This is a question I am frequently asked. As you would expect, the answer is never simple.
Firstly, the decision is not purely tax driven. “Purchase price” and cash flows are just as relevant as the tax implications. Secondly, the choice of vehicle may influence the decision with emissions playing a part in the tax treatment. Thirdly, it depends on who I am advising – an employee for which the decision is based purely on their own circumstances or the business owner in which case the impact on the business matters too.
Below, I summarise some of the key issues that will help answer this question.
Company car – or to be accurate an employer provided vehicle as this can be a car provided to an employee of a sole trader or partnership too (but not to the proprietor or a partner). In this instance the driver is taxed by way of the Benefit In Kind (BIK) system based on the car’s list price when new (including all extras fitted which can be problematic to identify on pre owned cars) and the car’s emissions. This amount is assessed to income tax on the driver at the usual income tax rates of 20%, 40% or 45% dependent upon their total income. The employer is assessed to Class 1A NIC at 13.8%.
The charge is designed to assess personal use of the employer provided asset. The BIK can be reduced by the employee contributing to the capital cost or for private use but must be documented correctly to achieve the desired purpose. I have seen attempts to achieve this fail as a result of poorly documented attempts to reduce the BIK done in good faith.
Sometimes fuel is also provided by the employer for private use. Quite often the tax on this charge is more than the actual private element of the fuel used. The fuel benefit can be avoided by applying the authorised fuel only mileage rates (these are shown elsewhere in Inspired).
Privately Owned car – in this instance the car does not attract any BIK (assuming the company does not assist with payments, which is also a BIK). The employee can charge up to 45p per business mile from their employer without a charge to tax (for the first 10,000 miles, 25p thereafter). Business miles exclude the home to work commute. Whilst this avoid the tax charge and, instead, provides income, the employee needs to fund running costs, the car payments and save for the replacement vehicle using their own funds, suffering the depreciation along the way. The employer will need to ensure the car being driven is fit for purpose otherwise, should there be an accident, consequences including corporate manslaughter can fall on the employer.
The car can be “acquired” in a number of ways and the treatment for tax will depend upon the method chosen and whether company or private:
Lease hire/operating lease – tax deduction for rental payments, some VAT may be recoverable if through the business. Car not an asset of the business
Outright ownership – tax deduction by way of capital allowances spread over time, the rate of relief being 8%, 18% or 100% dependent upon emissions
HP – as above but with tax relief for interest payments. PCP type arrangements are usually HP for accounting/tax purposes
Finance Lease – tax relief for the depreciation
Whilst this may seem like a minefield today’s car dealerships usually employ a business or corporate adviser who can give specific advice based on their model range.
So as you can see, there is a lot to consider, and this is before the rules for what is or is not a business journey is discussed, or vans (including double cab pick ups) are considered, but that is probably a topic for another day.
