This is one question I get asked very often. This is always an area of interest to HMRC because there will always be a personal element, which will trigger benefit in kind calculations.
This is never a straightforward consideration as there are various dependencies – the cost and emissions of the car, whether the car is new or used, how the car is to be financed and the extent of any business mileage.
When an employer makes a car available to an employee or director, or to a member of his family or household, he will be charged tax on the value of the car as an employment benefit if the car is available for private use.
Should I buy the car privately?
Owning the car privately and using it for business is much simpler than buying through the company.
If you own the car, you would be able to claim from the company the cost of business journeys that you make with the car. This can be claimed in only one of two ways:
- by making a claim for mileage, or
- by making a claim for the actual cost of running the car for business
You cannot make a claim with both methods – you have to choose one method and continue with that method until you change your car.
Mileage covers the cost of fuel, vehicle repairs, insurance, vehicle tax, MOT and wear & tear.
If claiming using the actual cost method, you will need to make a claim for only the proportion that relates to business.
Should I buy the car using the company?
It gets more complex and complicated when looking to buy the car using the company and when the car is available for private use.
In terms of cash flow, you may not have to find money to pay for the car, if the company has sufficient cash. Additionally, you need to consider how the car is going to be purchased:
- Cash purchase
- Hire purchase or other finance
- Leased (more like renting the car)
Regardless of how the car is bought, there are extra costs to you if the company owns the car and these are derived from what HMRC deems as taxable benefits.
Below are some of the tax considerations and implications when the car is available for private use:
Car benefit charge:
There will be a car benefit charge (taxable value) based on the manufacturer’s list price (this is unlikely to be the price paid for a new car as the dealer’s price is typically reduced by discounts or special offers).
In addition, the taxable value is derived based on other factors such as the fuel type, engine capacity, CO2 emissions, capital contributions, amount of time the car is available for use privately, etc.
Based on 2019/2020 tax rates, below is a basic comparison:
If the table is not displayed, please go to https://tinyurl.com/tac-company-taxablevalue to view the comparison.
https://tinyurl.com/tac-company-taxablevalue
Based on the comparison, a car with a list price of £25,000, petrol engine greater than 2001CC and CO2 emissions greater than 100g/km will have a taxable value of £6,500.
As an employee earning below the 20% tax bracket, you can expect to pay additional income tax of £1,300. With earnings above the 40% tax bracket, you can expect to pay additional income tax of £2,600.
The above is for illustration purposes only.
It is assumed that the employer has not provided fuel.
Car fuel benefit:
In addition to the car benefit charge above, there will be a car fuel benefit charge where the employee has benefitted from fuel provided by the employer – that is used fuel privately.
In order to avoid the car fuel benefit charge, a director (or employee) should consider:
- Paying for fuel privately, or
- Reimbursing the employer the cost of private use of fuel (on or before 5 April).
Additional National Insurance Contributions (NIC):
The employer is liable to making additional NIC contributions by way of reporting the benefit on a P11d at the end of the payroll year.
Value Added Tax (VAT):
As the vehicle is available for private use, the VAT paid on purchase cannot be reclaimed.
Corporation Tax:
Where it is an electric car or the CO2 emissions is less than 75g/km, the employer may claim the full cost of the vehicle as a tax-deductible expense (please see further advice).
Other vehicles that do not fall in the above category may qualify for what is called a write down allowance over a number of years.
If the car is purchased as a contract hire, the monthly repayments may be treated as business expense.
Mileage:
Mileage can be claimed on qualifying business journeys at a reduced rate. HMRC publishes and revises these rates every six months. This can be viewed via https://www.gov.uk/government/publications/advisory-fuel-rates/advisory-fuel-rates-from-1-march-2016
In summary
It may be much more simpler buying the car privately and making a claim for mileage at the approved rates (45p per mile for the first 10,000 and 25p thereafter).
As you will see from the above, buying the car through the company can quickly become complex. However, there may be certain benefits accruing from buying the car through the company. These benefits will largely depend on individual and business circumstances.
If you would like to discuss issues arising from this article or to find out more on the applicable tax exemptions, please contact Tobi Lab via hello@thetacuk.com