Thinking of buying a vehicle as business expense?
Here at Manchester’s most trusted accountancy firm, we aim to save you money using our specialist tax expertise
The first thing to say is that there is no right or wrong answer to buying a car or any vehicle. We’ll go through the factors you’ll need to consider both from a finance and tax perspective and hopefully you’ll work out what’s best for you.
Firstly, we need to establish the difference between leasing and purchasing. Leasing a car tends to result in cheaper monthly payments as at the end of the contract, you’ll hand the car back so you are really only paying the depreciation costs while you have the car. Whereas purchasing the car, you’ll own the car and it will, hopefully, have a resale value for your business.
Leasing will come with certain conditions such as a mileage limit and ensuring the car is in a good shape when you hand it back in and most times you’ll need probably need to get it serviced through the scheme too.
There are different types of leasing where you have the option to purchase a car at the end of the contract but the difference there is explained better than we can in this article.
2018/19 Business Tax considerations
When it comes to the impact on your business with regards to the business’s tax position there are different ways of working out the tax implications between leasing and purchasing.
If you purchase a new car through the business, unlike other capital allowances, it doesn’t count towards your annual investment allowance however if the car is electric or produces less than 50g/km of CO2 in emissions you can claim the whole cost against your corporation tax bill.
On all other vehicle purchases and for any costs in subsequent years, and depending on the CO2 emission, the claimable rate is between 8% and 18% of the value of the car per year your car is owned by the business. This is known as a “writing down allowance”.
Leasing is a bit simpler to work out from a tax perspective. There are two ways you can claim some of the cost against your tax bills. Firstly the cost of the lease is reclaimable at 19% and if you are VAT registered you can also claim 50% of the VAT cost too:
Your limited company leases a car for £400 per month or £4800 per annum plus VAT of £960
The limited company can reclaim 50% of the VAT of the lease amounts:
£960 x 50% = £480 per annum
The company can also claim corporation tax on the annual lease amount at 19%:
£4800 x 19% = £912
This reduces your corporation tax bill by £912 each year.
Personal Tax Implications for running a car
In recent years it has become less tax efficient to purchase or lease a car through your business particularly if the car is to be used by you in a private capacity. Regardless of how often you use it HMRC sees this as a benefit in kind and you will be taxed at your personal rate between 7% for an electric vehicle through to 37% for a high performance petrol car using the list price (not what you paid for the car) multiplied by your tax rate. You can see the full table on the AA website. It sounds complicated but let’s look at an example:
Your limited company purchases or leases a car worth £18,000 at list price. The CO2 emissions are 120g/km. Your personal tax rate is 20% (basic rate).
The tax due is £18,000 at 25% (25% for the CO2 emissions for that car) x 20% tax
Therefore, your personal tax bill for the private use of the car is £900.
In this example, the company has saved £648 in tax but you have paid £900 to use the car privately, a loss of £252. In this case you are better off buying the car yourself and claiming mileage.
You may also choose to get the business to pay for all your fuel costs too. In this case, all the mileage you do on company business will be reclaimable in the same way as the purchase of the vehicle (through VAT and corporation tax) but you will be taxed on your personal use too. The taxable benefit is calculated by applying the appropriate percentage to the car fuel benefit charge multiplier, which was fixed at £23,400 in 2018/19 regardless the cost of the vehicle. So lets look at an example again:
Your limited company pays for all your petrol. The CO2 emissions are 120g/km. Your personal tax rate is 20% (basic rate).
The tax due is £23,400 x 25% (the percentage for the CO2 emissions for that car) x 20% personal tax
Therefore, your personal tax bill for the private fuel use of the car is £1,170.
So unless you are doing a lot of miles privately, it would be better to pay for your own fuel and claim back mileage against the company. You can assess whether “free fuel” from your company is worth it against your tax using this handy calculator.
As we said right at the beginning of this article, there are lots of variables to take into account. In terms of leasing or purchasing a car that will depend upon your personal approach to the car – leasing is good if you want lower monthly payments and are likely to want to hand the car back but buying the car means you can do what you want with the car and your business will own it.
The “benefit in kind” rules make the personal tax implications significant especially if you are not choosing the new low emission types of car. Thankfully, there are a few calculators our there that will give you the low down on this area especially given the huge amount of variables around the CO2 emission percentage.
As always, we are here to try and make life, especially around tax, a bit easier for you so feel free to give Martin or Yang a call on 0161 278 2714 and we can do you a detailed calculation on both the business and your personal tax implications and the vehicle you are thinking of purchasing.
So to save tax contact the leading Manchester Accountants on Tel; 0161-278-2714 today and request your free tax and business review.
Article is copyrighted to Salford Chartered Accountants.
Article written in full by Salford Chartered Accountants. It may not be reproduced in part or full without the prior expression permission of Salford Chartered Accountants which is a trading name of Salford Tax Specialists Ltd.
16th July 2018.