Is buying a car through the company more efficient?
You are the owner/manager of a small company, and you want to buy a new car. What are the different ways of purchasing it and is it more tax efficient to buy the car through the business or pay personally? Naomi Swan advises in this article.
You are the sole director shareholder of your company and you have selected three possible vehicles:
• An electric car with zero emissions.
• A hybrid with CO2 emissions of 35g/km.
• A petrol car with CO2 emissions of 100g/km.
All three have a similar list price of around £40,000.
Naturally, you would like to understand the tax implications for each of the various ways to acquire the car, and for the chosen method, whether it would be more tax efficient to buy it through the business or extract the cash from the company and pay for it personally.
Outright purchase
The most straightforward way to purchase the car is an outright cash purchase. If this is done via the company, it will account for the cost of the car as a fixed asset, with the depreciation of the vehicle disallowed for tax purposes but capital allowances are given instead.
Hire purchase
If you don’t want to part with £40,000 in one go, a hire purchase (HP) agreement is a way of acquiring the vehicle without having to pay for it in full on day one. Instead, an upfront deposit is paid followed by monthly payments, with ownership passing on payment of the final instalment.
As the car is purchased in instalments, an element of interest is included within the monthly payments which is deductible for corporation tax purposes.
As an HP agreement is for the purchase of a vehicle, the company will again account for the actual £40,000 cost of the car as a fixed asset, with capital allowances given instead of depreciation.
Finance lease
A finance lease is similar to a HP agreement in that an upfront deposit is paid followed by monthly instalments, and also that the car is recorded as an asset on the balance sheet. However, it differs in one fundamental way: the ownership of the car for tax purposes does not pass to the lessee and therefore capital allowances cannot be claimed.
This assumes the finance lease is not treated as a long funding lease – broadly a lease for longer than five years.
Therefore, as no capital allowances are available, a unique situation arises where the depreciation charged in the accounts is allowable for tax.
Where a car has CO2 emissions over 50g/km, 15% of the lease payments (both the interest charge and depreciation) is disallowed in the tax computation.
Contract hire
A contract hire agreement is effectively the rental of the car for a short period, where the car is handed back at the end of the term. All payments under the lease go through the profit and loss account and are allowable for tax. The same 15% restriction applies on cars with CO2 emissions over 50g/km.
You have decided that an outright cash purchase is more straightforward and will prove more cost efficient in the long run. So, what are the tax implications for purchasing through the company compared with buying personally?
Capital allowances
The rate of allowances available to you will depend on the CO2 emissions of the chosen vehicle. Electric cars with zero emissions will qualify for a first-year allowance of 100%, meaning full tax relief in the year of purchase. Cars with CO2 emissions of 1-50g/km will go into the main rate pool and receive writing down allowances of 18%, and cars with CO2 emissions over 50g/km will go into the special rate pool with writing down allowances of 6%.
Only new and unused electric cars receive the 100% first year allowance – second- hand electric cars will go into the main pool.
From a corporation tax point of view, therefore, it will be more tax efficient to acquire the electric vehicle as tax relief for the full value of the car will be received in year one. But what about from an income tax point of view?
Benefit in kind
As you will be using the car for private purposes a benefit in kind will arise based on the list price of the vehicle (not the purchase price). Again, the rate of tax will depend on the CO2 emissions of the car, and in the case of hybrid vehicles it will also depend on the range the car can travel on its electric battery alone.
The benefit in kind will be subject to income tax.
Electric cars with zero emissions will be charged at 2% of list price. Hybrid cars can be as low as 2% if their electric range exceeds 130 miles, but as high as 14% if the electric range is less than 30 miles. The hybrid which you are considering has an electric range of 42 miles and therefore will be charged at 8% of list price. The petrol car with CO2 emissions of 100g/km will be charged at 25% of list price.
The percentages have been frozen until the 2024/25 tax year, at which point they will rise 1% each year from 6 April 2025 to 5 April 2028.
Of course, the benefit in kind charge is annual, and tends to increase. For higher emission vehicles the tax charges may eventually eclipse the upfront savings so it’s important to look at the position over several years.
SUMMARY
When looking at the upfront tax relief, purchasing outright via the company is likely to be the most efficient option. However, don’t forget that the annual benefit in kind charge for the company car will erode the savings over time. For older cars or those with higher emissions figures, this may mean the company route is more expensive in the long run.
If you would like further advice do get in touch with JRW to fully discuss the implications.
