Company car tax rules for limited companies

The new car registration has just come into force – so if you see a car with “11” as the second pair of characters on its number plate, it’s brand new.

What does that mean for small business owners?

We’ve looked at how sole traders and partners deal with car travel. For a sole trader or partner, there’s no question of who owns the car, the individual or the business – because legally they’re both the same.

But if your small business is a limited company, there’s an important question to think about.

Should the new car belong to you, or to the separate legal entity which is the company?

What are the tax issues here?

For the purpose of this article I’m going to assume that you’ll use the car for travelling both on business and for personal journeys – because that’s what most of us do.

There is a grey area between the two and some things that HMRC say are personal aren’t what we’d usually think of as personal. For example, HMRC say that your daily commute into work is not business travel. Be careful!

You own the car

If you own the car, then you would claim from the company the cost of business journeys that you make in your car.

It’s a good idea to use HMRC’s Approved Mileage Allowance Payments (AMAP) rate for this – which at the moment is 40p a mile for the first 10,000 miles travelled in that employment in any one tax year (6th April – 5th April), and 25p a mile thereafter.

FreeAgent calculates this automatically for you.

Be careful, that allowance is not per vehicle, so if you change your car within the tax year, you don’t start a new “first 10,000 miles”.

This amount is meant to cover the full cost of owning and running the car – so you wouldn’t be able to claim anything extra if your car is a gas-guzzler, or needs expensive repairs. And unlike a self-employed person, you have to use the mileage method as an employee. You can’t use a percentage of the costs of running the car. So if your car is expensive to run, you could lose out.

Assuming that you’re employed by your own company, it’s as well to claim the full amount of AMAP back on expenses, even if the company can’t pay you in full straight away.

That’s because the company is entitled to tax relief on the amounts you claim back, so the more you claim, the less corporation tax the company will pay.

But if you go over the AMAP rate then you, personally, will have extra tax to pay, so this would balance out the effect of claiming, say, £1 per mile from the company, not to mention the dent this could make in the company’s bank account. 

The company owns the car

This is where it gets a bit complicated.

The good news is that you may not have to find several thousand pounds to pay for the car, assuming the company has that money to spare.

Extra cost to you if the company owns the car: taxable benefit

But because the company is, to use a bit of HMRC-speak, “making the car available to you for private use”, then you will have to pay tax on the benefit that the company is giving you (i.e. the car), and the company will also have extra National Insurance to pay.

There’s also an extra taxable benefit if the company is paying for your private as well as business fuel. 

HMRC provide a useful calculator for use if you’re thinking of having the company buy a car that you’re allowed to use. (This calculator times out so you will need to refresh the page.)

There are a few key points to highlight here.

HMRC look at when the company made the car available to you for private use, not when you were able to drive it. So there’s no reducing the benefit for times when you were away on holiday, or even if you’ve broken your leg and are unable to drive.

They are quite strict about this, and say that for the car benefit charge not to apply, the employee must be forbidden from using the car privately – and must not actually use the car privately, for example by hiring a chauffeur.

That means that even an employee who’s been disqualified for drink-driving must be expressly forbidden by his employer from using his company car for private use. I’m not joking, I’ve seen that happen! 

HMRC also use the manufacturer’s list price of the car to work out the benefit – so if the company has bought the car at a discount, you don’t get a reduction in the taxable benefit.

The benefit is worked out using a sliding scale of percentages of the list price. How much of the list price is used depends on the published C02 emissions of the car. And the percentages will go up from 6th April 2011.

The only chance you have of reducing the benefit is if you, personally, pay towards the cost of the car.

Ow!

Cars that “cannot under any circumstances emit CO2 by being driven” – that is, electric-only cars (not hybrid cars like the Toyota Prius, I’m afraid) – don’t attract a benefit charge, but these are so expensive to buy that the cost would almost certainly outweigh the benefit saving.

Claiming capital allowances

Usually cars don’t qualify for the Annual Investment Allowance, so the company won’t get a great deal of tax relief on the cost of the car, unlike for other assets.

However, if the car’s CO2 emissions are under 110g/km, the company can claim tax relief on up to 100% of the cost of the car. 

So if you are planning to buy a low-emission car, you may well save money by having your company buy it for you.

If you have an accountant then he/she will be able to crunch the numbers and work out, all factors considered, which is the more tax-efficient option for your business – whether you buy the car or your company buys the car.

So make sure you do take advice if you’re considering having your company buy a car for you to use, it’s a complex area because you have to consider both fuel and the cost of the car itself, and also how much motoring you do and how expensive your car is to run.

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