Buying a Company Car - What Business Owners Need to Know | Business Advice (2023)

If you are the owner of a limited company and are considering a company car for your employees (even if it's just you), you have a number of purchasing options to consider. Because each has its own tax liability and tax relief implications. Therefore, it is important to understand the options available to you so that you can make the right and most informed decision for you and your business. Benefit-in-Kind (BIK) statistics published by HMRC in July 2021 showed that there were 800,000 company car drivers/20 in 2019, generating approximately £1.75 billion in tax revenue. The number of company car drivers is widely expected to increase over the next year following new company car tax rates, including an initial zero rate for pure electric vehicles in April 2020, so now is a good time to familiarize yourself with what you need when buying a company car Notice. Read on to find out how to buy or lease a company car through a limited company, how to do it in the most tax-efficient way, and 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 providing your employees with a company car may seem like an obvious and exciting purchase, and one of the great perks of the job. but because of youCanbuy a company car,shouldyou? To decide whether buying a company car is right for your business, you should weigh the sales tax implications and possible additional costs before heading to the nearest showroom. The type of vehicle, its CO2 emissions, how it is used, by whom and how it is purchased are all key factors to consider when deciding whether buying a company car is a good idea. Since each of these factors will be specific to each business, there is no single right answer. Instead, you should use the guidelines in this article to work out your exact costs in order to make the right financial decisions for your business.

How will the car be used?

Before you start picking your dream company car from the glossy brochures, it's important to know exactly what it's for. Knowing whether the car is being used for personal or business use will help you understand the in-kind level of taxable income.Private use of company vehiclesIf the employee will use the company car privately, including commuting to and from get off work, then this results in a taxable benefit-in-kind (BIK). The amount of tax owed to HMRC will depend on the new value of the vehicle, and additional tax may also apply if the fuel is paid for by the company but used for personal mileage. If such a BIK is set up, the limited company owner needs to file Form P11D with HMRC annually to enroll for benefits.Use company vehicles for business purposes onlyIf the company supplied the car for business use only, then the business owner can claim a refund of the VAT spent on the car and fuel. You should note that business use alone does not include the daily commute from home to your regular place of work.

How will the car be purchased?

Another important consideration when purchasing a company car is how to pay for it. Just like buying a personal car, business owners have the option of purchasing the car outright or leasing it for a period of time using various financing options. Deciding whether to buy a company car outright will largely depend on the availability of cash reserves and which option is the most attractive when considering the full tax implications of each option, as one option may leave the business in a better financial position than the other .

rent a car

A rental car will mean that the company does not actually own the car and must be returned in good condition, usually within a mileage cap after a period of time. Since the car was never owned, no capital allowance is reimbursed, but the cost of leasing the car is reimbursed as a business expense. Vehicle running costs including taxes and insurance are also deducted when calculating the value of corporate tax owed. The percentage of rental costs that can be claimed as a business expense will depend on the emissions level of the car, as a 15% deduction will be made for a car emitting more than 50g/km of CO2.

• If CO2 emissions exceed 50 g/km, 15% of the rental cost is not available for taxation.
• 100% of the rental cost is reimbursed as an expense if CO2 emissions are below 50g/km.

When reimbursed for company car expenses, you should also know;

• If you finance your car with a hire purchase agreement, only the interest payment can be classified as a business expense.

buy a car directly

Buying a company car outright means it will be classified as a fixed asset and you will be eligible for a tax deduction through capital allowances. This means companies can use vehicle costs to reduce their taxable profits. The amount of capital allowances that can be claimed by HMRC, and strictly administered, is largely dependent on the vehicle's CO2 emissions, with company cars that emit more than 130g/km CO2 receiving less tax relief than lower emitting cars. Carbon dioxide emissions:

• Over 130g/km - 8% of the purchase price can be deducted annually from the annual profit
• Below 130g/km - 18% of the purchase price can be deducted from the annual profit each year
• New cars with CO2 emissions below 50g/km - 100% of the car purchase cost is deductible in the first year.

When reimbursed for company car expenses, you should also know;

• If you take out a business loan to pay for your vehicle, only the interest payment can be classified as a business expense.

More information on benefits in kind

Whether the cars are purchased outright or through financing, company cars create taxable benefits-in-kind for the employees who use them. A benefit-in-kind (BIK) is classified as any non-cash benefit of monetary value that a company provides to its employees. Common BIKs include company cars, gym memberships, and health insurance. Since each allowance has a monetary value, it must be considered taxable income. The amount of BIK tax payable in relation to a company car depends on: the market price of the new car, the CO2 emissions, whether the company also pays private fuel costs and the employee's tax bracket. The in-kind cost of this taxable benefit should be factored into your calculations when deciding whether buying a company car is right for your business. Companies are required to pay further national insurance contributions to BIK at a rate of 13.8%. They are also required to submit form P11D to HMRC annually outlining details of the car and the value of benefits provided to the employee.

Vehicle Type

The type of vehicle purchased through your company will affect the tax benefits you may be entitled to and the additional costs you may incur for choosing a vehicle. Buying a van or truck, for example, means you're exempt from certain fees and restrictions imposed when buying a car, as HMRC allows "negligible" private use of company vans. In the real world, this means employees can drive the van home after using it for business, and the business owner can claim 100% of the vehicle cost instead of splitting it up as you might need to do with a car Personal and commercial use.

Carbon dioxide emissions

Climate change is a big topic, so when it comes to the amount of CO2 emissions cars produce, low-emitting cars will get better tax breaks and operating costs than cars that spew more harmful emissions into the environment. The most attractive tax package will be a 0-2% tax rate on pure electric vehicles from April 2020. The savings can add up quickly if you can get an EV to meet your business's company car needs, compared to 15-37% for petrol and diesel. You can check the emissions and resulting emissions of a proposed company car using the cost ofthis toolFrom HMRC.

Pros and Cons of Buying a Company Car

So, you've considered tax implications, emissions and vehicle type, but are there any other real-world pros and cons you should consider when buying a company car? We highlight a few below.

ownership

As the name implies, company cars are owned by the company, so while employees who use the vehicle don't have to worry about the vehicle depreciating in value over time, it is sometimes a particular concern when selling a vehicle and should be a major concern for businesses. Companies that offer corporate car ownership allowances need to make sure they are on top of the rent or loan payments used to buy the car to prevent financial trouble and the car being impounded.

operating cost

The running costs of a company car are usually borne by the company. This means that maintenance, service and insurance costs do not need to be paid by employees, but these costs do need to be budgeted by the business owner and can add up quickly.

choose

Company cars are often renewed on a regular basis, especially if they are leased. This means employees can drive some of the newest models on the market, which is great for car enthusiasts or those who enjoy the latest technology. If your employees like to choose their own vehicles or have a firm opinion on the type of car they want to drive, you may end up disappointing some people. It often makes economic sense to limit the types of vehicles offered by a company. Cars get the best prices from fleet purchasing companies and of course can make smart decisions about car emissions to reduce the amount of BIK tax due. For example, the Lexus IS emits 137g/km of CO2, which equates to a BIK tax of 32%, which we're sure is far more than driving a premium car feels to some!

Related questions

Company car or car allowance?

When it comes to car benefits, an employer can offer a car allowance or a company car, but the two are very different options with very different tax implications.

• A company car, when the vehicle is issued to an employee for his use, may only cover business use or both business and private use during the period of his employment contract.

• A car allowance is a cash amount added to an employee's salary to enable them to buy or lease a car of their choice, which they can keep even after their employment relationship ends.

The company car is managed by the employer, while the responsibility for all car payments related to car allowances falls on the employee. If the company pays for it, users of the company car will be subject to additional income tax and possibly additional fuel tax, and the company issuing the car will be required to pay a Class 1A NIC for the benefits provided. However, the car allowance will incur additional National Insurance and income tax payments based on the tax bracket the employee falls into as a result of adding the car allowance to their base salary.

Do you need to report company vehicles to HMRC?

Businesses providing company cars need to notify HMRC of:

• They provide employees with a company car
• Company car available for private use
• They no longer pay for the fuel they use in their private cars
• changed company car
• Company car benefits revoked

They are also required to report Class 1A national insurance contributions based on the value of the motor vehicle interest in operation. Companies that need to notify HMRC of their company car can do so online via form P46 or PAYE and payroll software. Individuals can also notify HMRC of the status of their company car through their personal tax account. accessHMRCFor complete information, including deadlines and how to submit the P46 form.

summarize

Buying a car through a limited company is subject to a strict set of rules from HMRC. You should fully research these implications in relation to your business to determine if you will benefit from potentially valuable tax benefits or if you will incur additional costs and buying a company car is not a good investment in the long run choose. The type of vehicle, how it was purchased, emission levels, and the needs of employees in performing their duties can all influence the decision to continue purchasing a company car. In short, there isn't a proper solution for buying a company car. Every company should weigh the pros, cons and costs involved to determine if buying a company car is the right decision for their needs and circumstances. We therefore recommend that you discuss the true tax implications of this decision for your particular business with a qualified accountant who can highlight the issues to ensure you are acting in the most efficient and financially viable manner. In the meantime, you can find out the cost of buying a company car by using this handyCompany car expensesHMRC's calculator.