I hope you’re having a good morning so far. Today I’m going to talk about company cars.
How significant could your car be in reducing your tax bill?
Well, the answer to this one depends on two main factors:
- Your trading structure (Sole trader or Limited company)
- The amount of business versus personal use
Let’s take a look at trading structure first.
For Sole traders
For a sole trader there is no such thing as a “company car” because there is no legal difference between you and your business, however tax relief can be claimed that reflects the amount your car is used for your business.
This can be done using one of two methods;
- The simplified expenses method – this can only be used if you have never claimed any capital allowances on that car. For this method, you would add up your business mileage for the tax year and then apply HMRC’s tax-free mileage allowance rate per mile to it. This is currently 45p per mile for the first 10,000 miles for cars and vans and 25p per mile thereafter. The idea is that this rate covers the purchase, running and repair costs proportionate to the amount the vehicle is used for business use.
Example – If your annual mileage is 18,000 but 14,000 of that is business mileage, the calculation would be as follows;-10,000 x 45p plus 4,000 x 25p
NB. If your business has premises away from your home, journeys to and from your place of work are not classed as business mileage, however, if you were travelling directly from home to see a client, this type of journey could be included.The figure you arrive at can then be put into your accounts as a day to day running cost of the business thus reducing the profit upon which you will pay tax.
- Actual cost method – this method must be used if you have claimed or wish to claim a capital allowance for the vehicle, or if you believe that your car costs more than 45p per mile to run. To use this method, you add up your total mileage, business and private, and then work out your business mileage as a percentage of the total and then apply the business proportion to your vehicle expense.
Example If you estimate that 30% of your annual mileage is business mileage, and your petrol/diesel bills amount to £2000 per year, the calculation would be as follows;-£2000 x 30% = £600. Apply this calculation to each running cost and then include these costs in your accounts as day to day running costs of your vehicle for business purposes.
You can claim allowable business expenses for:
- Vehicle insurance
- Repairs and servicing
- Hire charges
- Vehicle licence fees
- Breakdown cover
You cannot claim for
- non-business driving or travel costs
- travel between home and work
NB. If you are using this method, you will also be able to claim capital allowance See the “Capital Allowances” section under “Limited Company”
For Limited Company directors
If you are the director of a limited company then you do have the option of a “company car”, because you and your business are separate legal entities. However, the decision whether to buy your car personally or through the business is a complex one and even after the two main factors above have been considered, there still isn’t really a “one size fits all” solution. There are a number of other factors to consider, the influence of which may differ from person to person or business to business.
Buy and own the car personally
- The business can claim tax relief on your business mileage – Using the mileage method described above for sole traders, you would calculate an “expense claim” and submit to the company. The company can make a tax-free payment to reimburse you and put the cost through the accounts as a day to day running cost with the effect of reducing profit upon which the company will pay corporation tax.
The business buys and owns the car
- The business can claim tax relief on all the vehicle’s running costs – Using the actual cost method mentioned above, the business can put these costs through the company accounts as day to day running costs with the effect of reducing profit and as a result, the corporation tax bill.
- Capital allowances can also be claimed on the purchase cost of the vehicle
- Tax relief can also be claimed on interest payments if a loan or hire purchase agreement is used to finance the purchase of the car
If you intend to use the vehicle purely for business use then buying it through the business is a no-brainer. HOWEVER, if you intend to use it privately as well, including in most cases just journeys to and from home to work, HMRC throws a fairly significant spanner into the works!
- Liability for company car tax personally – This is a “benefit in kind” tax that covers the benefit you derive from the use of a vehicle that you have not purchased or pay to run personally. If the company paid you a car allowance to buy and run a car, you would pay income tax on that allowance, therefore, the benefit in kind tax ensures that the company car driver is not treated more favourably from a tax perspective
- The business will need to pay Employer’s National Insurance – This needs to be paid in respect of the cost to the business to provide you with the car, again mirroring what would happen if the business were to pay you additional income to pay for a car.
We hope you have found this email interesting and informative. If you have any questions or would like further information about company cars, please contact Trinity on 02475 185286 for a Free Consultation or complete our online form.
Look out for tomorrow’s tip all about tax-efficient gifts you can give to you and your staff.