One question we come across in the field of taxation
fairly often, is what is the best way to reduce tax using a car when you own a
limited company?
The problem is that there is a substantial number of things to consider that makes the question a lot more complicated. So we will look into each option and show which situations would make each option the most suitable.
Summary
After many calculations, we believe that mileage allowance would be the better option in most cases partly because its simple to work out and tax deductible. However if you must have a company car (because you don't want to pay the expenses out of your own bank account, for example) then you better make sure you buy a 'brand new' car, that is cheap to buy, with low emissions (so its going to be small and without any optional extras!) and you don't use it privately at all (not even a penny of fuel for private travel).
Conversely if you buy an expensive used car for less than its original list price (say two or three years old), with a big diesel engine, with only small private use (and you cant be bothered to repay the private miles to your company) and if you normally earn enough to pay tax at 40% - you are generally going to pay a lot more personal tax on the car even if there is some tax relief claimed by the company.
The problem is that there is a substantial number of things to consider that makes the question a lot more complicated. So we will look into each option and show which situations would make each option the most suitable.
Summary
After many calculations, we believe that mileage allowance would be the better option in most cases partly because its simple to work out and tax deductible. However if you must have a company car (because you don't want to pay the expenses out of your own bank account, for example) then you better make sure you buy a 'brand new' car, that is cheap to buy, with low emissions (so its going to be small and without any optional extras!) and you don't use it privately at all (not even a penny of fuel for private travel).
Conversely if you buy an expensive used car for less than its original list price (say two or three years old), with a big diesel engine, with only small private use (and you cant be bothered to repay the private miles to your company) and if you normally earn enough to pay tax at 40% - you are generally going to pay a lot more personal tax on the car even if there is some tax relief claimed by the company.
Company car
The main advantage of having a company car is that
you can put the running costs through your company and therefore reduce the
amount of corporation tax you are due. Unless your car happens to be less than 110g/km carbon emissions or
an electric car, you will not be able to claim back the whole amount in the
first year as with other assets. You may only claim back 18% of the cost per
year, (on a reducing balance basis) or if your emissions are more than 160g/km
only 8%. This means the tax relief you can gain on your car will come through
at a slow rate over a long period of time.
Private taxation of a company car
If your car is put through your company and is made 'available' to you for private use (whether or not you actually use it privately) triggers the 'Car benefit' rules. If you you do use it for private trips you will find yourself hit with a
taxable 'fuel' benefit.
The Car benefit is calculated by taking the list price of
your car (how much it would cost brand new) and then multiplying it by a
percentage determined by the emissions of your car (with an additional 3% added for diesel cars) to a maximum of 35%. This
means that if you buy a second hand car, you will still be charged as if you
bought it brand new, this can quickly outweigh the capital allowances claimed by your company as these are determined by how much the company paid for the car.
In addition to the Car benefit, you will be hit with a Fuel benefit determined by a basic price of £20,200 multiplied by the same
percentage as used for Car benefits. This means that on a 35% car you would need to have private fuel costs of more than £7,000 to have a net gain in your favour. You can repay any private miles to your company and in so doing there is no Fuel charge - but you have to work out your private miles each month and reimburse the company - you cannot do this retrospectively after the end of the tax year!
You can reduce the Car benefit by paying some of your
personal money towards buying the car, this will reduce the list price by the
same amount, and annual contributions will reduce the benefit calculated by the
amount you spend.
So to make the most of your company car, you will
want to either avoid using it for private purposes, or buy a brand new petrol/electric car, with low emissions and list price, and reimburse any fuel you use. If you
need some actual figures to help you in your decision, you can click on this
link to view a car benefit calculator provided by comcar.co.uk, you can also
find a list of percentages for different emissions by clicking here.
Mileage allowance
The other mentioned method was to own the Car
privately and claim a mileage allowance. This means you do not put any of the
costs through the company, but instead charge an expense depending on the
number of business miles you do - and the company will get tax relief as an expense for the mileage claim.
The rate begins at 45p per mile for the first 10,000
miles, and 25p per mile afterwards. You must make sure you don’t charge any
more than this, otherwise you will have to pay tax on the excess amount.
The disadvantage of a mileage allowance if that if
you have a lot of running costs then you will not be able to claim them against your
profits to reduce tax, same goes for the cost of buying the car, you will not
be able to claim this either, even if you have bought a car with zero
emissions.
So to make the most of a mileage allowance you will
need to do a lot of business travel, and have low running costs for the year
that can be exceeded by your mileage claim.
The discipline of record keeping
Whichever method you choose, you will be required to keep track of expenses, either costs and personal contributions relating to your company car, or the number of business miles you make, both of which can take up valuable time.
The discipline of record keeping
Whichever method you choose, you will be required to keep track of expenses, either costs and personal contributions relating to your company car, or the number of business miles you make, both of which can take up valuable time.
If you feel you still need a bit of advice on the
matter, or have any questions about this article, then feel free to call me to shed some light on the subject.
Mark
