In discussions with diverse individuals, we frequently encounter recognition of the tax advantages linked to acquiring a car via a limited company. Nevertheless, many business managers lack a thorough understanding of the extensive tax implications related to selecting the suitable car for personal use and the accompanying financing. This three-part blog aims to offer readers a comprehensive overview of essential factors to contemplate when assessing the feasibility of obtaining a car through a limited company.
These blog’s will explore:
- Company car choice – Electric vs fuel.
- Financing – Contract hire, lease or cash/finance, tax impact and accounting treatment considerations.
- Benefit In Kind – Company-provided car benefits.
The two most common methods of financing a car are:
Contract hire/lease
For businesses lacking immediate funds or wanting to avoid finance complexities, leasing offers a savvy solution. This avenue becomes especially appealing if the car won’t see extended use, as direct purchase might not align with financial considerations.
Leasing a vehicle through this method doesn’t entail ownership transfer to the business. Consequently, the car isn’t recognized as a fixed asset, and the option to claim capital allowances is off the table. Instead, monthly rental payments are directed to the lessor, often at a fixed rate. This arrangement proves advantageous for maintaining strict control over cash flow. These expenses are then marked as business costs in the Profit & Loss statement, making them eligible for tax deductions (with a 15% cap for leased vehicles boasting CO2 emissions over 50g/km).
VAT Impact:
Leasing a car generally disqualifies VAT recovery on the car’s purchase. However, if a business holds VAT registration, they can reclaim 50% of the VAT costs related to the rental expense. Yet, the drawback lies in potential lessor-imposed limitations like mileage caps and maintenance prerequisites. Breaching these conditions could incur added expenses.
Finance / Hire Purchase:
For businesses seeking car ownership without an outright payment, spreading the costs over several years is an option. In scenarios involving leased or gradually paid assets, capital allowances aren’t accessible, essentially resembling a lease arrangement (expenses over time). However, machinery and similar assets constitute an exception. Those obtained and financed over a period can be eligible for expedited capital inclusion, covering the entire cost at acquisition. This eligibility hinges on the financing method’s capacity to transfer ownership to the lessee or purchaser. Alternatively, if there’s a clear prospect of ownership transferring, particularly when the final payment significantly undercuts the asset’s market value (common with HP agreements featuring an ‘option to buy’ fee, like £100). In these instances, the asset (like a car) is treated as a direct purchase once usage rights transfer, launching the finance arrangement.
A crucial aspect to factor into your planning is that asset financing nearly always entails interest charges incorporated within your monthly payments. These interest expenses are categorized as finance costs on your business’s Profit & Loss statement and are eligible for tax deductions.
If you’re considering the prospect of procuring a car through your business, we encourage you to reach out to your client manager. We can conduct an evaluation of the car(s) under consideration and provide you with a breakdown of expenses and the associated tax implications before you make a purchase commitment.
Not an SAS client? Reach out to learn how we can assist your business effectively!
