As a business owner, when you are deciding whether to buy a new car, as well as choosing what make and model you would like, you also need to consider;
- whether you buy the vehicle personally or through your business, and
- whether you buy it outright or use finance of some sort
The tax treatment of each option varies considerably and it is important that these differences are taken into account in your decision making.
There are three ways in which a car can be acquired. These options are set out below, along with details of the tax implications:
Option 1: Loan/hire purchase (HP or PCP) or outright purchase by the business
If a business buys the car outright or finances it under a loan/hire purchase agreement, the tax relief is given as follows:
- All the running costs of the car (fuel, insurance, repairs etc.) can be paid for by the business and are tax-deductible in calculating taxable profit;
- Taxable profit can be reduced by claiming capital allowances on the initial purchase price of the car. Capital allowances are a form of tax-approved depreciation and the rate of deduction can fall between 6% and 100% depending on the emissions of the car and whether it is new or second-hand.
If you operate as a limited company and use the car for private purposes, a taxable benefit will arise – known as a benefit in kind (BIK). The BIK is calculated based on the car’s list price and CO2 emissions and currently ranges from 1% to 37% of list price, although these rates tend to change each tax year. The Government aims to encourage business owners into buying electric cars by offering generous tax relief on the initial purchase price and low BIK rates.
If you operate as an unincorporated business, a private use adjustment will be applied to the car’s purchase and running costs, meaning that only the business proportion of the costs is deductible for tax.
Option 2: Car lease by the business
The tax implications are very similar to Option 1. However, instead of capital allowances on the purchase price, the business receives tax relief on the lease costs i.e. the monthly payments made.
It should be noted that relief is restricted on the leasing costs of high-emission cars. A flat rate disallowance of 15% on the leasing cost applies to cars where CO2 emissions exceed 50g/km.
Option 3: Purchase or lease the car personally
In this scenario, you would be responsible for all the running costs of the car, but you can claim back your business mileage. The rate per mile that can be claimed is currently 45p per mile up to 10,000 miles per year and 25p per mile after that. These are the HMRC-approved rates and are not subject to personal income tax. The business can claim tax relief on the amounts reimbursed.
If the business pays you more per mile than the approved rates above, the excess is a benefit in kind, resulting in tax and National Insurance contributions becoming due. Any excess mileage paid would need to be reported annually on form P11D, with the resulting benefit being recorded on and taxed through your personal tax return.
The BIK that can arise on vehicles with even modest emissions often makes a company car look unappealing. There could, however, be a hidden tax cost to personally funding cars. Often it is necessary to extract additional funds from the company in the way of dividends to fund the monthly repayments. In the right circumstances, the BIK can be cheaper than the cost of tax on additional dividends.
Do you have further questions about vehicle purchase options?
If you are considering buying a car in the near future, please get in touch so we can work out which method and car is the most tax-efficient option for you.