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Company Cars – the Pros and the Cons

Company cars

The world of company cars and their related tax issues can be quite complicated.  Here we aim to guide you through some of the implications of company cars and what you need to consider.

Buy or Lease?

If you lease a car, then it does not belong to the company and so does not appear on the balance sheet as an asset – instead the leasing costs will appear in the profit and loss statement.  If you buy a car – either outright or using hire purchase – then the company owns the car and so it will be treated as an asset.  As with other assets, it will lose value over time and so must be depreciated with the depreciation expense being included in the profit and loss statement.

Company Car Benefit

An employee or director who has a company car is treated as having a ‘benefit in kind’.  This means that HMRC consider there to be a personal benefit from being given use of a car and which must be taxed in addition to any salary that is being received.

The level of tax that will be incurred depends on a few things including engine size, fuel type, the cost of the car when it was new and the level of CO2 emissions – more environmentally friendly cars are taxed at a lower rate.  HMRC provide a calculator here to help work out how much tax will be due on a particular type of car.

In addition to the tax paid by the employee, the employer providing the car will also have to pay additional National Insurance.  This is called Class 1A National Insurance and is calculated and paid annually in July.

Fuel

The cost of fuel can be dealt with in a number of different ways.

  • the employee can pay for all fuel personally and then claim expenses back from the employer – HMRC issue a set of advisory rates which can be used to determine a cost per mile.
  • the employer can pay for all fuel and then ask the employee to make a reimbursement for any personal miles that have been done using the HMRC advisory rates.
  • the employer can pay for all fuel and the employee can be given an additional ‘benefit in kind’ which is taxed in a similar way to the car itself.

VAT

The VAT rules for company cars are different to other expenses.

VAT on the purchase of a new car cannot be claimed unless there is no personal use of the car (which can be hard to prove).  If VAT is claimed, then it must also be charged when the car is sold at a later date.

Where a car is leased, only 50% of the VAT on the lease may be claimed as input VAT.  This is because HMRC consider there to be a personal benefit and so restrict the VAT claim.  You will normally see this restriction laid out on the invoice from the leasing company.

VAT on any repairs or maintenance of the car can be claimed in full, provided there is some business use and the company pays the repair bill.

VAT on fuel can be managed in several different ways.

  • if fuel is used only for business purposes, then 100% of the VAT can be claimed.
  • if there is personal use, then VAT can only be claimed on the business part of the expense.  The percentage of business use can be calculated using HMRC advisory rates.
  • if there is personal use, then you can use a system called ‘fuel scale charges’.  This is where you reclaim all of the VAT on fuel, but then apply a fixed charge each month based on the CO2 emissions of the car.

Need any further company car help?  Just get in touch.

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