Should I buy a company car?
We get asked a lot by our clients can I buy a car through my limited company? This is normally a way to ask can I include my car expenses in my company accounts.
I go to a lot of meetings with clients and I need to find a way to include the cost of my petrol or diesel in my accounts. This may be the same for a lot of creative business owners a lot of your time is taking up in meetings and speaking to new clients.
There are a number of ways to include the costs in your accounts these are usually based around taking a mileage allowance for every mile that you travel or buying a car for you or your employees. There are a number of issues to bear in mind for both options.
Mileage
Claiming car mileage is one of the easiest ways to include the costs of running your car through your company. You need to keep a record of the miles that you travelled, the date and the reason for your journey. These miles will need to be shown that you actually did the miles. From the miles on your car and the fuel that you bought it has to be shown that you actually did the miles.
The miles can be claimed as below for a car.
The first 10,000 miles per year at 45p per mile
Any miles after at 25p per mile.
There are mileage rates that you can claim for motorcycles
24p per mile
You can claim mileage rates if you travel by bicycle
20p per mile
If you pay at these levels there are no further tax due on the money, if you pay more than these approved rates tax will be due on the amount that you pay above.
Taxes on Cars
HMRC will almost always assume that if you buy a car through your company that there will be personal use. It is very difficult to prove otherwise. You may stand a chance if the insurance on the car prohibits any personal driving but it will still be hard to prove.
The tax on the car will be paid on a form called a P11d. The P11d will include any benefits in kind that you receive from your company or employer. A benefit in kind is something that you get given or paid by your employer that you need to pay tax on.
Cars used to be one of the most popular benefit in kind, rather than paying extra in wages an employer would provide you with a car and you would save on tax and you would have the used of a car. Anything like this are taxed on the P11d form.
The amount that you pay in tax on the P11d form is based on two main factors - the new list price of the car and the CO2 emissions. Buy an expensive car with high emissions and you will pay a lot of tax.
What can you do to reduce the amount of tax you pay?
One of the ways that you can reduce the amount of tax that you pay on the car is to make a capital contribution to the car price. Any payments that is made towards the purchase of a car will be deducted from the value that tax will be charged at.
The amount that it is reduced by is the lower of the capital contributions made and £5000.
There is another option that if you provide a car to an employee either for a reduction in salary or as an alternative for a cash allowance. You can consider the Optional Remuneration Arrangement rules. Under these rules the amount of cash that is given up can be exchanged for the P11d value if it is higher than using the list price and the CO2 emissions calculation.
What can you do? – don’t leave it to the roll of a dice
You need to be able to see what your future money in your bank account will be. You need to know so that you can be certain that you can pay your bills and not be left short of money. You need to be able to pay your bills, wages and taxes when they are due.
Electric and Hybrid Cars
Electric and Hybrid cars are a way to reduce the amount of tax you pay. Because the CO2 emission are lower on a hybrid and are nil on an electric there is less of an amount of money that is taken to the calculation that you pay tax on.
If the car you buy has a list price of £70000 but the CO2 emissions mean that a percentage of 2% is added to your income. That means £1400 is added to your income that you will pay tax on. If you consider that to either the purchase amount or the leasing cost of the car, there is a taxable saving to be made.
Before you buy the electric or hybrid car it is important first to check the tax rules. Hybrids and Electrics have different CO2 emissions based on how far they can travel on battery before they need to be recharged or switch to the petrol or diesel engine. The reliefs that are currently offered are more than likely going to end soon as the take up of electric cars increases. We will keep you updated when it does.
Vat reclaim on lease payments
Leasing a car may be a good way to be able to get the car that you want. It provides a boost to cashflow because the amounts that you are paying each month are quite small compared to the cost of buying the car for cash. The lease payments over the course of the contract will more than likely be equal to the amount of money that the car will fall in value at the end of the contract.
The lease payments that you pay will have vat on them. Your business will only be able to claim back 50% of this vat in its vat returns. If the lease amount is £500 per month, plus vat of £100. You will be able to claim back £50 of this £100 in your vat return.
Conclusion
The taxes on cars are confusing. If you want to be able to reclaim the expenses that you have travelling to meetings it easier to just do the mileage claim and so long as it is at the approved rates there is no further tax due.
If you want to buy a car the best option open to you is to buy an eco-friendly car. There a reduction on the taxes that you will pay on these cars until the end of the 2023 tax year. After that it is uncertain what will happen.
The UK government has committed to phasing our diesel engines and the uptake of electric cars is increasing. The number of chargers are increasing along with the distance that can be travelled without needing to charge.
Next steps….
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