What is the tax cost of a company car?

If your company buys or leases a car, which you then use for both business and personal journeys, there are tax implications for both you and your company. As contractor accountant specialists have a read of Orange Genie Accountancy's advice below; 

Implications for your company

If your vehicle is a company purchased car, the company become the registered owner and keeper of the car. The car will need to be insured in the name of the company, with you as a named driver. Your company will meet all costs of insurance, road tax and maintenance – all of which are tax deductible and will reduce Corporation Tax Liabilities.

When purchasing a new car, VAT is not reclaimable. If you purchase a second-hand car then VAT is not normally charged, however, if it is then the VAT is reclaimable.

If a car is obtained under a lease contract, then VAT is normally chargeable on the monthly cost. If you are on the Flat Rate VAT scheme then none of this can be reclaimed. If you are on the standard VAT scheme then only 50% of the VAT can be claimed.

Corporation Tax relief is available when a car is provided to an employee although the rate of relief differs depending whether the car is purchased or leased.

Fuel can also be provided at the Company’s expense but a further benefit in kind for the employee is then created.

The company will have to pay 13.8% Employers National Insurance on any benefit in kind value.

Implications for you, the Director/Employee

The use of the car for personal journeys is deemed to be a benefit by way of your office and employment and hence a benefit in kind charge is incurred. In effect, the benefit is treated as additional salary and taxed as such. The benefit in kind would be reported on a form P11d.

The benefit in kind will use up part of your basic rate tax band and will affect the level of dividends that can be taken, effectively tax-free.

Calculating the Benefit in Kind

The Benefit in Kind is calculated by reference to the Original List Price of the Car and its CO2 Emissions and fuel type.

For example:

Original List Price

CO2 Emission

HMRC Benefit in Kind %

£ 30,000

120mg

18% (diesel rate)

The benefit in kind charge would be £30,000 x 18% = £5,400. This would be added to your Taxable Income for each year that you have use of the car.

Tax payable on the benefit would be as follows:

Basic Rate Tax Liability

Higher Rate Tax Liability

£ 1,080.00

£ 2,160.00

In addition, the company can pay for all fuel. A further benefit arises based on the official % and a fixed value of £21,100. Based on the above example the provision of fuel would add a further benefit of £21,100 x 18% = £3,798

Tax Payable would be:

Basic Rate Tax Liability

Higher Rate Tax Liability

£ 759.60

£ 1,519.20

If fuel is not paid for by the company you can reclaim fuel costs at the applicable advisory rate for all business mileage.

Low CO2 Emission Cars

Traditionally Company Cars are seen as “expensive” benefits in kind. In relation to owner managed companies, where the recipient of the company car is also the sole shareholder, the same person effectively ends up paying both the employer and employee taxes.

A company car may be efficient if it is environmentally friendly. A car is classed as having low emissions if they are below 75g/km or below. The applicable benefit in kind % for a low emission car ranges between 0% - 14% for petrol cars. A 3% premium will be added to the percentage if the car is diesel.

Company Vans

Company vans are more tax efficient than a company car because the tax treatment is different. The van benefit is £3,000 per annum added to your taxable income and if fuel is provided, the flat rate benefit in kind is an additional £564 per annum.

To qualify as a van, the vehicle must be purpose built and not converted by having windows covered up etc. HMRC’s definition of a van states it should be a goods vehicle with a maximum legal laden weight of 3,500 kilograms.

A benefit in kind will not be incurred if the van is used solely for business purposes. In practice, if the van is parked at your home overnight, it would be quite hard to prove there is no personal usage.

Any benefit in kind on the van would be assessed on your Self Assessment tax return each year or through your PAYE Coding notice. Your company will have to declare the company van on your P11d form each year and would have to pay employer’s NI at a rate of 13.8%.

To find out more about running your own limited company or to find out more about how Orange Genie Accountancy can help you, please call us on 01296 468 185 or email accountancy@orangegenie.com.

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