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 privatelyIf 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 useIf 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.CO2 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.
Pros and cons of buying a company car
So you’ve considered the tax implications, emissions and vehicle type, but are there any other real world pros and cons you should be thinking about when buying a company car? We’ve highlighted a few below.
|Regularly updated car with latest tech||Lack of personal car ownership|
|Chance to reduce BIK payments with lower emission cars||Running costs should also be considered|
A company car is, as its name suggests, owned by the company, so although the employees using the vehicle do not need to worry about the vehicle losing value over time, which can sometimes be a particular concern when it comes to selling the vehicle, this should be something that business owners pay attention to.Companies offering the perk of company car ownership, need to ensure that they are on top of hire payments or loan payments used to buy the car to prevent running into financial difficulty and the cars being seized.
The running costs of a company car are typically covered by the company. This means that maintenance, servicing and insurance costs won’t need to be paid by employees, but these costs do need to be budgeted for by business owners, and can quickly add up.
Often company cars are updated regularly, especially when leased. This means employees could be driving some of the latest models available on the market which is great for car enthusiasts, or those that enjoy the latest tech behind the wheel. If your employees like to choose their own vehicle or have firm opinions on the type of car that they want to drive, then you may end up disappointing some people.It will often make financial sense to put limitations on the type of vehicles offered as company cars to get the best deals from fleet purchasing companies and of course can make wise decisions on car emissions to reduce the amount of BIK tax due. As an example, a Lexus IS has CO2 emissions of 137g/km which would equate to 32% BIK tax which we’re sure could far outweigh the feeling of driving a premium car for some!
Company car or car allowance?
When it comes to car benefits, employers can offer either a car allowance or a company car, but both are very different options, with very different tax implications.
- A company car when a vehicle is issued to an employee for their use, which can cover just business use or business and private use for the duration of their contract of employment.
- A car allowance is a cash amount that is added to an employee’s salary with the intention of enabling them to buy or lease a car of their choosing that they can keep even after employment ends.
Company cars are managed by employers, whereas the responsibility for all car payments relating to car allowances fall to employees. Users of company cars will be open to additional income tax and possibly additional fuel tax too if the company pays for this and the company issuing the car will need to pay Class 1A NICs on the benefit provided.Car allowances however will incur additional National Insurance and Income Tax payments based on the tax bracket the employee falls into as a result of having the car allowance added to their base salary.
Do you need to tell HMRC about a company car?
The business providing the company car is required to inform HMRC that:
- They have provided a company car to its employees
- A company car is made available for private use
- They stop paying for fuel for personal car use
- A company car is replaced
- A company car benefit is withdrawn
They also need to report class 1A national insurance contributions made based on the value of the car benefit in operation. Companies that need to notify HMRC about company cars can do this online via a P46 form or a PAYE and payroll software.Individuals can also notify HMRC of their company car status via their personal tax account. Visit HMRC for full information including deadlines and how to submit a P46 form.
Buying a car through a limited company comes with a rigid set of rules from HMRC. You should fully research the impact of these in relation to your business to determine if you will benefit from the potentially worthwhile tax benefits available or if you will incur additional costs which make buying a company car a poor investment choice in the long run.The vehicle type, how you purchase it, emission levels and the needs of your employees in relation to carrying out their duties will all impact the decision on whether to proceed with buying a company car.Simply put, there is no one fit solution when it comes to buying a company car. Each company should weigh up the pros, cons, and costs involved to determine if buying a company car is the right decision based on their needs and circumstances.As a result, we would recommend talking the decision through with a qualified accountant that can highlight the real tax implications for your specific business to ensure you act in the most efficient and financially viable way possible. In the meantime, you can get an idea of the cost of buying a company car by using this handy company car cost calculator from HMRC.