Quite a lot of clients ask us about company cars. Long story short, in our experience it nearly always makes sense to find a modest car sufficient for your needs, often second hand, buying it personally, paying all costs personally, and reclaiming mileage from your Ltd Co for business journeys.
But the car salesman makes company cars sound so appealing
Of course they do, it’s their job. They want to sell (or lease) you a brand new car now. Even better if you’ll be trading it in for a newer model in a few years time. By getting you onto a company car, you’ll find the tax rules potentially further encourage you to get into a cycle of regular replacement.
Two vital things to bear in mind when considering tax on company cars:
1) the benefit in kind tax is based on the car’s list price when new, irrespective of the actual age of the car.
2) the % band based on CO2 emissions keeps moving every year. This is understandable, as cars get more fuel efficient, the government moves the goal posts to make it harder and harder to get the lowest %. See here for a table showing rates for the last year or two and the next few years.
Year 1 – The year you get the car it seems great. Let’s say the car’s list price is £30k, it’s petrol, and has CO2 emissions of 100g/km. On the day you get it, it’s worth £30k to both you and from a tax perspective, and (based on 2015/16 tax year) you’re taxed on 15% of that value. Seems a good deal, taxed on £4.5k per year to get usage of brand new car.
Year 2 – The car’s lost its brand new feel, but you’re still paying tax based on £30k, now at 17%.
Year 3 – The car’s starting to get a bit tired, but you’re still paying tax based on £30k, now at 19%.
Year 4 – The car’s worth a fraction of its list price is, but you’re now taxed based on an annual value of 21% of the £30k. You’re now taxed on £6.3k per year to get usage of a four year old car. It’s starting to feel very unfair, the tax you’re paying on it increases every year despite the car getting older and older and being worth less and less.
…so what do you do?
Well of course the dealer will suggest the best option is that you trade it in, getting the newest latest model, perhaps £30k again, but due to lower emissions you’re back at the 15% rate or thereabouts…and so it continues, you’re trapped in this cycle.
Alternatively, you continue with the same car owned by the company, as the car still works fine and you don’t need a newer one…but then you’ll continue to see your tax charge increase each year despite the car getting continually older and less valuable.
Your third option would likely be to buy the car outright, and with any luck you can agree a price with the dealer and the tax man so it’s you personally buying the car. No more ever increasing benefit in kind, and you revert to reclaiming mileage. This may seem the obviously most appealing option (at least to me?!)…but if that’s the case, why didn’t you just buy the 3 year old car personally in the first place?!
Other reasons to consider:
P11Ds – chances are if you don’t have a company car, you won’t have to do one (obviously check there are no other taxable benefits in kind). Having a company car means you definitely will.
Fuel – you need to take care over who pays for fuel, you, or the company. Money will likely need to be reimbursed one way or the other at rates which are regularly changing. Alternatively you can get the company to pay for all fuel and accept a further hefty benefit in kind charge.
VAT fuel scale charges – if the company pays for fuel, you need to calculate the fuel scale charge to pay over to HMRC in addition to your usual VAT liability. This is supposed to offset the fact you’ll be reclaiming VAT on all fuel, whilst some will be used for private journeys.
Your plans might change and you want to close the company – so you sign up for a 3 year lease, 1 year later you get offered a brilliant permie role, or emigrate, so want to close your Ltd Co. You can’t…unless you can agree an early exit fee with the lessor, but that likely won’t come cheap.
So…when you’re looking at the shiny new cars and the salesman tells you what amazing tax breaks you can get by doing it as a company car, ensure you consider all the facts before pressing ahead.