If Company Buys:
On Full Payment
If you buy a new car through your company then it will attract capital allowance. The amount of capital allowance will depend on the amount of CO2 emission by the car. If CO2 emission is 75g/km or less (50g/km from April 2018) then the capital allowance (First Year Allowance FYA) will be 100% of the price of a car. If CO2 emission is from 76-130 g/km then 18% written down allowance (WDA) will be available to claim. But only 8% of WDA can be claimed for the cars having CO2 emission above 130g/km.
If you buy a car for use in business (100%), then you can claim 100% of VAT paid on that car. If the car will have private use then VAT cannot be recovered and the car will be called as “VAT blocked”.
For example, your company buys Audi A4 Saloon 2.0 Petrol for £31,450, the CO2 emission is 134g/km. you can claim WDA = £31,450 × 8% = £2,516
The WDA of £2,516 will save a corporation tax of £478.04 for your company at a rate of 19% (2017-18).
The recovered amount of input VAT will be £6,290 (£31,450 × 20%) assuming 100% business use.
There are two types of leases agreements available i.e. finance lease and operating lease. Both have different tax implications. Details are below:
- Under an operating lease, your company (the lessee) simply pays lease payments and either extend the lease or tax returns the car at the end of the contract term. The car dealer (lessor) retains ownership of the car throughout and assumes the “risks and rewards” of ownership. For a lease on a car to be treated as an operating lease, there must be no option to purchase the car at the end of the lease, with the car being returned to a car dealer. Your company can claim corporation tax relief on full amount of lease payment. On an operating lease, the car doesn’t qualify for any kind of capital allowance. If CO2 emission of the leased car is more than 130g/km then 15% portion of the lease payment will be disallowed expense for the company.
If you buy a car through a lease for use in business (100%), then you can claim 50% of VAT paid on that car. If the car will have private use then VAT cannot be recovered and the car will be called “VAT blocked”. Most company cars are VAT blocked.
For example, your company buys the above car by an operating lease agreement and the lease payment per month is £500. The allowed expense for your company will be £500 which will save annual corporation tax of £969 (£500 × 12 × 19% × 85%).
The amount of VAT recovered will be £ 600 per year (£500 × 12 × 20% × 50%) assuming 100% business use.
- With a finance lease, your company (lessee) also pays lease payments and the car dealer (lessor) still legally owns the asset, however, the substance of this type of agreement is different. A finance lease is effectively a loan to purchase an asset, where the loan is secured on the asset. The lessee has the “risks and rewards” of ownership and “in substance” owns the asset. Many cars bought under a hire purchase contract fall under the category of a finance lease as the legal owner of the car may transfer to the lessee at the end of the lease, or there may be an option of a final “balloon” payment to purchase the car at that time.
Generally, the legal owner of an asset has the right to claim capital allowances but, in this case, the lessee may treat the car as a capital purchase and claim the allowances on the cost of the car, subject to business use element. The lease payments that the lessee makes contain a capital element and an interest/finance charge element. Only the capital element is eligible for capital allowances and is written down at the relevant rate. The interest element is not eligible for capital allowances but, instead, will be claimed as part of your general motor expenses.
For example, your company buys the same car with a finance lease agreement. It can claim capital allowance as per the WDA rate i.e. 8% for 2017-18 for a car with CO2 emission over 130g/km. The allowed expense for your company will be £2,516 which will save annual corporation tax of £478 (£31,450 × 8% × 19%) assuming 100% business use.
NOW PERSONAL SIDE
The above calculation relates to company taxation. You, being the beneficiary of the company’s car, will be taxed for the car benefit. If you use the car only for business purpose and not for private use then you won’t have to pay any tax. The car benefit for private use is called “benefit in kind” (BIK).
The HMRC definition for private use is:
“Private use includes employees’ journeys between home and work unless they’re travelling to a temporary place of work.”
How much tax you will be charged depends on the list price of the car. The list price is the price of the car when it was new, therefore it is irrelevant how much you paid for that car. In the case of a second-hand car, the list price of the car that is used for the calculation of tax is the price of that car when it was new.
The second factor on which tax calculation is based on is the CO2 emission of the car. Lower the CO2 emission lower will be the percentage and vice versa.
Using the above example, your BIK for the tax year 2017-18 is £3,145 (£31,450 × 25% × 40%). Assuming your personal tax rate is 40%.
If the company pays for the fuel you use for that car then your company can claim back the VAT it pays on the fuel as long as there has been no private use of the car. However, if there has been any private use you may only recover the business element of the total input VAT you pay. A company can treat the fuel as allowed expense for corporation tax purposes. But you will be taxed for the fuel benefit that your company provides you. The fuel benefit will be calculated by using the car percentage as per CO2 emission of the car and the fuel multiplier (see below table). For the above car, the car fuel benefit is £2,260 (£22,600 × 25% × 40%). Even allowing for claiming the VAT back, unless you’re doing a lot of miles, it’s likely the personal tax bill will be greater than the company tax saving.
If you buy yourself:
If you buy the car yourself and use for business purpose then you can charge your company `a mileage allowance and the company can treat the mileage allowance as allowed expense for corporation tax calculation. Buying a vehicle yourself is tax beneficial in most cases as it attracts mileage allowance which is tax-free for your personal tax and an allowed expense for your company.
However, in the case of electric vehicle, the situation may be reversed because the BIK rate is only 7% and there is no fuel benefit.
For example, you buy an electric car through your company of price £59,000. 100% first-year allowance will be available to your company that will save a corporation tax of £11,210 (£59,000 × 19%). There is no fuel benefit charge for your personal tax and BIK will be £1,652 (£59,000 × 7% × 40%). So, an electric car would be tax benefits if purchased through your company. HMRC tax relaxation for the low CO2 emission cars is to promote environment-friendly vehicles and to save the environment.
Tax on company cars is complex, so it’s always worth asking an expert before you buy.