Question: I am an owner of a Limited company and I am thinking of purchasing a car through the company, as I heard that you can obtain a large amount of tax relief. Is this the case and are there any potential issues? Mrs C of Hastings
As is normally the case with such things it is not as clear cut as that. The tax benefits of purchasing a car through a company have steadily reduced over the years. The relief available depends mainly on 2 factors; 1) whether the car is New or Used and, 2) the C0² emissions. This means the relief can vary from 100% of the cost in the first year to 8% per year on a reducing balance basis.
The tax allowances, in many ways, are the simpler part of the question. The potential issues however are more complicated and can be substantial from a tax perspective. I assume from your question that you will be purchasing the car for use within your business and that there may be an element of personal use also. If a car purchased by a company and provided to an employee or director is used for personal journeys then there will, in almost all circumstances, be a tax charge on the company and the individual concerned.
There are some circumstances where it is possible to provide a car that is exempt from tax. However the criteria are extremely difficult to meet and in almost all scenarios will not be a viable option.
If the company car does not meet any of the exemptions then a benefit in kind charge arises and the company is required to pay Class 1A National insurance at 13.8% based on the benefit total for the year. In addition, the value of the benefit provided is taxed on the employee or director as income.
Similarly to the tax relief that is available, the benefit value is defined by the list price of the car and its C0² emissions.
If the company also pays for the personal fuel of the employee or director there will be a substantial tax charge.
It is rarely an advisable course of action to provide a car to an employee as the potential tax costs can be substantial. You should always consult a professional before making a decision such as this.
An alternative to purchasing a company car is to pay employees mileage allowance for using their personal cars. The company can claim the costs as a tax deductible expense. There is also no tax effect on the employee if the relevant rates are not exceeded.
If you would like to discuss this in more detail or require any assistance in relation to company benefits please contact Martin Copland on 01424 720222 or email him at email@example.com.