Implications of a Company Car
If you’re reading this article, odds are you’re considering buying a car through your company or perhaps have already done so. In this article, we’ll discover what benefits you can gain and some tax traps which you must beware of when acquiring a car through a company.
Let’s start with the benefits. You are able to capitalize the cost of the car (including VAT) in your company’s accounts which means you will be able to claim capital allowances on it at the rate of 6% of the value of the car in your initial year. This will be reducing your company’s profit for the year and hence it’s corporation tax payable. In the second year, the 6% will be calculated based on the cost of the car less the initial 6% capital allowance already deducted in the first year and so on in each subsequent year. This is akin to the reducing-balance method of depreciation which one may be familiar with if they’ve got a background in or reasonable knowledge of accounting.
Contrary to popular conception, you are not able to reclaim the VAT paid on the cost of the car (except under certain circumstances) hence you must capitalize the cost of the car including VAT. You may have heard that this is one of the greatest advantages of buying a car through a company rather than as an individual but we’re afraid it’s just not true. But what are these exceptions you may be wondering? Should your company be involved in a business activity where vehicles are central to its functioning, for example a taxi fleet or a driving school, then you become eligible to reclaim the VAT paid on the purchase of the car and hence capitalize the VAT exclusive value.
An example of a car derived van
A loophole, however, is where you acquire a vehicle classified as a van. VAT paid on acquisitions of vans can be recouped by any vat-registered business whilst the rate of capital allowance allowable on the cost of the van jumps up to 18%. This means lower profit and thus lower Corporation Tax payable on that profit. Individuals seek to benefit from this rule by acquiring what are known as “car-derived vans”. These are vehicles which appear as cars but are considered vans and therefore offer the individuals (and their company) the best of both worlds.
Another exception is where the vehicle purchased is fully electric, i.e. considered to be zero-emissions, in which case the company may claim what’s known as a first-year allowance. This allows the entire cost of the car to be claimed in the form of a capital allowance rather than merely 6%. This can be extremely beneficial to the companies who have healthy cash flows and earn substantial profits therefore incurring large Corporation Tax liabilities. Even for a company which may not be extremely profitable, the first-year allowance may turn the company’s otherwise profit chargeable to corporation tax into a loss. This loss can be carried forward and offset against subsequent profits chargeable to Corporation Tax as well thereby benefiting the company in future accounting periods too.
However, regardless of whether you purchase a van, an electric or ICE (internal combustion engine) car, you may also need to consider whether you have been (or are planning on) using the car for private purposes as well. This is extremely likely given that HMRC doesn’t permit journeys to and from work to be classified as business purpose travel. As a result, you will be liable to a benefit-in-kind. For cars, the benefit-in-kind is linked to their CO2 emissions as part of the government and HMRC’s attempts to greenify the taxation system. The more polluting a car is considered to be, the higher the rate of benefit-in-kind (BIK) which will be calculated on the list price of the car. Once again, the rules for vans are more generous since there is a flat van benefit charge of £3600 (for the 2022/23 tax year) regardless of its emissions. Should you be a basic-rate taxpayer, the BIK will simply be 20% of £3600 (potentially 40% for higher-rate taxpayers and 45% for additional higher-rate taxpayers).
You (or your accountant if you have one) will have to compute the BIK based on the applicable rate and declare this on your Self-Assessment as a source of income. Your company will also need to submit a P11D to HMRC using the same value of the BIK on which it will be paying Employer’s National Insurance contributions.
Contact Cheylesmore Chartered Accountants to enable us to advise you on the most beneficial strategy regarding acquisition of a vehicle. Our accountants will take into consideration all the relevant factors and devise the optimal tax strategy which keeps your tax bill low whilst remaining fully compliant with the legislation. We promise to make it as hassle-free and seamless a experience as possible. So, leave the number-crunching and form filling to us and focus on what you do best which is managing your business.
