Although company car tax can appear daunting at first, this article aims to provide some simple tax advice and information so that you can soon understand the essentials for what you really need to know. In this article we don’t need to delve into why the government provides these tax incentives but rather concern ourselves with what it could mean for your business if you decide that a company vehicle is what you want.
How to purchase the vehicle:
If you’re considering purchasing a company vehicle there are a few options available to you:
- Buy the vehicle outright, either entirely self-funded or with help from the bank.
- Buy the vehicle using hire purchase.
- Lease the vehicle.
- Contract hire.
This is the big first decision to make, so properly understanding the benefits and concerns involved at this stage is essential. Speaking to a professional tax advisor can make all the difference in ensuring that whatever method you choose will be the right one for you and your business.
It goes without saying at this point that, no matter which option you choose, it is vital to have a solid understanding of your finances and cash flow before making the final decision. Advice from your accountant and the ability to see your finances at a glance in a clear and understandable way can ensure that you avoid any problems down the line. At Moulds and Co we like to use Xero as our choice of cloud accounting software as it enables us to provide our clients with quick up to date reports and their real-time cash position.
Whichever scheme you consider, apart from an outright purchase, you will likely have to make an up-front payment followed by further monthly payments. From our offices in Wetherby we can advise our clients whilst they have immediate access to their finances anytime using Xero, so long as they are connected either via their phone, tablet or computer. This ensures that we can understand together whether these monthly payments are affordable and whether the business cashflow is stable and predictable enough to avoid any future pitfalls.
If all looks OK at this stage then it’s time to explore your legal position.
What are the legal considerations?
If you buy outright, or use hire purchase, you own the vehicle. However the finance company may be able to repossess the vehicle if you fall behind with the finance repayments. If you lease or contract hire, the vehicle does not belong to you and instead belongs to the finance company.
With all this in mind, you may be thinking “It is honestly worth the hassle?” So to help clear that up, let’s finally look at the reasons behind purchasing a company vehicle.
What are the available tax benefits?
Commercial vehicle tax allowances are very generous. In most cases you should be able to recover any VAT included in the purchase price if you buy outright or use hire purchase finance. You may also be able to write off the full cost of the vehicle in the tax year that you buy.
If you are buying a car, tax allowances are restricted to an annual writing down allowance dependant on the car’s CO2 emissions. This is because the government have decided that one of the ways they will try to reduce CO2 emissions in the UK is by providing tax incentives.
If you are self-employed or work for your own company, there may be tax adjustments or benefits charged to reflect any private use of the vehicle.
If you are renting the vehicle, the rental or contract hire costs will be tax deductible, less any adjustment for private use. Whereas if you are leasing, and you are VAT registered, you will only be able to recover 50% of the VAT added.
You might have thought at the beginning of this article that choosing the right vehicle itself would be the hardest decision to make when it came to the company car. But with numerous purchase options available and legal considerations to take into account it can really pay to ensure that what vehicle you decide to get is the definitely right vehicle for you.