When operating a limited company choosing the right vehicle for your business isn’t just about picking the model that suits your needs, it’s also about understanding the financial implications of how you acquire that vehicle.
This summary guide provides a summary of company car tax and a clear comparison of the tax and cash flow implications for different vehicle purchase options available to SMEs which you should consider.
Overview of Vehicle Types and Purchase Options
Vehicles play a critical role in many businesses, whether it’s a car for travel between client meetings or a van for transporting goods. Understanding the differences between cars and commercial vehicles like vans and pickups, as well as the purchasing options available; outright purchase, hire purchase, and leasing is essential for making informed decisions.
Company Car Tax Implications
The way you purchase your vehicle can have significant implications for your company’s tax bill. Outright purchases can qualify for capital allowances, which reduce taxable profit.
Hire purchases allow you to spread the cost and also claim capital allowances, while leasing expenses can be deducted from taxable income, though the treatment may vary depending on the lease terms.
Here are some illustrative examples:
Outright Purchase: Claim up to 100% of the purchase price as a capital allowance in the first year for certain commercial vehicles.
Brand new electric vehicles also qualify for a 100% First Year Allowance.
However in general, other cars do not qualify for a 100% deduction and potentially the deduction is as low as a 6% Writing Down Allowance.
Hire Purchase: Similar benefits to outright purchases, with the addition of interest deductions.
Lease: Typically, monthly payments are fully deductible.
VAT Considerations
VAT can be reclaimed on commercial vehicles, but the rules for cars are stricter due to potential private use. Full VAT can be reclaimed on commercial vehicles if they are used exclusively for business. Here’s how VAT applies:
Cars: Generally, you cannot reclaim VAT unless the car is used exclusively for business, which is rare.
Commercial Vehicles: Full VAT can be reclaimed, assuming the vehicle is used only for business.
There is an exception to the general rule for cars if the car is leased by the company. In this case 50% of the VAT charge can be reclaimed by the company.
Benefit in Kind (BIK)
If your company provides you with a vehicle that you can also use privately, you’ll face a Benefit in Kind (BIK) tax. The BIK value depends on the vehicle’s type, its CO2 emissions, and the type of fuel it uses.
There are also potential BIK charges for commercial vehicles, however these are generally much lower compared to cars. When considering if a BIK charge applies to commercial vehicle use, home to work travel is not considered private use, but incidental use of the vehicle.
In Summary
| Vehicle Type | Purchase Option | Corporation Tax | VAT Reclaimable | BIK Implications |
|---|---|---|---|---|
| Car | Outright / Hire Purchase | Generally 6% Writing Down Allowance (Brand New Electric – qualify for 100% First Year Allowance) | No, unless exclusive business use | High, based on CO2 emissions |
| Car | Lease | Payments deductible | 50% of VAT is reclaimable | High, based on CO2 emissions |
| Commercial | Lease | Payments deductible | Yes, if exclusive business | Low, flat rate |
| Commercial | Hire Purchase | Capital allowances and interest deductible | Yes, if exclusive business use | Low, flat rate |
Choosing how to purchase and use vehicles in your business has significant tax and financial implications. Understanding these can help you make decisions that align with your business strategy and financial goals.
Have questions about how these options apply to your business? Don’t hesitate to call us on 01228 904904 for personalised advice tailored to your business requirements.
