Company cars: are they still worth buying through your limited company?
Posted on 14th January 2019 at 09:30
Should you buy a car through your limited company? Is it better from a tax saving point of view? Or should you just stick to a personal purchase and claim business mileage expenses?
Once upon a time, company cars were incredibly appealing for business owners.
The allure of a pristine Mercedes Benz or BMW would often be too tempting to resist, and buying a car through the limited company was a regular move made to save on tax payments.
But is this still the case in 2019?
Back in April 2002, new legislation surrounding company car taxation came into practice. Company car tax was calculated on the basis of the car’s CO2 emissions, as well as the car’s listing price when brand new. The new taxation laws were brought in by the government in order to encourage companies to provide more environmentally friendly vehicles.
Fast forward sixteen years to July 2018, when statistics were published by HMRC showing a 2% drop from the previous year in drivers paying tax on benefits in kind (BIK). The figure is expected to continue to drop as business owners become more tax-savvy and environmentally conscious.
Is it tax efficient to buy a company car?
Simply put, if you have a company car for any kind of private use, including commuting to and from work, you’ll pay a tax called ‘benefit in kind’. If you also buy fuel through the company, you are charged separately for this in addition to your BIK company car tax payment.
The amount of tax you pay on your company car is determined by various factors including the manufacturer’s list price of the car and the fuel required to keep it running, as well as the personal tax rate you are on. There is a 4% surcharge on diesel vehicles, owing to their significantly higher carbon dioxide output.
You benefit from lower tax payments on the company car if you only have it part-time, you pay something towards the car, or if it is a low emission vehicle.
Who technically owns the car?
As the director of a limited company, you need to decide who owns the car – you or the company. We can help you make this decision, as you will need to carefully consider various tax implications, such as the size of the car and its running costs.
If you decide that buying through your limited company is the right move for you, you could potentially claim capital allowances on the cost of buying the car. However, the fact that you would need to put the day-to-day running costs of the car through the company’s accounts means that the company’s profit decreases. This does mean that the company’s corporation tax bill would be reduced, but you would personally have to foot the bill for the BIK tax.
Owning the car as a personal asset may be a simpler option, in some cases. Like a sole trader, you would claim expenses back on journeys made for business purposes. To do this, you would add up your business mileage for the tax year, and then apply the rate set by HMRC per mile to that.
However, this method may not be suitable for all vehicles, as certain cars are significantly more expensive to run than the HMRC rate per mile (which is currently 45p, decreasing to 25p once your business travel reaches 10,000 miles). These rates have not changed in years, so it is likely that they may not cover the fuel and running of more expensive models.
So, what is actually causing the steady decline in the purchase of company cars?
As the business world becomes increasingly digital, people in roles that traditionally required lots of travel, such as sales people, are now able to carry out the majority of their roles entirely from their computer, negating the need to travel up and down the country.
Arguably, one of the greatest changes in attitude towards company cars has come from our increasing awareness surrounding the environmental impact of regularly using a petrol or diesel car.
HMRC is recognising the changing attitudes limited company owners are having towards company cars, and this is reflected in taxation legislation. Salary sacrifice exemptions for ultra-low emission vehicles (ULEVs), vehicles that emit less than 75g of carbon dioxide per kilometre travelled, make electric and hybrid-electric vehicles an attractive option to employers providing company car schemes.
And there is currently a plug-in grant that enables you to obtain up to £3,500 off the list price when purchasing eligible electric cars. See details direct on HMRC's notice here (correct at Oct 2018). The details on this are updated regularly, so this blog will quickly be out-of-date - so always get in touch with us to discuss the current options.
However, ULEVs can be fairly pricey, and there is currently only a limited amount of such vehicles on the market, which is less appealing for drivers who want more choice of vehicle.
So what’s the verdict? Great perk? Or great cost?
Generally, company cars are not worth the cost anymore, and in most cases, we advise against them - unless you are looking at a ULEV.
However, there are some good perks of a company car scheme. In most schemes, the cars you can purchase through your limited company are brand new and new models come in every three or four years, which is a particularly attractive perk. If you have employees, providing a car to them can be an alluring benefit to them.
There is a flip side though, and it’s our opinion that, in general, company cars are often a greater cost than benefit. BIK tax rates are becoming more and more expensive, particularly for high-value vehicles. The tax rates increase even more when you buy fuel through the company.
Where can I get more help?
In the grand scheme of things, company car taxation is far from simple, and there are a huge number of variables to consider.
Nicola J Sorrell -
Founder | Xero Champion | IR35 Expert
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