Cars, business & taxation

For both employers and employees who drive a car as part of their job, taxation is a potential minefield. For a whistle stop tour of the options available plus plenty of useful links and car buying advice read on…

car graph blocksIt was not that long ago that a company car was considered a business 'perk' and every three years or 60,000 miles it was replaced with a new one. The tax paid for the privilege was less than the car was worth and company cars were used by business as a means of avoiding tax, topping up executive salaries and attracting new staff with the promise of a heavily subsidised executive car. Needless to say our friends at HMRC were less than amused and the practice was consigned to history with the new car taxation regime of 2002.

Of course few of us enjoy paying tax and the Revenues and Customs is not likely to be at the top of our Christmas card list but grudgingly we have to admit the new system is fairer than its predecessor as it reflects more closely the true value of car ownership. The majority of individuals who use a car for business, whether it's their own business or not, now choose to use their private car and claim a tax free mileage allowance. It's certainly the simplest option.

Currently an individual can claim 45 pence per mile for the first 10,000 business miles and 25 pence per mile thereafter. This tax free allowance is available whether you drive a six litre Mustang or a 600 CC Smart Car. And in truth, with newer models delivering better MPG and following a period of relative stability in fuel prices the allowances are not ungenerous.

Normally, you would claim the allowance through your Company, which would then claim it back as a business expense. You should remember however, that travelling to and from your regular place of work is not regarded as a legitimate business expense and is not, therefore allowable.

The tax implications of a company car

So what are the other car buying and ownership options for a business? It is still possible for a business to own cars and in some circumstances there may be tax advantages in doing so. The one circumstance where business ownership of the car will almost always work for you, is if the car is used wholly and exclusively for business purposes as you will then be able to reclaim the VAT. This may be the case for a pool car for example as long as you can demonstrate it is used 100% for business purposes.

A company owned car which is also used privately will be considered a benefit in kind and the driver will attract an income tax liability whilst the business will be required to pay NI on this benefit.

The tax system has a double purpose when taxing private use of company cars, the first is to pay tax on a sliding scale according to its perceived value and the second is effectively an environmental tax on CO2 emissions, also on a sliding scale. To calculate the benefit in kind on which the tax is based the car’s value when new (including extras) is multiplied by the HMRC’s emissions % calculator. In simple terms the higher the value of the vehicle and the higher the emissions, the higher the benefit in kind and the potential tax liability. Diesel engines are considered more polluting than petrol engines and therefore there is currently a flat 3% surcharge on the emissions calculator.

Capital Allowances

If you buy a car through a company, the company can claim a capital allowance which is calculated using the same logic as the benefit in kind; that is, the higher the CO2 emissions the lower the capital allowance you can claim and therefore the higher the tax liability. The capital allowance bands for the current tax year are:

The government is using the tax system to encourage the use of less polluting engines. Electric cars attract 100% capital allowance in their first year.

Private Fuel

If your company pays your private fuel bill you will be taxed using the same CO2 percentage as the HMRC use to calculate the car’s benefit in kind. The calculation is £22,200 (this is a fixed arbitrary sum for this tax year) x the CO2 percentage. In the case of the Jaguar in the example above, the fuel benefit in kind would therefore be £22,200 x 19% = £4,218.

So, in this example if you are a higher rate tax payer, the tax you would pay for the privilege of free fuel would be £4,218 x 40% = £1,687 a year. This means you would have to drive a wapping 25,000 private miles a year to make it worthwhile accepting your free fuel from the company.

If you have a company car but pay the fuel for private miles, you will be asked by HMRC to provide accurate and believable records to demonstrate this. The alternative is that an employee with a company car can pay for all the fuel including business miles and can be reimbursed by the company for the business element. There are advisory fuel rates provided by HMRC which will not give rise to an additional tax charge. These rates vary depending on the size of the car’s engine and fuel type.

The tax implication of car finance

If a limited company buys a car either by cash or finance the normal accounting practices apply. The capital value can be written off to capital allowances (as shown above) which vary depending on emissions and any interest on loans can be treated as a business expense.

If the vehicle is leased, the monthly lease payments can be claimed as a business expense, however, there is a flat rate disallowance of 15% of relevant payments for cars with CO2 emissions above 130g/km.

For the self-employed and non-incorporated partnerships, the same restrictions apply minus the private element. For example, if 25% of your motoring is private, then 75% of the business car lease rental can be set against tax (assuming the car has CO2 emissions below 130g/km).

Should I put my car through the business?

Once upon a time the tax system governing cars was such that serious but legal tax avoidance schemes were common place but in more recent years the systems have been tightened up so that its largely tax neutral. That is to say whether to put your car through the business or not the net effect on taxation will not be very different.

Yes, you can put monthly leasing expenses or loan interest through the books as well as claim capital allowances on the asset value of cars that the business owns but you can claim the 45p mileage allowance on cars which are not owned or leased by the business. Swings and roundabouts.

Only for commercial vehicles and cars used solely for business purposes is there is still potential for substantial tax advantages for the businesses which own their vehicles.

This article is an overview for individuals and small business only. For an in-depth understanding you should seek professional advice.

Useful links:

Taxable benefits in kind and expenses payments- Company Car Tax rules

Company car guide and tax calculator