By Scott Ferguson

Thinking of buying a car through your limited company? At first this can seem like a great tax saving idea, but it is important to consider all of the associated costs and tax implications before deciding whether to invest. The purpose of this blog is to summarise the obvious, and perhaps not so obvious, implications to aide you in making this decision and also to touch on some of the other important points to consider around business travel.

Note: all the rates and allowances in this blog relate to the 14/15 tax year per HMRC.

1. Is the car going to be used 100% for business, or will it also be used privately?

This is most important when dealing with the VAT on the vehicle. You can only reclaim VAT on a car if it is used exclusively for business, and you can prove to HMRC that it is not available for private use by yourself or your employees. A good example of this is a pool car that is kept on site overnight and is readily available for any employee (not one specific employee) to use for business purposes throughout the working day. Other exceptions where you can reclaim the VAT are when the vehicle is to be used primarily as a taxi, for driving instruction or for self-drive hire. It is important to note that driving to and from your regular place of work is known as your ordinary commute and is not considered to be business use by HMRC.  This means that even if you use the vehicle solely to travel to and from your workplace, you cannot reclaim the VAT.

If the vehicle does have a private use element this will give rise to a benefit in kind on which you may be required to pay Income Tax. The company will also be required to pay Class 1A National Insurance on this benefit.

2. What level of CO² emissions does the car produce?

The CO² emissions produced by the car directly affect the deemed benefit on which you will be taxed and the percentage at which capital allowances can be claimed on the vehicle expenditure.

The deemed benefit in kind of the vehicle is calculated by multiplying the list price of the car by the CO² emissions percentage of the car. The list price used for the calculation should include any accessories fitted before the car was first made available and also any fitted after costing more than £100. The CO² emissions percentage can be found on: http://bbaccs.co/1nSlt8K.

Put simply, the greater the amount of CO² produced by the car, the higher the CO² percentage will be, resulting in a higher benefit on which you will have to pay tax.

This can be illustrated more clearly with an example:

Vehicle: VW Golf 1.6 TDI

List Price: £18,595

CO2 Emissions: 98 g/km

In this example the CO² emissions percentage per HMRC is 15%, so the taxable benefit will be:

£18,595 x 15%  =  £2,789.25

Note: This is taxable benefit not the actual amount of tax you will pay.

3. Capital Allowances

It is important to note that when a company buys an asset (including a car) it is not treated as an expense that can be deducted from profit for tax purposes. Tax relief is obtained through Capital Allowances, which have specific rules as to how much can be claimed. In relation to cars, as mentioned previously, the amount of Capital Allowances that can be claimed directly correlates to the level of CO² emissions the car produces. It follows the same logic as with the benefit in kind calculation in that the more CO2 the car produces, the less tax relief you can claim. However, Capital Allowances are somewhat simpler as there are just 3 bands to consider rather that a whole scale of percentages.

• If the car’s CO² emissions are 95g/km or less, 100% of the price of the car can be claimed (i.e. deducted from profit) in the first year, provided that it is a new car.
• If the CO² emissions are between 96g/km and 130g/km the rate at which capital allowances can be claimed is 18% per annum
• For CO² emission levels above 130g/km the capital allowance rate is 8% per annum.

In the example above, the VW Golf would fit into the second band, so Capital Allowances would be claimed at 18% per annum.

Clearly, from a benefit in kind and Capital Allowance point of view, it makes much more sense to buy a more environmentally friendly vehicle in order to save the greatest amount of tax.

4. Fuel

There are a number of rules to consider around providing fuel for yourself or employees. Again, it is important to distinguish between business fuel and private fuel.

If any fuel is provided for private use then the employee will be deemed to be receiving a taxable benefit based on the CO² emission percentage as calculated above multiplied by £21,700. So, using the VW Golf example above, the taxable benefit would be £3,255. The £21,700 is a fixed amount, regardless of how much fuel has actually been provided to the employee for private mileage.

If fuel is provided solely for business use there is no benefit in kind and so no additional tax to be paid; however, HMRC would require proof that none of the fuel was used for private purposes. This could be demonstrated through accurate mileage records or payments made by the employee back to the company for any private fuel. One thing to note, the same rules apply regarding the ordinary commute, this is not classed as business travel.

There is also the VAT on the fuel to consider from the company’s perspective. If the fuel is used solely for business use then all of the VAT on fuel can be reclaimed. If there is private usage of fuel paid for by the business then this needs to be taken into account. This is applied through a fuel scale charge. Essentially the company will reclaim all of the VAT on the fuel and then pay the appropriate fuel scale charge to HMRC to make up for the estimated private use element. Once again this charge is based on the CO² emissions of the vehicle. The latest fuel scale charge can be found here: http://bbaccs.co/1nSpzOc.

Continuing the VW Golf example, if private fuel were paid for by the company with all of the VAT being reclaimed, the quarterly fuel scale charge to be added on to the total VAT liability would be £26.

5. Other alternatives

Clearly, weighing up the costs and benefits of buying a car and paying for travel through your business is not always straight forward. Overall, the easiest way to reimburse yourself and employees for business travel is by sticking to HMRC’s defined tax-free mileage allowances. This allows an employee to be reimbursed up to 45p per mile for the first 10,000 business miles in any given tax year using a private vehicle and 25p per mile for any business mileage thereafter. Provided there are accurate mileage records for business travel this amount will be tax free.

If the employee does use a privately fuelled company car, and you wish to reimburse them for their business fuel, there are advisory fuel rates provided by HMRC which again, if paid, will not give rise to an additional tax charge. These rates vary depending on the size of the car’s engine and fuel type, and can be found here: http://bbaccs.co/1nSt733.

Hopefully, this article will clarify some of the issues surrounding the purchase of vehicles and business travel in general.  However, if you do have any questions relating to any of the points raised please leave a comment below or get in touch with us and we’ll be more than happy to help.

Scott