It can be confusing whether to introduce company cars into your business or not. For the purposes of this article we are assuming that your business is a limited company. If you are a sole trader or partnership there may be some differences as to the tax treatment to the cars used by the business owners.
There are three tax efficient areas to consider when making the decision to purchase a company car: – corporation tax via capital allowances, personal taxation via benefits in kind, and value added tax (VAT).
[1] Capital Allowances
These are calculated using the following factors, original list price and CO2 emission levels. If CO2 emissions are low, i.e. are 110 grams per kilometre or less they attract 100% first-year capital allowances. Many businesses are therefore choosing to buy cars that qualify in this bracket, fortunately the variety of cars that are included in this bracket continues to grow, and include the Lexus CT200h, Mini 1.6 Cooper D and Audi A1 1.6 TDI. This is only available if you purchase the car or have a finance lease. The 110gm/km threshold will decrease to 95gm/km from 1st April 2013.
For cars with higher emissions less generous capital allowances are available. Cars with CO2 emissions of less than 160g/km qualify for 20 per cent capital allowances in the main rate pool. Cars with CO2 emissions over 160g/km qualify for 10 per cent capital allowances in the special rate pool.
[2] Benefits in Kind (BIK)
If you have a company car you will be charge a benefit in kind from 5% to 35% of the list price of the vehicle, therefore you may find that an expensive company car with high emissions may not be so attractive. Also note, that the BIK is calculated on the list price, so purchasing second-hand company cars may not be suitable.
Example: Liam is given an A3 Sportback 1.4 TFSI S line as his company car. The car emits 134gm/km which puts it in the 17% bracket. The list price is £20,925 therefore the benefit in kind for his P11D is £3,450.15.
[3] VAT
Do not assume that you can reclaim 100% of the VAT paid when purchasing a new car. However, if you use the vehicle for a taxi, self-drive hire or driving instruction you can usually claim 100%, as the rule is that the vehicle must be 100% for business purposes therefore, a pool car can often qualify. If the car is a lease car, 50% of the VAT can usually be reclaimed. Ensure that you consult with your accountant or tax advisor to assess how much VAT you can reclaim.
Top Tips when considering a Company Car
- Try to go for the low emission options if possible.
- Consider the total tax position, you may find that it is more tax efficient to purchase a car privately, hence why many companies offer a car allowance rather than a company car.
- Purchase before 1st April 2013 if possible as capital allowances decrease.
- Compare purchase, hire purchase and contract lease options. If the business doesn’t own the car, as with a contract lease, then capital allowances don’t apply, however, the expense of the lease should be tax deductible.
- Pools car don’t attract benefits in kind.
Car Specific Examples
Example: Lexus CT200h
- A 40% Taxpayer will pay under £80.00 per month for an SE-I model (excluding metallic paint)
- 10% Employee Benefit in Kind
- 100% First Year Write Down Allowance/Tax Relief equating to £6,184 (based on 26% Corporation Tax)
- Offset Contract Hire Rentals against Corporation Tax
- Fuel consumption combined of 68.9mpg (tested under European standard conditions)
- CO2 Emissions 94g/km
- Congestion Charge Exempt
- £0 Road Tax
Other examples in comparison:
| Lexus CT200h SE-I | BMW 118d SE Auto | Audi A3 2.0 TDI SE140 S’tronic | Alfa Romeo Giuletta 1.6 JTDm-2 Lusso | Mercedes A160 CDI Blue EFFICIENCY Classic SE | Volvo C30 DRIVE 1.6 diesel SE Manual | |
|---|---|---|---|---|---|---|
| CO2/km | 94 | 119 | 129 | 114 | 118 | 99 |
| Employee Benefit in Kind (BIK) rate 2012/13 | 10% | 17% | 19% | 16% | 17% | 13% |
| Employee 3 year BIK 40% tax payer | £2,943 | £5,068 | £5,494 | £4,159 | £3,687 | £3,434 |
| 3,000 miles private fuel cost pa* | £856 | £960 | £1,047 | £939 | £960 | £812 |
| Total Cost | £3,799 | £6,029 | £6,540 | £5,098 | £4,647 | £4,245 |
*Calculations based on the following fuel prices: diesel £1.38, petrol £1.35 in 2012, 7.5% increase in 2013, 5% in 2014. Data sources: direct.gov, Thacham.
All car metrics kindly supplied by Andrew Moss – Lexus Twickenham Corporate Sales. For more information on Lexus models, please email Andrew directly quoting ‘Goringe Accountants’.
Tags: benefit in kind capital allowances co2 emissions company car company cars emission levels finance lease lease options P11D personal taxation pool cars VAT