Small business owner wants help on most tax efficient way to run his business car
I’VE been talking to my accountant about whether it would be better to stop running my car privately and let the company buy it so it can be run as a company car. The trouble is there’s NIC (National Insurance), BIK (benefit in kind company car tax), extra admin, and in the end, one way or the other, I’m paying for it! What should I do? Ian Rowe, director of DoorTECH, a small business with several employees
David Rawlings, car tax and SME specialist at BCF Wessex, provides the answer on whether to run a private car on business or a company car.
AS the owner of a small business requiring a car you are faced with two choices. You can acquire the car via the business and claim the associated tax relief, or acquire the car privately. Unfortunately far too many business owners do not take all the relevant factors into account when making this decision.
Option one – Acquire the car via the business
On the face of it this appears to be a logical route. If the car is leased the rentals and running costs can be offset against taxable profits (subject to the 15% lease rental disallowance for cars with CO2 emissions exceeding 160g/km).
If the car is purchased capital allowances may be claimed and offset against taxable profits along with the running costs; please note though that the rate at which you may claim capital allowances is greater for cars with lower CO2 emissions, and that 100% first year allowances are available for cars with emissions below 111g/km).
Taken together with the recovery of VAT on lease rentals and other running costs, and the case for a company car looks pretty good. But as you now have a company car, you will pay income tax on the Benefit in Kind and the company will have to pay the associated Class 1A National Insurance Contributions (‘NIC’). Add these back into the equation and the combined costs of a company car can rise dramatically, especially if you are a higher or additional rate taxpayer and considering higher emission vehicles.
Option two – Acquire the car privately
In this case you acquire the car yourself, perhaps via a Personal Contract Purchase or Personal Contract Hire agreement. The company won’t be able to claim tax relief for the acquisition costs but neither will it incur the Class 1A NIC liability due if the car is a company car.
Moreover, you will not have to pay income tax, as the car should not be a company car, and if you use the car for business purposes you can take advantage of HMRC’s Approved Mileage Allowance Payments (‘AMAPs’) and pay reimburse yourself business mileage tax and NI free; the rates are 45p per mile for the first 10,000 miles and 25p per mile thereafter.
Which route is right for you?
Finding which route is financially better is sensitive to many factors, the main being the car’s CO2 emissions, your income tax rate and business mileage.
Although it’s difficult to make broad brush assumptions we can deduce that if a car has very low CO2 emissions and you drive few business miles your income tax liability will be relatively low and little benefit can be derived from AMAPs. In this case a company car may be the best financial alternative.
If however, you are considering a car such as a Range Rover, with very high CO2 emissions, the rate at which capital allowances may be claimed is very low (8% per annum from April) , or if the car is leased tax relief will be restricted. If you drive high business miles the value of AMAPs should be taken into account and it’s possible that acquiring the car privately should be a serious consideration.
Of all the financial calculations we carry out this can often be one of the most confusing which is probably why so many broad brush decisions are made. If you find the analysis too daunting a visit to your accountant may be required, but do make sure he has all the facts relating to the car and your business mileage.
