Tax efficient cars for company owners

Who wouldn’t want a company car?  Well, potentially those who don’t like paying more tax than they need to.

Many company car drivers will be aware that having a company car can result in significant Income Tax bills.

The use of a company car is considered by HM Revenue & Customs (HMRC) to be a Benefit in Kind (BIK) and company car drivers pay Income Tax on this benefit at their marginal rate, in England and Wales 20%, 40% or 45% or in Scotland at 19%, 20%, 21%, 41% or 46%. In addition, the company also must pay National Insurance on the BIK, currently 13.25%.

Depending on the type of vehicle the BIK can be as little as 1% of the List Price up to 37% of the vehicle list price when new.  Thus, the BIK rate for each vehicle determined by a vehicle’s CO2 emissions can prevent some company cars even being an option for potential company car drivers.

It also doesn’t matter how old the vehicle is, what is important in calculating the Income Tax payable is the List Price when new – therefore if you have an old vehicle, you could potentially be paying more Income Tax per year than the vehicle is actually worth.

Due to the BIK rules many owner managed companies have chosen to own their cars personally even if they are used mainly for business.  This is because even though the company would save some Corporation Tax on the vehicle purchase and associated running costs, the tax payable via the BIK would be higher than the savings.

Many owner manged companies have chosen the tax efficient option of owning a car personally and recharging the company for business miles done in their personal cars at the HMRC approved rates – 45p per mile for the first 10,000 miles done and then 25p per mile thereafter.

This is tax efficient, however potentially doesn’t go far enough to cover the cost of the vehicle, especially when fuel costs are at an all-time high.

So where are the potential tax advantages?

Well, the BIK rates favour low emission cars.  Therefore, if an electric vehicle or a hybrid with low CO2 emissions and an electric range over 130 miles is an option for you, the BIK rate would be 2% for 2022/2023.

At this level it would be tax efficient in most cases for the company to provide the vehicle.

In addition, for cars which are new and fully electric there is a 100% first year allowance (FYA), meaning if you buy the vehicle (even if financed by Hire Purchase) then you would get full Corporation Tax relief in the year of purchase – saving a chunk of tax and assisting a company’s cash flow.

Unfortunately, although a new fully electric vehicle gets a 100% FYA for Corporation Tax purposes, the VAT rules are the same as for any other vehicle.  If purchased and available for private use, no VAT incurred on the purchase is reclaimable.

If the company leases or rents a fully electric vehicle the company would get Corporation Tax relief on the monthly payments made, and as a VAT quirk would be able to recover 50% of the VAT incurred on these payments.

Directors of owner managed businesses for many years have had to go without company cars after reviewing the tax costs.  However, with the rules for fully electric or very efficient hybrids at last directors may again be able to enjoy having a company car.

Making the decision on your future company vehicles is not as straight forward as it once was due to the increased price of fuel, running costs, initial vehicle price and the increase in order lead times.  If you would like to discuss the most tax efficient options available to you and your company, please get in touch.

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