We are often asked by our clients about the tax implications of buying a vehicle through their business. There are two options open to limited company owners, which we outline below along with the related tax liabilities and relief.
- Buy the car (or van or motorcycle) yourself
When you buy a vehicle personally, the initial costs are not tax deductible and nor can you claim tax relief on running costs such as fuel, servicing, insurance etc. However, you are entitled to claim a tax-free allowance from your company for business mileage. The mileage rates, which are HMRC approved, are 45p per mile for the first 10,000 business miles in each tax year (from 6 April to 5 April), which becomes 25p per mile once this has been met. These rates are also not subject to Personal Tax.
To give you an example, for a journey of 50 business miles, the limited company you work for would pay you:
50 x 45p = £22.50
You do not pay tax on this and the limited company’s taxable profit is reduced by £22.50.
The only difference to this is that the mileage rate for a motorcycle is slightly lower at 24p per mile, no matter how many business miles you travel in a year.
In cases where the limited company pays more than the approved mileage rates, this is classed as income, so tax and National Insurance will need to be paid on the excess. When you or your accountant completes form P11D, it will show only the excess mileage that is paid along with the related tax liability.
- Buy the car through your limited company
How your company is taxed depends on how you finance the cost of the vehicle, its CO2 emission levels and how it is used.
Financing the purchase
If the vehicle is bought on Hire Purchase or through a loan, only the interest payments are an allowable company expense. Your company will also claim Capital Allowances to gain relief for the cost of the vehicle and reduce taxable profit.
The Capital Allowance available for cars depends on the CO2 emission levels for 2018/19 and for 2017/2018 (the Allowance is slightly higher for vans):
- Vehicles with CO2 emissions of 110g/km (2018/19) or 130g/km (2017/18) or below are entitled to an annual 18% allowance.
- Vehicles with CO2 emissions above 110g/km (2018/19) or 130g/km (2017/18) are entitled to an annual 8% allowance.
- First Year Allowances for electric cars are available at 100% if CO2 emissions are 50g/km (2018/19) or 75g/km (2017/18) or lower.
If the vehicle is leased, your limited company can claim the monthly payments as a business expense. However, there is a flat rate disallowance of 15% of relevant payments that applies only to cars with CO2 emissions above 110g/km (2018/19) or 130g/km for 2017/18. This means 15% of the expense is not allowable for tax purposes.
Running costs of the vehicle such as insurance and tax will be paid by the company and these are deductible expenses for Corporation Tax.
Benefit in Kind
For you, as an individual, the use of the vehicle will create a taxable Benefit in Kind. This form of tax relief is based on the CO2 emissions and calculated as a percentage of the market list price of the vehicle. In this case, the list price is the market list price of the car when new, not the price you paid for the car, together with any extras. As some dealers sell new cars for less than the nationally recognised list price, it’s a good idea to be aware of this when purchasing the vehicle.
If your limited company pays your private fuel costs, there will be an additional taxable Benefit in Kind. This is £23,400 in 2018/19 (£22,600 2017/18). The percentage used to calculate the taxable benefit of the car for which the fuel is provided.
Your limited company must pay additional National Insurance on these benefits at a rate of 13.8% for 2018/19 and 2017/18 and complete a P11D form, which discloses the car’s details and value of the benefit(s). As taxable benefits are treated as income, they are included in your total earnings for the tax year. This can mean that you will be paying 40% tax on benefits you receive if you are a higher rate taxpayer.
Vans and motorcycles
Vans and motorcycles are classified as plant and machinery for tax purposes, so they qualify for 100% allowances under the Annual Investment Allowance (AIA). This means you get a deduction for all of the cost to reduce your company’s taxable profits.
If you’d like sound tax advice about your next vehicle purchase, the team at DS Accountancy would be happy to help you. Please contact us at firstname.lastname@example.org and one of the team will be in touch.