Company Cars: The Pros and Cons for Ltd Companies

For many directors and business owners, the idea of acquiring a new vehicle through their limited company can seem like a shrewd financial move. On the surface, it presents an opportunity to leverage business assets, potentially reduce tax liabilities, and maintain a professional image. However, the reality of running a company car is a complex landscape of tax implications, allowances, and personal benefits that require careful consideration. This article delves into the intricacies of whether a limited company should pay for a new car, exploring the advantages, disadvantages, and key factors to weigh before making a decision.

Can a Limited Company Buy a Car?

The straightforward answer is yes, a limited company can purchase a vehicle. The car becomes a company asset, registered in the company's name and funded from the business bank account. This setup is particularly beneficial if the vehicle is primarily intended for business use, such as attending client meetings, visiting various work sites, or transporting goods. When a car is a company asset, its associated running costs can often be offset against the company's profits, potentially leading to a lower corporation tax bill.

The Benefits of a Company Car

Acquiring a car through your limited company can offer several attractive advantages:

1. Reducing Your Tax Bill

One of the most significant draws of a company car is the potential to reduce your overall tax liability. Many expenses related to the car can be treated as allowable business expenses. These include:

• The purchase price or lease costs of the car.
• Fuel (for business journeys).
• Insurance premiums.
• Road tax (Vehicle Excise Duty).
• Maintenance and repair costs.
• MOTs and servicing.

By deducting these costs from your company's profits, you effectively lower the amount of taxable income, thus reducing the corporation tax payable.

2. Claiming Capital Allowances

When your company purchases a car, it can claim capital allowances. These allowances allow you to deduct a portion of the car's cost from your company's taxable profits over time. The rate at which you can claim these allowances is heavily influenced by the car's CO2 emissions:

This means that environmentally friendly vehicles, particularly electric cars, can offer substantial tax benefits by allowing a full write-off of the cost in the first year.

3. VAT Reclaims

If your company is VAT-registered, you may be able to reclaim some or all of the VAT on the purchase price and running costs of the car. However, the rules here are strict. Full VAT recovery is typically only possible if the car is used exclusively for business purposes and is not available for private use. If there is any private use, you can usually only reclaim 50% of the VAT on lease payments, and for outright purchases, reclaiming VAT on the car itself can be very challenging unless it's a pool car or used for specific commercial purposes like taxis or driving instruction.

4. Professional Image

A company car can significantly enhance your business's professional image. Arriving at client meetings or industry events in a well-maintained, perhaps even branded, company vehicle can convey a sense of success and reliability.

The Downsides of a Company Car

While the benefits are appealing, there are significant drawbacks to consider:

1. Benefit in Kind (BIK) Tax

This is arguably the most significant disadvantage. If the company car is available for your personal use, including commuting to your regular place of work (which HMRC considers private mileage), you will be liable for Benefit in Kind (BIK) tax. BIK tax is calculated based on the car's P11D value (list price including optional extras), its CO2 emissions, and your personal income tax band. The higher the CO2 emissions, the higher the BIK tax you will pay. For petrol and diesel cars, this can result in a substantial annual tax charge that can easily negate any company tax savings and even cost you more than if you had purchased the car privately.

Example: A BMW 320i SE with a list price of £27,740 and CO2 emissions of 22% would incur an annual BIK tax charge of approximately £1,220 to £2,746, depending on your tax rate. The company would also have to pay Class 1A National Insurance on this benefit.

2. Higher Tax on High Emission Vehicles

As mentioned, cars with higher CO2 emissions not only result in higher BIK tax for the individual but also attract lower capital allowances for the company. This means the company gets less tax relief on the purchase price, making these vehicles less tax-efficient for the business.

3. Administrative Burden

Managing a company car involves considerable administrative effort. This includes keeping meticulous records of business and private mileage, tracking all expenses, processing fuel reimbursements, reporting BIK charges to HMRC via P11D forms, and managing VAT adjustments for private fuel use. For small businesses, this can be a significant drain on time and resources.

4. Depreciation

Cars are depreciating assets. When a car is owned by the company, its depreciation is reflected on the company's balance sheet. This can impact the company's net asset value. Furthermore, selling a company car often yields a lower resale value compared to selling a privately owned vehicle.

5. Insurance and Running Costs

Company car insurance policies can be more expensive than personal ones. Additionally, the company bears the responsibility and cost for all running expenses, which, while deductible, still represent a cash outflow for the business.

Buying vs. Leasing a Company Car

Companies have two primary options for acquiring a vehicle: buying outright or leasing.

Buying Outright

• Pros: Ownership of an asset, potential for 100% first-year capital allowances on electric vehicles, no mileage restrictions, and no ongoing payments once the car is paid off.
• Cons: Significant upfront capital outlay, depreciation risk, and the car remains an asset on the company's books, which might affect borrowing capacity.

Leasing (Contract Hire)

• Pros: Lower upfront costs, predictable monthly payments, easier to upgrade to newer models, and no depreciation worries as the car is returned at the end of the lease term. Lease payments are generally tax-deductible.
• Cons: Only 50% of VAT can be reclaimed on lease payments if there's any private use. You don't own the asset. Excess mileage or damage charges can apply at the end of the lease.

The Tax Position on Fuel

If your company pays for your fuel, HMRC treats this as a taxable benefit if any of it is for private journeys. The taxable benefit is calculated based on a fixed annual sum (£22,200 for 2016/17) multiplied by the car's CO2 emissions percentage. If your company pays for all fuel, including private mileage, you'll need to make a fuel scale charge adjustment on your VAT return to account for the estimated private use. For business-only fuel, all VAT can be reclaimed, but accurate mileage records are essential.

Alternatives to a Company Car

Given the complexities and potential costs of a company car, many businesses opt for alternatives:

1. Mileage Allowance

The simplest and often most tax-efficient method is to use your own car for business and have the company reimburse you using HMRC's approved mileage rates. Currently, these are 45p per mile for the first 10,000 business miles and 25p per mile thereafter. This reimbursement covers fuel, wear and tear, and insurance, and it's tax-free for you and a deductible expense for the company. Accurate mileage logs are crucial.

2. Car Allowance

Your company can provide you with a car allowance, which is a fixed amount added to your salary each month. This gives you the flexibility to choose and run your own car. However, the allowance is treated as taxable income, subject to Income Tax and National Insurance, similar to any other salary payment.

3. Vans

For businesses that require a vehicle primarily for carrying goods or equipment, a van can be a more tax-efficient company vehicle than a car. The tax rules, particularly regarding BIK and capital allowances, are often more favourable for vans.

Electric Cars: The Tax-Efficient Choice?

Electric vehicles (EVs) have become particularly attractive for company car schemes due to significant tax advantages:

• 100% First-Year Allowances: Companies can claim 100% capital allowances on new EVs in the first year, significantly reducing taxable profits.
• Lower BIK Rates: EVs have substantially lower Benefit in Kind tax rates compared to petrol or diesel cars, making them much more affordable for the employee.
• Reduced Running Costs: Electricity is generally cheaper per mile than petrol or diesel, and EVs typically have lower maintenance costs due to fewer moving parts.
• Government Incentives: While direct purchase grants have reduced, incentives like reduced road tax and potential grants for charging infrastructure remain.

For businesses and directors prioritising tax efficiency and environmental responsibility, an electric company car is often the most compelling option.

Is a Company Car Right for You?

The decision to buy or lease a car through your limited company hinges on several factors:

• Usage: How much of the car's mileage will be for business versus personal use?
• Car Type: Are you considering an electric vehicle or a traditional petrol/diesel car?
• Financials: What is your company's cash flow, and what is the budget for vehicle acquisition and running costs?
• Personal Circumstances: What is your individual tax rate, and how much BIK tax are you willing to pay?

For most individuals running petrol or diesel cars with any level of private use, the tax implications of a company car often make it a less attractive proposition than simply claiming mileage allowance on their personal vehicle. However, for electric vehicles, or for businesses where a car is an indispensable and exclusively business-use asset, the benefits can be substantial. It is highly recommended to consult with an accountant to thoroughly assess your specific situation and make an informed decision.

Frequently Asked Questions

Is it better to buy personally or through a company?

For electric cars, buying through the company often offers greater tax advantages. For petrol or diesel cars, personal ownership and claiming mileage allowance can frequently be more cost-effective once Benefit-in-Kind tax is factored in.

Can I claim 100% VAT back on a company car?

Only if the car is used strictly for business purposes with no personal use whatsoever. In most practical scenarios, only 50% of the VAT on lease payments can be reclaimed if there's personal use.

What's the most tax-efficient company car?

Electric cars are generally the most tax-efficient due to their low Benefit-in-Kind rates and eligibility for higher capital allowances.

Do I still pay road tax through the company?

Yes, if the company owns the car, it is responsible for paying the road tax as a business expense.

Is it worth buying a car through a limited company?

It can be worth it for electric cars or if the car is used predominantly for business. For petrol/diesel cars, the personal tax costs often outweigh the company benefits.

Which cars qualify for 100% capital allowances?

Brand new, fully electric cars with zero CO2 emissions qualify for 100% first-year capital allowances.

Does a company car reduce your tax-free allowance?

A company car is a Benefit in Kind, which increases your taxable income. It doesn't reduce your tax-free personal allowance, but it does mean you pay more income tax overall because the value of the car benefit is added to your earnings.

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