When deciding to buy a new car as a director of a limited company a commonly asked question is “can I put this through my company?” There is no straightforward answer to this question and the best solution will largely depend on the three following factors:
- Is the car going to be purchased for a mixture of business and personal usage?
- What are the CO2 emissions of the car?
- What is the list price of the vehicle?
Once you know the answers to these questions, you are on your way to calculating the most tax beneficial way of acquiring the car from the options presented in this article.
From a tax perspective, the most beneficial treatment of a new car purchase is as a pool car, however the requirements for a vehicle to be treated in this way are the most stringent. For example, a vehicle cannot qualify as a pool car if there is any private usage element to the car or if the car is kept at residential premises overnight. HMRC provide a more in depth guidance on the legislation surrounding pool cars in the Employment Income Manual Sections 167 and 168, which can be found here.
In theory, the vehicle would not be “your car” and would be available for all employees at the company to use with equal opportunity. If the vehicle does meet the parameters of a pool car, then there is no ‘benefit in kind’ to any member of staff and in turn no Class 1a national insurance which follows this. The cost of the vehicle will also be eligible for capital allowances for corporation tax purposes at a rate dependent on the engine’s CO2 emissions, as well as fuel costs and other expenses relating to this car. If the company is registered for VAT, there is also the ability to reclaim the VAT charged on expenses relating to the pool car.
Buying the vehicle in the company’s name – Electric vehicles
There has been a big push in recent years by the government to try and get more people driving electric cars in the UK. One of the ways they went about promoting this back in the 2020/21 tax year was with the reduction on the benefit in kind rates on fully electric vehicles. From 2022/23 onwards, where a petrol or diesel company car may have a benefit in kind percentage from 15-37%, the benefit in kind charge for electric vehicles in fixed at 2%. To put this into perspective, if an employee who is in the basic rate tax band was provided an electric car with a list price of £50,000 the beneficial value would only be £1,000. This would correlate to a personal tax liability of £200 and a class 1a national insurance charge to the company of £138.
In addition to the much lower tax implications of providing a fully electric company car over a petrol, diesel or hybrid for brand new electric vehicles the company will also receive Annual Investment Allowance (AIA) in the year of purchase at 100% of the vehicle’s net purchase price. If the electric vehicle is second hand or the company has already utilised it’s full annual investment allowance limit for the year (£1 million 2022/23) the company will still receive capital allowances through the writing down allowance at 18% each year.
Buying the vehicle in the company’s name – Non-Electric vehicles
If the vehicle is purchased and registered in the name of a limited company, it would be brought into the company’s accounts as a business asset. This will allow you to claim capital allowances against the company’s corporation tax liability. The tax deductible value is calculated based on the CO2 emissions of the car; if the emissions are under 50g/km then you can claim 18% of the cost included in the “car pool” each year (6% if over 50g/km). Additionally, you will be able to reclaim all business motor expenses relating to the vehicle (e.g. repairs) which can also be offset against your corporation tax bill.
From a VAT perspective, if the vehicle is to be used for a mixture of business and personal usage, the company cannot simply reclaim VAT on all of the vehicle’s fuel costs. The two options available are to either only reclaim VAT on fuel receipts relating to strictly business trips (you will have to maintain detailed mileage records to support these claims) or to reclaim all of the VAT on the fuel and then pay a fuel scale charge. This is based again on the emissions of your vehicle and an online calculator for your VAT fuel scale charge can be found here.
The major disadvantage of purchasing a non-pool car through a limited company is that it will create a ‘benefit in kind’ on both the vehicle and any private fuel element. Again, you will need to know the CO2 emissions of the vehicle as well as the fuel type. This taxable benefit will give rise to an income tax bill on you (the director/employee) personally at your marginal tax rate.
The car benefit is calculated based on the car’s “list price”. This is the value of the vehicle as if it was purchased brand new (including extras), even if the vehicle you are purchasing is second hand or older. This value is multiplied by the “appropriate percentage” as determined by the CO2 emissions of the vehicle. The appropriate percentages for 2022/23 starts at 15% for cars with CO2 emissions between 51-54 g/km and this rises 1% per 5g/km of emissions with a further 4% being added to the rate for diesel cars.
Any applicable private fuel benefit is also calculated at this rate, multiplied by a flat figure of £24,600. This applies where the user is provided with any fuel for private usage, however small a proportion of overall use.
The benefit charges are what put a lot of people off acquiring cars through a limited company especially when looking at how high the benefit charge remains as the car gets older and loses value.
Drawing money out of the company and buying the vehicle personally
Unless you have a director’s loan account balance which the company owes back to you personally, and the company has the cash to pay to you, you will need to either have the resources to acquire the car outright or fund the acquisition by lease or loan. You will then need to reimburse yourself from the company for the upfront outlay and/or instalments by means of additional salary (or possibly dividends if you are a shareholder). Although this will mean that you do not have the ability to claim capital allowances or motor costs on this vehicle against the company’s corporation tax liability, there will be no ‘benefit in kind’ as the vehicle is owned personally by you and so there will not be the personal tax implications that follow this. Additionally, although you cannot reclaim the cost of your motor and fuel expenses or any of the VAT on these costs, you will be able to claim a mileage allowance for all of your business miles travelled. This is calculated at 45p per mile for the first 10,000 business miles and 25p per mile thereafter. The company will be able to claim an element of VAT on this mileage expense. It is important to be able to predict how many business miles you will be driving because the ability to claim this tax free mileage allowance from the company is one of the main factors in determining whether personal ownership will be more beneficial than the company owned car
The treatment of purchasing a van is completely different for both ‘benefit in kind’ and corporation tax purposes, and sometimes a vehicle classed as a van for tax purposes may be acceptable to an employee/director as a company vehicle.
Author: Sam Baldwin, Business Services Manager, Plus Accounting
Any views or opinions represented in this blog are personal, belong solely to the blog owner and do not represent those of Plus Accounting. All content provided on this blog is for informational purposes only. The owner of this blog makes no representations as to the accuracy or completeness of any information on this site or found by following any link on this site
Date Published : 24 October 2019
Last Updated : 31 May 2022