Whether you’re a business owner looking to provide company cars for your employees, or an employee who is about to receive a company car, understanding the ins and outs of this perk is crucial.
Luckily, we’re about to explain everything you need to know (or rather Natalie is), as we’ve asked Natalie Key, Client Manager who is an expert in company cars to walk through the essentials, to help you navigate the world of company cars.
From understanding tax implications to making informed decisions about financing and choosing the right vehicle, Natalie has you covered!
Take it away Nat
Expenses related to company cars can be a complex topic, but understanding what can be claimed is fundamental. Whether the car is purchased or leased in the company’s name, there are various expenses that can be claimed, such as MOTs, car tax, fuel, insurance, and repairs. However, it’s important to be aware that claiming fuel costs for personal journeys can result in a taxable benefit and additional taxes, which can be avoided by claiming business mileage at the approved HMRC rates.
Financing and tax relief for company cars can also vary depending on whether the car is leased or bought outright, and choosing the right option can have significant implications. Electric cars and those with zero emissions offer the most tax advantages, with 100% of their cost being deductible from taxable profits. On the other hand, diesel and petrol cars aren’t recommended due to the lack of first-year allowances and higher tax bills. But don’t worry, I’ve outlined below some insights and tips to help you navigate the complexities of company cars to help make informed decisions. So let’s dive in, going back to expenses…
Expenses that can be claimed with company cars
Providing the car is purchased in the company name, you can claim most expenses relating to that car through the business, regardless of whether the company owns the car or leases it. MOT’s, car tax, fuel, car insurance and repairs would all be allowable for tax purposes. Be careful though, if you claim the costs of fuel and you use the car for personal journeys (even a regular commute to and from the office would be classed as a personal journey), you will create a P11D benefit in kind which would be taxable on the individual’s personal tax return and Class 1a National Insurance would be payable by the company. If the company is VAT registered, there would also be VAT implications for personal journeys which could be costly.
A fuel benefit in kind can often be expensive and so a good alternative would be to claim business mileage at the approved HMRC rates. This would involve keeping a log of business journeys and the company then making a direct reimbursement of these costs to the director/employee.
How should a company car be financed?
How your company car should be financed and the relief you can claim depends on if the car is on a lease or if it was bought outright. However, over the lifetime of the vehicle, it’s not likely to be much different. It also comes down to what type of deal you get from the car dealership, and the cashflow situation for the business. If the business needs finance, they can claim corporation tax relief on the interest element of the repayments.
For a car that is purchased with cash, either through a Hire Purchase (HP) agreement or a bank loan for example, the tax relief for the company would be the same. If the vehicle is brand new and is either fully electric or used as a commercial vehicle, 100% of the cost could be offset against taxable profits. Or, if the vehicle is petrol/diesel or a hybrid, then you would be claiming Capital Allowances. In other words, instead of claiming the full cost of the car when purchased, a percentage of the costs would be claimed each year, depending on the CO2 emissions of the vehicle. The percentage is usually around 6% for cars.
A car lease however would be different. The monthly costs of the lease would be offset against your taxable profits. Although, be careful with the VAT on the lease payments, only 50% of the VAT can be claimed! Also, depending on when the lease was taken out, 15% of the annual lease cost could be disallowed for corporation tax depending on the vehicles CO2 emissions.
Cars that work best for tax purposes
It may come as no surprise that the cars that work best for tax purposes are electric and cars with zero emissions. However, here are some other examples of vehicles that work best for tax reasons:
Commercial vehicles
You get 100% first year allowances if the van is new and 100% of the vehicle’s cost can be offset against taxable profits. You’re also allowed to class your daily commute as business, so there would only be a benefit in kind if the vehicle was used for personal journeys outside of work.
Hybrids
These aren’t as tax efficient as electric vehicles and are treated in a similar way to diesel and petrol cars for tax purposes. Capital Allowances could be claimed on the cost of the car (usually at 6% depending on the CO2 emissions) and the P11D value would also depend on the CO2 emissions of the vehicle and its range.
Diesel or petrol- Avoid!
This might be a surprise (we hope not) but take this as a warning- diesel or petrol cars are a big no! You don’t get first year allowances, although you can claim Capital Allowances instead. P11D values also tend to be very expensive on petrol and diesel cars currently and look to be on the increase. Generally, the higher the list price and CO2s, the higher your tax bill!
Looking to go green? You can click here to hear from Steve Bailey, who outlines the advantages of going green when it comes to company cars.
How we can help
If you’re looking for advice on what cars work best for tax purposes, insights on what you can claim or even how best to finance the purchase, we’re here to help.
To arrange a one-to-one session with a Tax Advisor, you can get in touch with our Corporate Tax Team by emailing info@djhmittenclarke.co.uk.
