Buying a car or vehicle through your limited company can be a bit of a minefield and is one of the most common topics we receive questions on.
These “mines” are created because there is so much choice in terms of financing, vehicle types and values, as well as what counts as a commercial vehicle, so almost every bit of advice we need to give is unique to each client.
So let’s start with the easy option…
Buy a van! Anything that clearly qualifies as a commercial vehicle gives little issue for any business structure including limited companies. If you’re VAT-registered, you can claim back the VAT, and the net cost is fully tax-deductible and qualifies for 100% deductions in the first year.
One thing to bear in mind though is that should you deduct 100% in the first year, when the vehicle is eventually disposed of (which could include being written off in an accident), the net proceeds will be taxable, but your advisor will be able to determine what is best for you.
However, in many cases, a van isn’t practical. So let’s go to the other end of the scale . . . avoid buying a car through your limited company with CO2 emissions over 50g/km, and avoid diesel cars wherever possible. A VAT-registered business cannot reclaim the VAT on any car purchase unless it is solely for business use, and it is very difficult to justify that a car is solely for business use. Then we get to the net cost which only attracts a 6% allowance each year (on a reducing balance).
In addition, you will end up with a P11D Benefit-in-Kind tax charge and this can be quite severe. For example, a petrol car in a limited company with 126 g/km CO2 emissions would attract a 30% BIK on the list value of the car. So, a £35,000 car would give P11D “income” of £10,500 which would then be taxed at 20/40%.
Why avoid a diesel car in your limited company?
Diesel cars which don’t meet the RDE2 regulations attract a further 4% charge. Without going into the complications of employer’s NI, CT savings and dividend tax (just trust us here please because the why is so very long!) in this scenario it would be better to take dividends from the business (if they are available and this is a car for the owner) and pay for the car personally, reclaiming any mileage . . . or better yet, go electric.
So electric cars . . . expensive, but VERY tax-efficient right now. Whilst you still can’t reclaim the VAT on the purchase price, if it’s new and unused, you can claim 100% of the cost in year 1 (as with vans).
So why would we recommend a van over a car?
Well, firstly, the VAT element, but putting that to one side, as a limited company you will still pay a P11D Benefit-in-Kind tax charge, but the initial percentage is currently only 2%. So, an electric car in the example above of £42,000 (let’s put a mark-up on our previous example for an electric car) would only give P11D “income” of £840 taxed at 20/40%.
This brings me onto another “mine” . . . vehicle values. Obviously, all of this depends on the value of the vehicle you’re buying, or the vehicles you are comparing. If you were comparing electric or petrol with the prices above, electric is clearly the best option. But you could easily be comparing an electric car with a hybrid, and the figures change once again. So, to reiterate, every bit of advice we need to give is unique to each client.
Let’s now talk about financing
So far I’ve only really touched on buying cars. Ultimately if this is purchased outright or on a finance agreement, it makes no difference whatsoever to your tax position. What I will point out, which is fairly obvious, is that financing will likely be more expensive because of any interest applied.
So what about leasing? The main obvious difference here is that you never own the car, but it’s important at this stage to distinguish between a lease and a purchase. Most finance arrangements are clear . . . you put a deposit down and spread the cost of the balance over the term of the loan, or you pay £x amount per month for x years and then give the vehicle back. However, those that fall in the middle need to be looked at closer to determine if they count as a lease or purchase from HMRC’s point of view.
Now assuming we’ve determined this is now a lease, what’s the difference?
Well with a commercial vehicle, the only difference is that you can reclaim the VAT on the monthly payments instead of the total amount upfront, and similarly with the net payments, you receive a tax deduction on the net monthly rentals rather than the total cost of the vehicle.
With a non-commercial vehicle, the default position (unless you can prove 100% business use) is that you can reclaim 50% of the VAT on the monthly repayments with the net amount (plus the remaining 50% VAT) acting as a tax deduction. It’s worth noting that you still pay a P11D Benefit-in-Kind tax charge on the list value of the vehicle (not the monthly rental amount).
What counts as a commercial vehicle in a limited company?
Some obviously are, for example, standard panel vans, and some obviously aren’t, for example, day-to-day cars. But those that fall in the middle such as pick-up trucks and vans with seats in the back are a little more complicated because they aren’t unsuitable for private use (to use HMRC’s language).
Essentially what they are looking at here are tractors, HGVs etc., which clearly aren’t suitable for personal use. Therefore, it is necessary to determine whether they are designed primarily for carrying goods. Because this can be a complicated determination I would recommend speaking to your accountant about the type of vehicle you’re looking at to allow them to come to a conclusion.
For advice tailored to you and your needs, contact the team at BAS Associates on 01296 681341.
Blog written by BAS Director Brett Smith BSc (Hons) ACCA ATT
To read more from HMRC on tax on company cars you can visit there website here.
