Buying a company car – what business owners need to know
If you are the owner of a limited company and are thinking about providing company cars for your employees, (even if that’s just you), then you have several purchasing options to consider. As each comes with its own tax liabilities and tax relief implications. It’s therefore important to understand the options available to you so that you can make the right and most informed decision for you and your business.
HMRC’s benefit in kind (BIK) statistics published in July 2021 show that there were 800,000 company car drivers in 2019/20, generating around £1.75 billion of tax payments. Following new company car tax rates, including an initial zero percentage rate for fully electric vehicles in April 2020, it’s widely expected that the numbers of company car drivers will increase for next year, so it’s a great time to get familiar with what you need to be aware of when buying a company car.
Read on to find out how to purchase or lease a company car through a limited company, how to do this in the most tax-efficient way, as well as some of the main positives and negatives to be aware of when buying a company car.
Should you buy a company car?
As a business owner, buying and supplying a company car to your employees can seem like one of those obvious and exciting purchases, and a great perk of the job. But just because you could buy a company car, should you?
To decide if buying a company car is right for your business, you should weigh up the business tax implications and additional costs that you may incur before heading off to the nearest showroom.
The type of vehicle, its CO2 emissions, how it will be used, who it will be used by and how it will be purchased are all key factors to consider when deciding if it’s a good idea to buy a company car. As each of these factors will be specific to every business, there is no single right answer. Instead, you should work out the specific costs to you using the guidelines in this article in order to make the right financial decision for your business.
How will the car be used?
Before you start picking out your dream company car from a glossy brochure, it’s important to know exactly what it will be used for. Knowing whether the car will be used for personal or business use will help you to understand the level of taxable benefit in kind payments due.
Using a company car privately
If employees will be using the company car privately, which includes commuting to and from work, then this creates a taxable benefit in kind (BIK). The amount of tax owed to HMRC will depend on the value of the vehicle when it was new, and there could also be additional taxation if fuel is paid for by the company, but used for personal mileage. If this kind of BIK is set up, then limited company owners will need to submit a P11D form to HMRC annually to register the benefit.
Using a company car solely for business use
If the company car provided is used solely for business use, then business owners can claim back the VAT spent on the car and fuel. You should note that business use only does not include a daily commute from home to a regular place of work.
How will the car be purchased?
Another big consideration when buying a company car is how it will be paid for. Just like a private car purchase, business owners have the option of buying a car outright or using various finance packages to lease a car for a set period of time.
Deciding whether to purchase a company car outright or not will strongly depend on the cash reserves available and which option is most appealing when the full tax implications of each are considered, as one may leave the business financially better off than the other.
Leasing the car
Leasing the car will mean the company doesn’t actually own the vehicle and that it must be returned in a good condition, usually under a mileage cap after a set period of time.
As the car isn’t ever owned, no capital allowances can be claimed, but the cost of leasing the car can be claimed as a business expense. The cost of running the vehicle including tax and insurance will also be deductible expenses when working out the value of corporation tax owed.
The proportion of leasing costs that can be claimed as a business expense will depend on the car’s emission levels, as cars with CO2 emissions over 50g/km are subjected to a 15% disallowance.
15% of the leasing cost is not allowable for tax purposes if CO2 emissions are above 50g/km.
If CO2 emissions are below 50g/km, 100% of the leasing cost can be claimed as an expense.
When it comes to claiming company car expenses, you should also be aware that;
If you finance the car using a hire-purchase agreement, then only the interest payments can be classed as a business expense.
Buying the car outright
Buying a company car outright means that it will be classed as a fixed asset and you will qualify for tax relief through capital allowances. This means that the company can use the cost of the vehicle to reduce it’s taxable profits. The amount of capital allowances that can be claimed and strictly governed by HMRC, and is largely dependent on the vehicle’s CO2 emissions, with company cars that have CO2 emissions of over 130g/km attracting less tax relief than those with lower emissions.
Over 130g/km – 8% of purchase price can be deducted from annual profits each year
Under 130g/km – 18% of the purchase price can be deducted from annual profits each year
New cars with CO2 emissions under 50g/km – 100% of the cost of the car can be deducted in the first year.
When it comes to claiming company car expenses, you should also be aware that;
If you take out a business loan to pay for a vehicle, then only the interest payments can be classed as a company expense.
More about benefits in kind
Regardless of whether the car is purchased outright or via finance, company cars create taxable benefits in kind to the employees using them.
A benefit in kind (BIK) is classed as any non-cash benefit of monetary value provided by a company to its employees. Common BIKs include company cars, gym memberships, and health insurance. As each perk has a monetary value, they must be treated as taxable income.
The amount of BIK tax payable in relation to a company car will depend on; the market list price of the car when new, it’s CO2 emissions, whether the company also pays for private fuel costs, and the employees tax bracket. This cost of this taxable benefit in kind should be factored into your calculations when deciding if buying a company car is right for your business.
Companies are required to pay further National Insurance contributions on BIKs at a rate of 13.8%. They will also need to submit a P11D form to HMRC each year to outline the details of the car and the value of the benefits offered to employees.
The type of vehicle purchased through your company will affect the tax benefits you may be entitled and which additional costs you may incur as a result of your choice of vehicle.
Purchasing a van or a truck for example, will mean that you are freed from some of the limitations imposed when purchasing a car as HMRC permits ‘insignificant’ levels of private use for company vans.
In the real world, this means employees could drive the van home after using it for business use and business owners could claim for 100% of the vehicle cost rather than splitting it out between personal and business use as you might need to do with a car.
Climate change is a big topic, so when it comes to CO2 emissions produced by cars, lower emission cars will attract more favourable tax relief rates and running costs than those sending more harmful emissions into the environment.
The most attractive tax package of all will be the 0-2% percent rate that was introduced for pure electric vehicles from April 2020. Compared to 15-37% for petrol and diesel, the savings could quickly add up, if you can make electric cars work for your business’ company car needs.
You can check the emissions and resulting costs of your proposed company car with this tool from HMRC.