In our latest news item we cover the topic of cars and the most tax efficient way of owning a car if it will be used as part of your business. We covered this topic 18 months ago but since then the taxman has changed the rules. This question often crops up so we hope you find John's answer useful.
Mrs Lawrence asked:
'I need to replace my vehicle because of all the business miles that I am doing and wondered what my options are. Should I:
1. Lease a car through my limited company.
2. Lease purchase a car through my limited company or
3. Buy a car using personal funds and continue to submit mileage claims for the business use.
I am not looking at a cost efficiency saving in the car, I am just trying to find the most convenient route. My ideal scenario would be for the business to manage everything including the petrol usage. I don't feel a need to 'own' a car so maybe the lease option is best? I am looking at a high spec automatic diesel, probably a 4 x 4.
In terms of convenience of ownership and administration there really isn't a difference between owning the car personally and owning in the name of the company. However there is a very big difference in terms of taxation. If you own the car personally you would usually buy it from money drawn from your business (usually by dividend) or from personal savings. You would then reclaim 45p per business mile with those journeys logged on the Expenses Claim form. Once you exceed 10,000 miles in the tax year then your rate reduces to 25p per business mile. Each new tax year you restart from zero miles. All mileage claimed is free from tax and this is the simplest way of running the car.
If the car is owned by the company there are a number of tax implications. Expenses are tax deductible. If you lease purchase or the car you will only be able to claim a small part of the cost each year against your profits as follows;
CO2 emissions of up to 130g/km : 18% allowance of cost pa on a reducing balance basis. So a car costing £30,000 would have an allowance of £5,400 saving tax of £1,080 in year 1 and £4,428 saving tax of £886 in year 2.
CO2 emissions of over 130g/km : 8% allowance of cost pa on a reducing balance basis. So a car costing £30,000 would have an allowance of £2,400 saving tax of £480 in year 1 and £2,208 saving tax of £442 in year 2.
HP interest is claimable. No VAT is reclaimable.
If you lease hire the car you will be charged VAT. If your company is on the Flat Rate VAT scheme you will not be able to reclaim any VAT. If you come out of the Flat Rate VAT scheme you can only reclaim 50% of the VAT charged but you will lose the profit you make currently from the Flat Rate VAT scheme.
Extra taxes are:
1. Personal tax - you will be taxed at your highest tax rate on the car as a benefit in kind. A diesel 4 x 4 could easily attract a benefit of 35% of the retail price of the car every year (even if you bought it second hand or at a discounted price). So a £30,000 car could have a benefit assessed of £10,500 to add to your income each year. If you kept the car for four years you would be taxed at 140% of the manufacturer's retail value even if you had bought the car when it was two years old for a much lower price.
2. If private fuel is also paid for you, you would have another benefit assessed of 35% of £21,100 every year, again taxed at your highest rate of tax.
3. Employers NI - your company will be charged at 13.8% NI on the combined amount of the two benefits above.
4. VAT - the company will also have to pay extra VAT based on the CO2 emission rate if private fuel is supplied. This will vary from £112 for the most efficient cars up to £393 for emissions over 225g/km.
The extra taxes charged are therefore much higher than the tax relief available.
In general our view is that only very environmentally friendly cars work as company cars as they have much lower rates for the benefit in kind charge. Claiming mileage and owning the car personally is therefore very likely to be the best way forward.