will be accurate for most companies, we recommend discussing your purchase with an accountant before signing any contracts.
If you’d like to view a condensed version of this guide, we’ve prepared an infographic that introduces the basic factors you need to consider before making your decision.
1. Determining business or personal use
The first decision you need to make when buying a company car is whether it will be used solely for business journeys or for both business and personal journeys.
This is the most important decision you need to make when buying a car through your company as your choice has implications for how much tax you and your company will need to pay.
If you plan to use the car for business journeys only, it will not incur any Benefit-in-kind (BIK) tax, provided the car remains on company premises overnight and over the weekend.
If the company car is used for any personal journeys, including commuting to and from your place of work, this will incur BIK tax. This means both you and your company will be liable to pay tax for the use of this company car.
Tax implications – VAT schemes
If you buy a car through your company you can reclaim 50% of the VAT paid on the purchase. This tax relief is not available if you buy a used car or the car will only be used 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 is 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 50% of the VAT you pay on the lease (and 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 a car through your company, the company pays for all the running costs. This will reduce the company’s profit (less dividends available) and the corporation tax the company needs to pay.
2. Selecting the most tax-efficient payment method
While it would be easy to say that one method of financing a company car is better than another, we know there is no one-size-fits-all solution and company finances are often more complex than they first appear.
The main consideration when selecting your preferred method for financing a company car is whether you would like the company to own the car. There are three main types of finance available to company directors, which offer varying levels of ownership.
From an accounting perspective, an outright purchase of a company car is not ideal as you would need to account for a large purchase on your balance sheet by treating it as an asset. This means the asset value would need to be depreciated each year and you would be able to claim less relief for each consecutive year.
Depreciation is often the main concern for those who buy cars when they are new. According to the AA, a new car may lose up to 40% of its value by the end of the first year, although this could be at little as 10% if you choose a car that is more desirable and keep your mileage under 10,000 miles per year.
While purchasing a company car may not be the most tax-efficient idea, it may be worth considering if you:
- don’t want to spread car payments over a number of years;
- the vehicle you are purchasing would be expensive to finance; or
- you have the capital for the vehicle purchase available now.
When it comes to a one-off purchase of a company car, this option may be more suitable in the long run if you do not intend to purchase another car in three or four years time.
Eligibility for tax relief for a one-off purchase
If you purchase a brand-new car through your company that emits up to 75g/km or is powered by an electric engine, you will be able to claim 100% of the purchase cost.
If the vehicle is used solely for business and depending on the VAT scheme your company operates on, you may also be eligible to claim the VAT amount for the purchase of the company car.
Personal Car Purchase
If you would like the option of owning a company car but don’t have much capital or want to spread payment over a number of years, a Personal Car Purchase (PCP) would be a more suitable option for you.
When you purchase a company car using this finance method, you pay a deposit upfront, make monthly payments over the contract term and either make a balloon payment (the agreed final sum) to purchase the car or move the finance agreement to a new car.
This option is great if you want to switch to a new car every few years or if you just want to keep your monthly payments low.
Please note, if you are purchasing the car second-hand, this significantly reduces the amount of relief you can claim.
Eligibility for tax relief for a Personal Car Purchase
As the car purchased for your company on the PCP scheme is likely to be brand-new, if this emits up to 75g/km or is powered by an electric engine, you will be able to claim 100% of the deposit paid for the car. You will also be able to claim the full value of monthly payments and the balloon payment as business-related expenses.
Business Car Hire (BCH)
If you do not wish to own a company car and would like to keep your monthly payments to a minimum, a Business Car Hire (BCH) scheme would be the best option for you. Personal Car Hire (PCH) schemes are also available, however, if you purchase a car on a PCH scheme, you will be unable to claim the VAT as this would be classed as a private expense.
As the company car is being hired rather than purchased on this scheme, the deposit or total amount paid by your company is likely to be lower than financing the car through a PCP scheme.
Eligibility for tax relief for Business Car Hire
As the car purchased for your company on the BCH scheme is likely to be brand-new, if this emits up to 75g/km or is powered by an electric engine, you will be able to claim 100% of the deposit paid for the car. You will also be able to claim the full value of monthly payments and the balloon payment as business-related expenses.
Before you select your payment method, it’s worth understanding what allowances you’ll be eligible to claim. We recommend claiming capital allowances as this will reduce the amount of Corporation Tax your company is liable for at year end.
The CO2 emissions produced by the car directly affect the percentage at which capital allowances can be claimed on vehicle expenditure. When you register the company car with HMRC, 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.
Capital allowances can be claimed at the below rates.
|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%|
Significant incentives are available for selecting a more efficient car, however, it’s worth bearing in mind you can only claim the full amount of relief – whether this is the purchase price or deposit amount – for the year the vehicle is purchased.
The next factor you’ll want to take into account when deciding whether to buy a company car is if it will be used for any personal journeys.
3. Calculating Benefit-in-kind for company car drivers
If your company car is used solely for business and stays on company premises overnight and at the weekends, you are not required to pay BIK tax.
If the company car is used for any personal journeys – even just commuting to work and back – the employee receiving the car as a benefit is liable to pay BIK tax.
Before you can calculate what the Benefit-in-kind tax will be for a company car, you need to consider all of the drivers who will have access to it. Whether this will just be company employees or if your partner will be driving the car, tax implications will be different.
For further information on how BIK will impact on personal or business use (and specific examples), select one of the options below.
BIK for personal journeys
BIK for fuel use
The degree to which the car is used for personal journeys will also have implications on the amounts you can claim for mileage and expenses.
4. What you can claim for mileage and expenses
Part of the appeal of purchasing a company car is that you can claim relief for business-related expenses including mileage and other running costs.
A maximum of 45p per mile can be claimed to cover the first 10,000 miles (per annum). If mileage exceed this limit, it can be claimed at a rate of 25p per mile.
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|
If the company pays for the fuel the car uses, the employee will also have to pay BIK tax on the fuel they have used for personal journeys and the company will need to make a national insurance contribution.
5. Company car tax examples and further resources
If you’re reviewing what the tax implications will be on making a company car purchase, you’ve probably identified some cars you like the look of already.
We don’t need to tell you that budget, fuel economy and even the brand of car you choose should all be taken into account when making your decision.
With this in mind, we have prepared some examples of the tax you could expect to pay on popular company cars and some additional resources you may find helpful.
Company car tax examples
Company car decision resources
As you will have gathered from this guide, calculating tax implications on the purchase or finance of a company car is a more complex activity than it may first appear.
Financing a company car
When it comes time to buy a company car, chances are your ideas may have changed as you consider the tax implications this will have for you and your company. As a general rule, the most tax-efficient purchase will be a car with low CO2 emissions, low BIK rates and a lower level of specification.
There may, of course, be exceptions to this rule. For example, if you run a luxury car-hire business or need to finance a less efficient vehicle for your construction company, the most tax-efficient treatment of your purchase will look different to this.
It’s important to get the right advice before you sign any contracts, regardless of whether you decide to purchase or lease a company car. Our accountants are experienced in tax and financial planning to ensure the decision you make is the most tax-efficient one for your company.
If you haven’t already set up your limited company, we’ll help you do this and make sure it is run as tax-efficient as possible while still being profitable and compliant. You’ll take home more money by taking advantage of the tax relief you can claim for business-related expenses, whether they be for a company car, laptop or even accounting fees.
Cobia Accounting specialises in fixed rate monthly accounting and tax planning services for individuals and small businesses. To find out more, contact us today.