26/12/2017
When running a business through a limited company, directors often consider the most tax-efficient ways to acquire essential assets, including vehicles. A common question that arises is whether a limited company can purchase a car or, more specifically, a van, using a hire purchase agreement. This article delves into the intricacies of acquiring a van through your limited company, examining the tax advantages, potential pitfalls, and the crucial administrative requirements. We will also touch upon the implications for personal use of such vehicles.
### Can a Limited Company Buy a Car with Hire Purchase?
The initial question posed is whether a limited company can buy a car with hire purchase. The direct answer is yes, a limited company can indeed enter into a hire purchase agreement to purchase a car. However, the more pertinent question for business owners is whether it is tax-effective to do so. For cars, particularly those with higher emissions, purchasing through a limited company is generally less tax-efficient compared to other methods, especially when compared to acquiring a van. The tax treatment of cars often involves limitations on capital allowances and significant benefit-in-kind charges for personal use, which can outweigh any initial tax savings.
### The Tax Advantages of Buying a Van Through a Limited Company
In contrast to cars, acquiring a van through your limited company can present considerable tax efficiencies. This is a key distinction that business owners should be aware of. The primary reason for this difference lies in how HMRC (Her Majesty's Revenue and Customs) classifies vehicles for tax purposes. Vans, when meeting specific criteria, are treated differently from cars, allowing for more favourable tax treatment.
#### Is it a Van?
The first and most crucial step is to ensure that the vehicle you intend to purchase is officially classified as a van for tax purposes. This is not merely about the vehicle's appearance or its common designation. HMRC has specific guidelines and lists that define what constitutes a van for tax purposes. The dealership where you purchase the van should be able to confirm its classification. If the vehicle does not meet HMRC's definition of a van, it will likely be treated as a car, and the tax benefits associated with van purchases will not apply. For vehicles with very low emissions, the tax treatment might differ, but generally, if it's not a van, it's unlikely to be a tax-effective purchase through the company.
#### Administration: Keeping it Official
Regardless of whether you are buying the van outright or through a hire purchase agreement, all associated documentation must be in the company's name. This includes the purchase agreement, invoices, and any financing documents. Furthermore, all payments related to the van, whether initial deposits or monthly instalments, must be made exclusively through the company's bank account. This strict adherence to company administration ensures that the purchase is clearly a business expense and not a personal one, which is vital for maintaining tax compliance.
### VAT and Corporation Tax Implications
When a limited company purchases a van, there are significant implications for VAT and corporation tax.
#### VAT Recovery
The company can typically claim the full VAT on the purchase price of the van. This applies even if the company is operating under a flat-rate VAT accounting scheme, provided the van was purchased new and cost over £2,000. This ability to reclaim the VAT upfront can represent a substantial saving.
#### Corporation Tax and Capital Allowances
For corporation tax purposes, the company is generally allowed to write off the full cost of the van in the year of purchase. This is achieved through a capital allowance claim. However, it's important to note that while the entire cost can be claimed against corporation tax, accounting rules may only allow a portion of the van's cost to be recognised as depreciation in the company's accounts each year. This discrepancy can lead to a deferred tax charge in the company's accounts, which is an accounting measure reflecting the future tax liability.
#### The Flip Side: Selling the Van
It is crucial to understand the implications when the time comes to sell the van. When the company sells the van, VAT will be charged on the sale proceeds. Furthermore, the profit made on the sale will be subject to corporation tax. This is the counterbalance to the immediate tax benefits received upon purchase.
### Personal Tax: Benefit-in-Kind Charges
If the van is used for personal purposes, you, as the director or employee, will be liable to a benefit-in-kind (BIK) charge. This charge reflects the personal benefit you derive from using a company asset. The BIK charge is calculated based on the van's value and any additional benefits, such as fuel.
#### Van Benefit-in-Kind
For the 2016-17 tax year, the BIK charge for the use of a van was £3,170. If you are a higher-rate taxpayer (paying income tax at 40%), this would result in an annual income tax liability of £1,268 (£3,170 * 40%). It is important to note that these figures are subject to change by HMRC in subsequent tax years.
#### Fuel Benefit-in-Kind
If the company also covers the cost of fuel for the van, an additional BIK charge will apply for the personal use of that fuel. For the 2016-17 tax year, this fuel BIK charge was £598. For a higher-rate taxpayer, this would incur an additional income tax liability of £239.20 (£598 * 40%).
#### Reporting and National Insurance
These benefits in kind must be reported to HMRC annually on a P11d form. Crucially, the company is also liable to pay Class 1A National Insurance on the total benefit-in-kind. For the 2016-17 tax year, the Class 1A National Insurance rate was 13.8%. Therefore, on the combined van and fuel BIK of £3,768 (£3,170 + £598), the company would have to pay approximately £520 (£3,768 * 13.8%) in National Insurance contributions.
### Strategic Fuel Management
The treatment of fuel costs can be a strategic decision. If you anticipate a significant amount of personal mileage in the van, having the company pay for all fuel costs might seem appealing due to the convenience and the potential for the company to reclaim VAT on fuel. However, the associated BIK charges on fuel need to be carefully weighed against this. Conversely, if the majority of your mileage is for business purposes with very little personal use, it may be more tax-efficient for you to pay for all the fuel personally and then recharge the company for the fuel used specifically for business trips. This approach avoids the fuel benefit-in-kind charge entirely for your personal use.
### Current Van and Fuel Benefits
It is essential to stay updated with the latest figures for van and fuel benefits in kind, as these are revised annually by HMRC. You can find the most current information on the GOV.UK website or by consulting with your accountant.
### When is it a Good Idea?
The decision of whether buying a van through your company is a good idea is highly dependent on several factors, including current tax legislation, your company's financial position, and your personal circumstances. For instance, if the van is predominantly used for business purposes, the tax benefits on purchase can be substantial. However, if personal use is high, the benefit-in-kind charges could negate these advantages.
### Key Considerations Summary
Let's summarise the key points to consider:
| Feature | Company Van Purchase | Notes |
|---|---|---|
| Vehicle Classification | Must be officially a van | Crucial for tax benefits. |
| Purchase Method | Hire Purchase or Outright | All admin in company name. |
| VAT | Full VAT reclaimable on purchase | Subject to VAT rules. |
| Corporation Tax | Full cost claimable via capital allowances | May lead to deferred tax. |
| Personal Use | Benefit-in-kind (BIK) charge applies | Affects personal income tax. |
| Fuel | BIK charge if company pays for fuel | Consider personal vs. business fuel. |
| Reporting | P11d forms required | For BIK reporting. |
| Company NI | Class 1A NI on BIK | An additional company cost. |
| Selling the Van | VAT on sale proceeds, profit taxed | Taxable event. |
### Frequently Asked Questions
#### Can a limited company buy a van on finance?
Yes, a limited company can purchase a van using finance, including hire purchase agreements, provided all documentation and payments are handled through the company.
#### What if the vehicle is a car, not a van?
If the vehicle is classified as a car, the tax treatment is significantly different and generally less advantageous. Capital allowances are restricted, and benefit-in-kind charges can be substantial, especially for higher-emission vehicles.
#### How is personal use of a company van calculated?
HMRC sets a flat rate for the van benefit-in-kind. If the company also pays for fuel, there is a separate flat rate for fuel benefit-in-kind. These are the figures used unless you can demonstrate that the van is only used for business purposes and is not taken home, or if specific mileage records are meticulously kept for personal use.
#### Should I pay for fuel personally or have the company pay?
This depends on your personal vs. business mileage. If personal mileage is high, paying for fuel personally and recharging the company for business use will avoid the fuel benefit-in-kind charge. If business mileage is high, the company paying for fuel might be simpler, but the BIK tax must be factored in.
#### When should I consult my accountant?
You should always consult your accountant before making a decision to purchase a vehicle through your limited company. They can provide tailored advice based on your specific circumstances, the vehicle in question, and the latest tax legislation. This ensures you make the most informed and tax-efficient decision for your business.
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