Buying a car through your business - limited company

Should I buy a car through my limited company? 

As a limited company director, it is crucial to understand that buying a car through your limited company is a complex decision that requires a lot of consideration.  

Some of the things to consider include: 

• Car-associated costs 
• How will you use the car – exclusively for business purposes or for personal use, or both? 
• Tax implications (tax liabilities and tax relief)  
• How will VAT play a role in the type of vehicle you choose? 
• Whether to buy or lease a car.  

We have prepared this guide for when you intend to purchase a car via your limited company, as a contractor as well as a business owner. 

The decision to purchase - hire purchase and renting via your limited company 

Corporation Tax 

You can get a car for your limited company using any of these three methods: 

• Pay off the full cost of the vehicle in a lump sum: in this case, the car will be recorded as an asset on your balance sheet. You will then obtain corporation tax relief via capital allowances, although this relief may be over several tax years (we discuss this later in this article). 
• Use a higher purchase lease: when you finance a vehicle purchase for your business using a hire-purchase (HP) agreement, you pay a deposit followed by monthly installments. You can only claim the capital allowances at the point the ownership of the vehicle is transferred to the business.  

• Lease a car for your company: when you lease a vehicle for your business, you pay fixed monthly repayments over a set period to hire the car (not to own). The regular payments you make are included as an allowable expense in your profit and loss account for corporation tax. If the car’s emissions are more than 130g/km - the company can only claim 85% of the total leasing costs. If the car’s emissions are less than 130g/km – the company can claim 100% of the annual lease costs against its corporation tax bill. 

 VAT 

The way your limited company buys, or rents the car does not typically impact your ability to claim a refund on the associated VAT.  

However, if you have already determined your eligibility to claim your input VAT, could impact the timing of when you can claim your input VAT. For example: 

• Purchase - when you buy the car via the company you can claim the full VAT based on the invoice date  
• Hire Purchase – you can only claim the VAT at the point ownership is legally transferred 
• Rental – VAT is claimed in line with the invoice date on your rental payments for the car 

Income Tax & National Insurance 

 Like VAT, whether you purchase the car, hire purchase, or rent it, this does not impact the amount of tax and national insurance you pay. 

How will you use the car – is it exclusively for business purposes - or - will there be some private use? 

If a company car is used for anything other than work travel, it can count as personal use. It is crucial to remember that commuting to and from your regular place of work is considered personal use.  

Generally, you can only reclaim the VAT on a car if it is used exclusively for business and is not available for private use by yourself.  

Where your company car is leased - unless there is exclusive business use, the company will only be able to recover 50% of the VAT charged on any lease payments. 

It is worth bearing in mind that if your company car is available for private use - it results in a taxable Benefit in Kind (we talk about this later in the article).  

Capital Allowances for Corporation Tax - How does my company claim for the cost of the car? 

When it comes to company cars, a Capital Allowances claim is the percentage of the car's cost claimable against your taxable profit -each year. Buying a car via your limited company makes it a business fixed asset, you need to obtain tax relief via capital allowances on its purchase value to reduce the taxable profit in your tax return. 

However, it is worth bearing in mind that the capital allowances for cars are determined by their CO2 emissions - the higher the emissions, the less tax relief you can claim.  

Capital Allowances claims fall into the following bands: 

If the company only leases the car, then the CO2 emissions will determine the proportion of claimable rental payments. The higher the CO2 emissions, the lower the claimable proportion. 

If you buy a vehicle through the business - there might be a balancing charge that will increase your tax bill when you sell it. This is more likely for a commercial vehicle - where the complete value of capital allowances has been claimed. 

For accounting purposes - the asset is written off each year - based on its estimated useful life. For example, if you buy an asset that will last five years for £50,000, then a charge of £10,000 will be made each year in the accounts. 

Eligibility to claim back VAT on Company cars 

The claimable VAT from the purchase of a car - is restricted by these two conditions: 

• It must be a car that has never had any private use, for example - a brand-new car or previously a pool car/lease car. 
• It will be used exclusively for the purposes of the business and is not available for any private use. 

As a result, for a car to pass the above test, it should be: 

• Parked permanently on business premises (not outside someone’s home). 
• Only used for business journeys.  

However, it is important to note: 

• The VAT rules are less restrictive for commercial vehicles like trucks and vans. Trucks and vans can only be used for the business, but they are not bound by the “available for personal use” rule. In that case, you may recover the full VAT on this purchase – including secondhand purchases.  
• VAT is claimable on a pool car kept on-site overnight and used by several different employees throughout the working day – even if some of that use is personal. 
• VAT is claimable on a car used primarily for - taxi, driving instruction or self-drive hire. 

Benefits in Kind - How are company car benefits taxed? 

When you buy a vehicle through your limited company - it belongs to the company as a "company" vehicle. Therefore, as a director or employee when you use the company vehicle for non-business purposes - this is classed as a Benefit in Kind - which is liable for tax and class 1A national insurance contributions. 

The amount of benefit for a car varies depending on the make, model, age, fuel type and level of CO2 emissions.  

The deemed benefit of private use of your company car is calculated by - multiplying the list price of the car by the CO2 emissions percentage of the car. The list price should include any accessories fitted before the car was first made available and any accessories equipped later (that cost more than £100). 

The result of this calculation is then multiplied by the class 1a NIC rate of 13.8%. 

NOTE: A genuine pool car, fulfilling similar conditions to those for VAT - does not cause a Benefit in Kind for the employees using it.  

Conclusion 

It is crucial to bear in mind that: 

• Personal use of company vehicles will result in a Benefit in Kind and extra tax / NIC for both the driver and the company. 
• Buying a van or commercial vehicle is often a better option than a car if used wholly for business purposes.  
• It’s generally unrewarding to introduce a car into the business unless it is a genuine pool car.  
• Remember to track business mileage and claim 45p per mile.  
• You can claim VAT on the fuel element of these journeys covered if you are VAT registered. 

Feel free to contact us for further support and guidance on buying a car via your limited company.