Should you buy a car through your business?

While it may initially appear to be a good idea to purchase your new car (or other vehicle) through a limited company, I always advise my clients to take the time to understand the implications of purchasing a car this way.

When you look into the details, a company owned car may not be as cost effective as you might think.

Considerations for buying a car through your company

If you’re considering whether to buy a car for work purposes either personally or through your business, there are several factors that will impact on the eventual cost to you. These include:

• How will the car be purchased;
• CO₂ emissions;
• Whether the car is solely for business use;
• The list price cost of the car; and
• Will it be a pool car?

Costs to consider buying the car personally

When purchasing a car in your own name generally, you will be entitled to claim a tax-free allowance from your company for business miles, at 45p for the first 10,000 miles and 25p per mile thereafter.

The claim needs to comply with HMRC rules and be in line with the current reimbursement rate, but the company can then claim corporation tax relief on the reimbursed amount. This allowance contributes towards fuel costs and vehicle wear and tear but financing the purchase of the vehicle personally does not allow for tax deductions to be made on the initial costs and you cannot claim future tax relief on road tax, insurance, servicing etc. There are some small costs you might be able to claim on, for example potentially car washes, but these are few and far between.

Costs to consider when buying the car through your company

How the tax allowance on the cost of your car is treated depends on how you purchase a car through your business.

If the car is financed through hire purchase or a loan, only the interest payment is allowed as a company expense. You also have the opportunity to claim Capital Allowances for the cost, with the amount dependant on the CO2 emissions level. When leasing a car, the monthly payments can be claimed as a business expense in line with HMRC allowances, based again on CO₂ emissions.

Are company cars an expensive employee benefit?

Once the car is purchased, the cost of using a car provided by the business can really be felt in your personal tax payments. As a benefit-in-kind, there will be a tax cost to the person using the car, which can be substantial, although it can be offset somewhat by choosing a “greener” vehicle.

To the company there is the National Insurance cost of providing this type of benefit. What started as a nice employee perk can then begin to feel like a substantial tax cost to both the employee and the employer.

To understand the costs of this, for a specific vehicle, feel free to use our handy company car and fuel benefit calculator.

Other Considerations:

• Sole Traders and Partnerships – As there isn’t a separation of entities (i.e., you and your business are one and the same legally, unlike Limited Companies and Limited Liability Partnerships), car costs can generally be allowed through the business, in proportion to what is business-related and what is personal;
• Limited Liability Partnerships (‘LLPs’) – interestingly here, Members, as opposed to Employees or Directors, do not suffer benefits-in-kind. Therefore, provided the car or other vehicle is purchased for business reasons, this can be a tax-efficient way to buy a vehicle through a business. However, this is an area HMRC have shown particular interest in recently, so you need to be sure that it really is purchased for business reasons;
• VAT – this is a can of worms in itself, but if you have a VAT-registered business, essentially for VAT to be reclaimable, the vehicle must be commercial (i.e., not a car) and a pool vehicle available to all employees with incidental (at most) personal use, i.e., it cannot be used for commuting or use by your family; and
• Capital Allowances – like VAT rules, capital allowances are much less generous for cars then commercial vehicles, so you might want to factor this into your decision.

Talk to Black and White Accounting before making a decision on company car purchase

To fully establish the potential cost to you of each purchase option you need to consider a wide range of factors that will impact cost in the context of your individual situation.

If you would like further information about how to purchase a company car, our specialist business advice team can help you and we can pull together a bespoke calculation, based on your business’ specific circumstances. Contact Black and White Chartered Certified Accountants today or call us on 0800 140 4644.