Company Car Tax & Benefit in Kind
One of the most frequently asked questions we receive is in relation to Company Car Tax - the use of cars for business purposes and how this will affect the tax liability.
The current system of tax relief and benefits in kind are all linked to the CO2 emission of the car. The tax system has long been used to incentive behaviour. With air pollution and congestion becoming key issues, the government has put in place a system which encourages company car buyers towards efficient green vehicles.
How the existing car tax system works for Limited Companies
If you decide to purchase a car for your limited company, the tax relief available will be determined by the CO2 emission of the vehicle. In general, cars with emissions of more than 130g/km will only benefit from an 8% tax deduction on a reducing basis.
In contrast, the cost of a car with emissions of 75g/km or less are available for 100% tax relief in the first year provided they are bought brand new by the business. Electric vans are also an option for 100% tax relief but do check that what you are buying meets the HMRC criteria for a van.
The personal cost to the driver in terms of the Benefit in Kind they pay is also linked to the CO2 emission – with the relevant percentage based on emission being applied to the cost of the car plus accessories.
For tax year 17-18, even cars with emissions of 50g/km or less will attract a benefit in kind charge of 9%. This rises to a staggering 37% for cars emitting over 190 g/km.
So what are the options ?
- Update your vehicle – in the past, many drivers bought diesels in good faith thinking these were less polluting. Consequently, around a third of the UK car fleet is now made up of diesels. The planned abolition of the 3% diesel supplement on car drivers originally announced for April 16 has now been delayed until April 21 meaning a real cost for diesel drivers who anticipated the reduction in their personal tax. New petrol cars will benefit from cleaner technology and lower emissions. Green cars such as hybrids and electrics can be costly but benefit from grants of between £2,500 and £4,500 and a fraction of the fuel costs going forward. Use the link here to choose your new company car and assess the personal tax impact: http://comcar.co.uk/
Become a white Van Man!
- Get a van – these attract a much more favourable tax rate than cars as they are classed as plant and equipment by HMRC. The purchase of a van can qualify for 100% tax relief within the current annual investment allowance of £200,000. Company vans also have a fixed rate of benefit in kind which is not related to CO2 emission and in general is much lower than those for car drivers. You can check the current list of vans approved by HMRC here.
Share the Car with other employees
- Have a Company Shared Pool car – provided you meet certain conditions about use and where the car is kept overnight, this will save employees suffering any car tax benefits. The car must be available to all employees not just the boss to qualify as a pool car.
- Lease a car – tax relief is available on the monthly payment and VAT can be claimed with a reduction of 50% if there is private use. Drivers will still suffer from the benefit in kind charge though.
- If you don’t want to put the cost of the vehicle and the running costs through the business, the more straight forward option is to record your business mileage and then claim 45 pence per mile for the first 10,000 miles and 25 pence thereafter per tax year. Whether this produces a higher cost and therefore a lower tax bill than the other method will depend on the type/age of car and how you drive it. Cloud Accounting will be able to advise which method is more beneficial to you. Once you choose a method, you have to apply this each year on a consistent basis until you change the car.
- Hire a car as and when you need it – Where there is no company car, there is no benefit in kind arising on a hire car that is used by an employee providing that the car being provided for business travel with only ‘incidental’ private use. According to HMRC guidance, incidental private use is not measured by the actual number of private miles driven, but rather in the proportion of the private element of the journey when viewed as a whole. A benefit in kind charge will arise where the vehicle has been used for private purposes over the weekend. The charge will be based on the normal rules of CO2 emissions, apportioned by the actual time used over the tax year. Where a hire car is being used say whilst the company car is being repaired, then there is no change to the main benefit in kind where for the company car providing it is not unavailable for a period of 30 days or more.
A Word About Fuel
Company directors as a rule should not buy fuel through the company as this incurs a fixed benefit in kind charge of a staggering £22,600 multiplied by the same percentage as the car benefit based on the CO2 emission for the car.
Fuel can be claimed by directors at the HMRC fuel rates which are based on engine size. These rates are reviewed twice a year so do check the latest official rates here http://www.hmrc.gov.uk/cars/advisory_fuel_current.htm
Sole traders business profit deduction options:
If you’re a sole trader, there’s no concept of a “company car” for you, because there’s no legal difference between you and your business, so you will always own the vehicle. Sole traders can use one of these two methods to claim tax relief on business journeys in your own car.
Mileage method (as discussed above)
If you have never claimed any capital allowances on that car, then you can use the simplified expenses method to work out the cost of your business journeys. I also call this the “mileage method”.
Put the result into your accounts as one of your day-to-day running costs, so that it reduces your profit and so reduces the amount you pay tax on. This is how you claim tax relief on the cost of your business mileage.
Actual cost method
If you can’t use the simplified expenses method, or if you think that your car costs more than 45p a mile to run, you would use what I call the “actual cost method” to work out the amount you can claim as a running cost in your accounts.
To use the actual cost method, add up all your mileage, business and private, and then work out the business mileage as a percentage of the total mileage. For example, you may find that 20% of your car journeys are business journeys, so 20% is the business proportion of the car’s use.
Then, apply the business proportion to all the running costs of the car, such as fuel, repairs, MOT, insurance, servicing and so forth. For example, if your fuel bills total £1,000, then the business proportion of your fuel would be £1,000 * 20%, or £200. Do this for each running cost – these are the amounts you can include in your business’s accounts as day-to-day running costs for the car.
If you’re using the actual cost method you can also claim capital allowances on the business proportion of the cost of the car.