Buying a new car – company car or private purchase?

These considerations can be broken down as follows:

1. Financing the vehicle
2. Tax implications for you
3. Tax implications for the company
4. Vehicle running costs.

Financing the vehicle

It is often the case that the money for the car purchase (or deposit) is initially held by the company. There would be a tax cost in extracting the money from the company and getting it in the hands of the business owner. This means that it may initially appear more tax efficient to purchase the car directly through the company. However, to make this assessment we need to consider the tax implications of having a company car.

There is also a decision to be made regarding whether to purchase the car outright, or what form of finance to use. This can vary between old-style HP agreements, the more recent “PCP” arrangements or contract hire agreements. Each has differing implications in terms of how it is accounted for and the tax consequences.

Tax implications for you

Company cars (assuming there is any private use whatsoever e.g., commuting) are assessed to income tax using prescribed benefit in kind rates. At the highest rate, the driver could be paying income tax on up to 37% of the list price of the vehicle every year.

The benefit in kind percentage is driven by the type of fuel (diesel being the most expensive) and the CO2 emissions from the vehicle.

Recent changes to Government tax policy discourage fossil-fuel propelled company cars and incentivise a move to hybrid and electric vehicles. A hybrid or electric company car benefits from lower benefit in kind percentages however the list price is usually higher for any “like-for-like” model. One further factor in reducing the benefit in kind percentage is the distance the car can travel on one full battery charge.

Tax implications for the company

The company will pay Class 1A National Insurance based on the assessable benefit of the car. Therefore, a policy designed to reduce the assessable benefit of the car benefits both the driver (in tax savings) and the company (in National Insurance savings).

In addition, for certain vehicles the company is able to claim accelerated tax reliefs for the car. In the case of a purely electric car, the company can claim 100% of the price of the vehicle for an outright purchase. In the case of a vehicle obtained under a contract hire agreement, the company can offset rental payments against profits and recover 50% of the VAT on the monthly rentals, whereas no VAT is recoverable for an outright purchase.

Vehicle running costs.

In addition to the provision of a company car, the company can provide further benefits alongside the car that do not give rise to any additional taxable benefit. These include:

• Insurance
• Maintenance
• Charging point installation
• Recharging at work
• Provision of a charge card to allow access to charge points.

By comparison, where a director / employee uses their own vehicle for business purposes, they are able to claim a reimbursement of 45 pence for each business mile (up to 10,000 business miles per annum). This rate is deemed to be tax neutral by HM Revenue & Customs. This rate covers the cost of fuel, vehicle depreciation, maintenance and insurance.

Conclusion

The best piece of advice I can give in deciding how to buy your next car is to have a conversation with your accountant at the outset of the car buying process.

More broadly, I would summarise the above as follows:

It is probable that purchasing an electric or hybrid car through your company could be tax beneficial.

It is less likely that purchasing a diesel or petrol company car through your company would be tax beneficial.

There are always exceptions, and everybody’s circumstances are different. Talk it through and make the best decision.