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By Lynne Gowers on 17th August 2018
If you need a vehicle for your business, you can choose whether you purchase it through your limited company or buy it personally and claim fixed mileage costs.
Obviously there are different tax implications and reliefs depending on which you decide so we have created a short guide to help you explore the options and make an informed choice.
If you purchase a car through your limited company, the company can claim Capital Allowances to gain tax relief on the purchase price, which serves to reduce the company’s taxable profit.
The Capital Allowance for cars is dependent on the CO2 emission levels. For 2018-19 the annual allowances are as follows:
The company will also get tax relief on the running costs of the car, such as vehicle tax and insurance. These are deductible expenses for Corporation Tax.
The company can’t normally reclaim the VAT on the cost of a new car, but the VAT on running costs is claimable.
If your company leases a car instead of buying it, the lease payments can be claimed as a business expense. However, for cars with CO2 emissions of more than 110g/km, there is a flat rate disallowance of 15%. That means that 15% of the cost is not tax deductible.
If you lease a car you can usually claim 50% of the VAT where you are standard rate registered for VAT.
It should be noted, where the company enters into a hire purchase agreement, the legal owner of the asset at the end of this term is the company and therefore the capital allowances route as detailed in Option 1 is followed.
Whether the company buys or leases the vehicle, (or owns this at the end of the payment term), its use creates a taxable Benefit in Kind to you (or an any other company employee) as an individual, where the vehicle is available for personal use.
To calculate this charge, you need to multiply the list price of the car by a fixed rate percentage based on CO2 emissions.
There is an additional taxable Benefit in Kind if the company pays for fuel for private use.
Handily, HMRC have done the complicated working out for you with their Company Car and Fuel Benefit Calculator.
It should also be noted hire cars, whilst an allowable business expense for Corporation Tax purposes they do have the same benefit in kind rules as above.
Comparatively, the tax rules around using your own car for work are somewhat simpler.
It is important to say that the initial outlay, or financing costs are not tax deductible when you buy a car yourself. Neither can you claim tax relief on the running costs, including tax, MOT, servicing and insurance.
Instead you can claim a tax-free allowance from your company for business mileage. This is a fixed rate allowance and includes all costs associated with using the vehicle, including the running costs.
For a car (or van), HMRC’s approved rate is 45p per mile for the first 10,000 business miles in the tax year and 25p per mile thereafter. The limited company claims Corporation Tax relief on the amount it reimburses to you.
The company can also claim VAT on the fuel element of the mileage reimbursed, where you are registered for standard rate VAT and fuel receipts are collated to cover the amount claimed.
Your employer may provide you with a company car allowance, you use these funds as you wish to go toward any purchase or running costs for your own vehicle.
This is effectively additional cash and therefore tax and national insurance contributions would be deductible for yourself and the employer using the normal PAYE rules via the company payroll.
As you own the vehicle, you can also claim mileage from the company, as detailed in Option 3.
Please note, should your company not organise, pay for and effectively own the vehicle / lease, you will be taxed for any reimbursement in the same way as the company car allowance. If therefore the benefit rules are to apply, do ensure the correct ownership and payment methods are established when entering into such agreements.
This should however be carefully considered in line with the remuneration package you receive.
Ownership and payment methods for a vehicle should be established from the outset, as who owns the car triggers the tax treatment.
If you reimburse employees for business travel in their company cars, you use Advisory Fuel Rates (AFR).
The rates are calculated based on fuel prices and adjusted miles per gallon figures, so they vary according to fuel type and engine size.
The Advisory Fuel Rates from 1st June 2018 can be found here
These rates should also be used when the company requires an employee to repay the cost of fuel used for private mileage.
These can be reimbursed at the approved mileage and fuel rates found here
If you are sole trader, there is no distinction between you and the business, so you cannot own a “company car” as such – you will always own the vehicle.
However you can still claim tax relief on your business travel. There are two methods of calculating how much you can claim:
Keep a log of your business mileage over the tax year then apply HMRC’s approved mileage rates to the total.
The total is entered into your sole trader accounts as a business expenses, so that it reduces your profit and therefore the amount you pay tax on when you do your self-assessment.
Proportion of actual costs
Using this method you start with your total mileage for the tax year, both business and private.
You then work out your business mileage as a proportion. So if a quarter of your business journeys are for business purposes, 25% is the business proportion of the car’s use.
You then apply this percentage to the actual costs of running the vehicle. This includes fuel, insurance, tax. MOT, servicing and repairs.
The figure you enter in your accounts is the proportion of total actual costs you have incurred in keeping that vehicle on the road.
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