Purchasing a vehicle through your business vs buying it privately
Are you looking for a new vehicle but not sure what the most cost effective way is to purchase it? Maybe you’re trying to decide if you should buy it personally or buy it through your business? Unfortunately the answer of what’s the best way to do this isn’t straightforward, there are a number of factors that can affect the decision two of the main ones being your business structure and the amount of business use vs personal use of the vehicle. Set out below are a few of the variables that should be taken into account when making your decision, hopefully this guide will help making the decision a bit easier for you.
Remember, it’s a complex decision and there’s no single right answer that fits all circumstances.
Capital Allowances
If you buy a car through your business it’s classed as a fixed asset, this means you can claim capital allowances on the cost to reduce the taxable profit so you pay less tax. However, cars attract far less generous capital allowances than most fixed assets. Most cars are placed in a “special rate pool” meaning they receive only 8% capital allowances per year i.e. a £20,000 car would attract £1,600 capital allowances in the first year (£20,000 * 8%) and £1,472 in the second year ((£20,000-1,600)*8%) and so on. This figure is set against the businesses taxable profit and it reduces the tax bill at the end of the year. Some low emission vehicles are eligible to be added to the “main rate pool” where most other assets are added. In this pool they attract 18% capital allowances per year, our example above would attract £3,600 in year 1 and £2,952 in the second year. No cars are eligible for the Annual Investment Allowance that allows a significant number of small businesses to claim 100% of their capital spend in the year of purchase.
When it comes to capital allowances a commercial vehicle, such as a van or a pick-up, is generally better option as this does qualify for the “main rate pool” and also for the annual investment allowance, so you can claim the whole cost of the van against the taxable profit in the year of purchase (depending on your level of capital spend in the year)
Personal use
When there’s personal use of the vehicle as well as business use, this needs to deducted from the capital allowance given for the vehicle e.g. in the example above our car worth £20,000 in the main rate pool, but used it for personal journeys for 50% of the time, then the capital allowances in the first year would be reduced from £3,600 (18%) to £1,800 (50% of £3,600).
You can still claim capital allowances even if you bought the vehicle on finance as long as the business does (or will) actually own it. There are no capital allowances on hire or lease vehicles.
When you go to sell or trade in the vehicle there may be a balancing charge which affect your tax bill. This is the difference between the tax written down value of the vehicle and the selling (or trade in) price received e.g. if we sell our low emission car after two years for £12,000 we would have a balancing allowance of £1,448 (i.e. our taxable profit is reduced by £1,448).
If we use the same figures for a commercial vehicle we would have received £20,000 capital allowance (through annual investment allowance) in the first year and then a balancing charge of £12,000 that will increase our taxable profit when we sold the vehicle.
VAT
The VAT that you can claim on the purchase of a car is very limited. There are two conditions that must apply before you can claim VAT:
1. There must never have been any private use of the car, normally this means it is a brand new car but could also be a vehicle that was previously a pool car or lease car.
2. It will be used exclusively for the purposes of the business and is not available for any private use, for example an company pool car.
Personal use includes commuting to and from work, so even if the car is only used to get to work and back you can’t claim the VAT.
Even if there is no actual private use, if the car is potentially available for private use then it fails the test.
The only cars which are likely to pass the test are those which are parked permanently on business premises (not outside someone’s home) and are only used for business journeys. Normally the employee contract should specify that they should not make personal use of the company car.
As with capital allowances, the VAT situation is less restrictive for commercial vehicles such as vans and pick-ups. The vehicle still has to only be used for the business, but there isn’t the same issue about “available for personal use”. You could park the van on your drive and as long as you were only using it for business, you could recover the full VAT on the purchase.
The same applies to second hand vehicle as long as the invoices showed VAT on the purchase.
If you did want to make some personal journeys in your company van, you could still recover VAT on the purchase, but not all of it. You would need to deduct a percentage to represent the personal use element.
With both cars and commercial vehicles you can recover the VAT on the business related running costs such as fuel, repairs etc. Again if there is an element of personal use then an appropriate deduction should be made. If you decide to use the mileage method for your motor costs, you can claim VAT on the fuel element of the mileage.
Motor Expenses
There are two methods for claiming motor expenses, the full cost method and the mileage method. The mileage method is fairly straightforward, you can claim 45p per mile for the first 10,000 business miles in a year and 25p per mile after that. As well as this you can claim extra journey costs such as toll charges or congestion charges, you can’t claim any other motor related expenses.
The second method is the Full cost method, this allows you to claim all motor related expenses, (fuel, repairs, MOT, insurance, breakdown cover etc.) against taxable profits after a deduction has been made for private usage of the vehicle. The private use element of the vehicle is based on the number of private miles compared to the total mileage in the year.
If you are purchasing the vehicle through a limited company you also have to be aware of the benefit in kind charge that will be added to your personal tax as a director / employee if you have private use of a company vehicle, this will be done through your P11D.
There is no notable difference between a car and a commercial vehicle in terms of claiming for the running costs or mileage.
Benefits in Kind (P11D)
Benefits in Kind can be an important consideration for businesses operating as a limited company. This is because a company director is considered to be an employee of the business. They do not apply to sole traders or partnerships (but do apply any employees).
A limited company is a separate legal entity to its shareholders and directors. If you buy a vehicle through your limited company, then the vehicle does not belong to you, it belongs to the company as a “company” vehicle. This does not apply to a sole trader or partnership business as you and the business are the same legal entity.
If you as an employee of the company have private use of a company vehicle then this is classed as a benefit in kind and is liable for tax and NIC.
The charge for benefit in kind is based on the CO2 emissions of the vehicle and the type of fuel it uses as well as the value of the car.
If a car is a genuine pool car, it would not be classed as a benefit in kind for the employees using it.
For company vans the situation is more straightforward as there is a standard benefit for all types of commercial vehicle. This is currently £3,230 for use of the van and £610 for fuel for private journeys. This means with private use of a company commercial vehicle with fuel you would be looking at an extra £768 in tax for a basic rate tax payer (slightly more complicated in Scotland depending on where you land in the various income tax bands).
There is also a cost to the company. Whether it’s a company car or a company van there is Class 1A (Employers) National Insurance to pay at 13.8% on the value of the benefit.
Leasing a car
Leasing a car can be a bit more straightforward, there are no capital allowances available because you don’t own the vehicle, you can claim the lease costs as an expense of the business, you can also claim 50% of the VAT on the lease payments.
Summary
If you are trying to decide whether to buy a vehicle through the business and what type of vehicle to buy, then there are a lot of different factors to consider. Unfortunately there is no straightforward answer!
You’ll have to weigh up which elements apply to your personal circumstances, considering the type of business you have, whether you are VAT registered, the amount of personal use, whether there is a real business need and how long you intend to keep the vehicle.
You also have to consider the extra administration, HMRC expect full record keeping, so having a business vehicle means you need to keep all the records for the expenses and mileage for the vehicle. There is time and effort involved with this and depending on the level of personal use, it might be easier to record and charge the business miles.