Small business owners – should you lease or buy a company car? Could there be any tax advantages?

Should you buy a car or lease a car for your company? It’s a question we are regularly asked by Stockport Small Business owners. The benefits and advantages of leasing vs buying can and have been discussed almost ad-infinitum, and there is plenty of advice knocking around the internet that will try and sway you one way or the other. The real answer for most small business owners is, of course, that it depends very much on your circumstances and those of your business – did you expect any other answer from an accountant?

What it comes down to is the numbers, and understanding the implications of list price, C02 emissions, business vs private miles etc. For small business owners, these will be different in almost every case. However, there are some points that business owners can consider, before making the decision, one way or another.

A New Car for the Business

Company cars were once ubiquitous. The height of the company car bonanza came in the 1980’s, when the shiny new Ford Sierra sitting on your driveway was a signal to the neighbours of your unwavering professional success and monetary value.

However, since the 80’s the rules have changed. A company owned car that is available to you for personal use now comes with a tax liability. HRMC views the use of the car as part of your salary package, so there is the dreaded benefit-in-kind tax to pay. The benefit-in-kind is also assessed on a more than just the cost of the car. It is valued by a combination of the car’s list price and its CO2 emissions.

All of this, means that the glory days of the company XR4x4 are now well and truly over (other flashy generic 80’s cars are available!)

For most small business owners there is now the question of whether buying a company car is worth it, or whether it’s much more worthwhile to carry on using your personal car and expensing the mileage.

Business owner-managers – the car dilemma

If you are the owner-manager of a limited company, there are a number of things to consider before buying a company car. For sole traders, the situation is different again, and we will be addressing this in future blogs.

As an owner-managers, it is important to know whether you are shifting tax liability from Corporation Tax (Capital Allowances), to your personal Income Tax (benefit in kind). This can potentially create scenario where your personal tax flowing from the car is greater than the company tax saving over the life of the car would have been. In this situation, a company car is not the way for you to go, and you’d be better off buying a car personally, or continuing to run your own car and expensing business mileage.

Buying a car through Finance Lease or Operating Lease

From a tax point of view, there are two methods of car finance contract when you lease a car. A Finance Lease, where your business owns or will own the car at the end of the contract, or an Operating Lease, which is closely based on a rental model, where the business leases the car, but will never actually own it.

Buying your car with a Finance Lease

With a Finance Lease, the company leases a car and ends up owning it. With this method, your company can claim Capital Allowances, which is a form of depreciation for cars. This is claimed as a percentage of the cost of the car.

If you aren’t worried about what the neighbours will say, and you can run a car with CO2 emissions of less than 75g/km or less, you will  received a Capital Allowance on 100% of the cost for the year of purchase. In this situation, not only are you an showcasing your environmentally friendly credentials, but you are also better off!

If your car emits more than 75g/km, but less than 130g/km you’re still rewarded with a higher rate of Capital Allowances – 18% of the car’s cost annually on a reducing balance, so for a £35,000 car you will receive tax relief of £29,000 after eight years.

If, however, you want a new porsche, and your new car that emits over 130g/km, then you’ll receive a lower annual rate of 8% annually on a reducing balance, which means that after 20 years you would have received tax relief on £29,000.

Car Buying Example:

Your Ltd Company buys a car for £30,000.

The CO2 emissions are 140g/km.

Your company can claim tax relief on £30,000 @ 8% = £2,400.

At the Corporation Tax rate of 20%, this reduces the Ltd Co’s tax bill by £480 each year.

Buying a car with an Operating Lease

The second route, where the company only rents the car and never actually owns it at the end of the contract, is taxed differently. With this method, your company can claim a corporation tax relief, which is a tax deduction, on the full annual rental lease payments. But, once again, the percentage of this is dependent on the efficiency of the car engine.

  • Emit less than 130g/km and you can claim the full cost of your lease or rental charges
  • Emit over 130g/km you can claim a tax deduction for 85% of the rental payments.

Your company can reclaim 50% of the VAT on the lease payments. The expense for corporation tax is the lease payment net of VAT.

Leasing Example

Your Ltd Company leases a car for £500 plus VAT per month, ie £6,000 plus VAT per annum.

Your company can reclaim VAT of £600 for the year –  £6,000 x 20% VAT rate x 50%. And also claim corporation tax relief on the lease payment of £6,000. At the Corporation Tax rate of 20%, this reduces your company tax bill by £1,200 each year.

How will it affect my personal tax?

Small business owners are both business owners and the employees. Your business has had tax relief on the car, but what about you? The reality is, that unless the car is only used for business trips and is left at the business premises every night, you will be taxed as having a “benefit-in-kind” for the private use of any company car, whether leased or purchased.  It’s also irrelevant how much private use there is – it’s all or nothing!

The value of the benefit in kind is based on a percentage of the list price of the car when it was new. So even if you buy a second hand car, it’s the new list price that is used. The percentage then depends on the CO2 emissions of the car. The percentage is low for an electric car and higher for higher emissions. The range is from 7% to 37%.

Personal Tax Example

Following the same as above, your company buys a car for £30,000.

CO2 emissions are 140g/km. Your personal tax rate is 40%.

Your tax due is £30,000 x 25% (the appropriate %age for the CO2 emissions) x 40% tax. Therefore, your tax bill is £3,000 for the year.

So, in this example, the company has saved £480 in tax on a purchased car……but you’ve got a tax bill of £3,000. In this case, you’re better off buying the car yourself!

Fuel costs

If your company pays for fuel, the company can reclaim VAT and claim corporation tax relief on the net cost of the fuel. However, you will also be taxed on the fuel benefit! This is calculated using the same CO2 percentage as the examples above.

HMRC sets a standard value for fuel, called the fuel multiplier, that this percentage is applied to. In 2016/17, the value is 22,200. As with the car benefit, the number of private miles you actually drive is irrelevant – it’s all or nothing!

Fuel Tax Example

Your limited company pays for all of your petrol. The car is the same as above and has CO2 emissions of 140g/km and you’re a higher rate taxpayer. Your tax due is £22,200 x 25% x 40% tax.  Therefore, your tax bill for the fuel is £2,220 for the year.

Even allowing for claiming the VAT back, the company’s gross fuel bill would have to be at least £6,660 to get tax relief of £2,220 so, unless you’re doing a lot of miles, it’s likely the personal tax bill will be greater than the company tax saving

Buy, lease or use a personal car?

In the end, it all comes down to specifics – whether you lease or buy, the CO2 emissions and your personal tax rate. Which means that you need to do the calculations on a case-by-case basis.

It is often more tax efficient to simply purchase the car yourself, then charge the company for business mileage at 45p per mile (dropping to 25p per mile after 10,000 miles each year). This is tax deductible for the company … and tax-free for you.

But, at the end of the day, you also need to take into consideration your cash flow – can you or your company afford the greater initial outlay to buy a car versus leasing?

To get the best advice, and to make the right decision for you, talk to an expert who knows how to find the best options for your business.

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