A look at Limited Company Expenses # 4: Company Cars
"What expenses are allowable in my Limited Company?"
This is perhaps one of the most frequently asked client questions, and understandably so. The tax burden of owning and operating a limited company is getting heavier. With Corporation Tax rates set to increase as well as tax on profit extraction (i.e Dividends) increasing next year, now is the time for owner managed limited companies to start taking stock of what expenses a company can claim for to offset against corporation tax, and the personal tax implications of any benefit in kind.
We're going to periodically look at different types of expenses in this series, including what is allowable, as well as why certain expenses are not allowable. We'll also be introducing you to some of our associates who can help in each particular field.
As always, these articles are for information only and do not constitute formal advice - should you wish for detailed, specific guidance, please contact us directly to discuss your circumstances.
Company Cars are very often one of the first questions people ask about when discussing what can be claimed through a limited company, however it is an area which can lead to an unwanted personal tax bill if not properly researched beforehand and in some cases may be actually better avoided.
HMRC rules mean the private use of a company car is a benefit in kind which must be taxed as part of the employee’s overall income from employment. The value of the company car benefit in kind (BIK) is used to calculate the amount of Income Tax the employee must pay and the National Insurance contributions the employer makes to HMRC.
To work out the BIK cash value (i.e the equivalent "Cash Value" derived from having private use of the company vehicles, we have to use the manufacturers list price of the vehicle as new, as well as considering both the fuel type and the CO2 emissions, which will then give us a percentage multiplier from HMRC's annual tables -
List Price of Vehicle x BIK percentage (from HMRC table) = BIK cash value
The maximum amount the BIK value can be is 37% of the vehicle list price.
However there are incentives available for ultra low emission and some pure electric cars, which are significantly lower multipliers for BIK Cash Value - with the cleanest being 1% (due to rise to 2% next year and 3% year after). This can make the proposition more attractive as the personal tax burden is significantly reduced.
The BIK value is then included on a P11D form to HMRC at the end of the year and the employee taxed accordingly on the benefit.
In terms of the company's tax saving, cars can only be claimed through written down allowances (if purchased), that is a percentage write down every year - again subject to emissions or; the value of the monthly payments if the vehicle is leased.
So for companies with a sole director and shareholder, or companies with a small number of employees, it might not be tax efficient to offer a company car.
An alternative however to company cars, is to claim back from the company expenses for Business Related miles traveled in your own personal vehicle. These need to be evidenced with mileage sheets to show the journey undertaken was for business reasons, and cannot include a regular commute to a fixed place of work, (e.g travelling into office and back everyday), but otherwise are an allowable expense of the company. The employee can claim 45p per business mile for the first 10,000 miles traveled in the year, and then 25p per mile for each additional mile - these are paid to the employee by the company and expensed in the companies P&L.
Again, please contact us for specific guidance & advice before making any decisions with regards to purchasing/leasing a company vehicle and we'll be happy to discuss further.
NOTE: COMMERCIAL VEHICLES ARE TREATED DIFFERENTLY TO COMPANY CARS AND WE LOOK AT THESE IN A LATER ARTICLE