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Car Allowance Blog

July 7, 2015

Posted by Simon Misiewicz 7th July 2015

Do you use a car for business purposes?

Do you get confused about which method of running a car (ie own, lease, hire) is the most tax efficient for you?

Would you like to know what you can charge your limited company for using your car?

This article is written to assist anyone who needs to work out how to most efficiently (cost and tax-wise) provide a car for business purposes. All costs you would pay out are shown in red and all tax reductions or cost reductions are shown in green.

For this article we are going to examine the financial and tax implications of three cars:

A Ford Focus Estate – great for carrying around the occasional bathroom suite required for refurbishments.
A BMW X3 – good for dealing with “new build” muddy terrain.
A Toyota Prius – the energy efficient dual fuel car that got many people interested in running a low carbon emission car in the first place.

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Buying a car

If you purchase a car for business or for mixed business and private purposes then you can claim capital allowances, (8) which will help to minimise your tax bill. Let’s look at the above three examples and how much tax can be reduced through capital allowances. We will assume that the cars are purchased brand new and used 100% for business purposes only in the table below.

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The value of the capital allowance tax reduction is based upon the CO2 emissions of the car purchased so you can see that the lower the car is in terms of emissions, the better the tax break you will get. Unfortunately HMRC may change (at any time) the tax allowances that you can secure against cars. So whilst the detail above is correct at the time this article was written (Summer 2015), the details of % allowances may change so you need to check or make sure your accountant knows the details when you are calculating the tax break possible for your circumstances.

Want to get the full value of the car you purchase as a tax break? Simple – under current rules you just need to buy a car that has 75g/km or less CO2 emissions (7).

What happens to the capital allowance value if you buy a second hand car? You still secure a % capital allowance rate based upon the car’s CO2 emissions rate and the price you purchased the car for. Please do however make sure that you receive an invoice/receipt to prove the purchase price.

What happens to the capital allowance value if you use the car for a mixture of business and private miles? You can still claim the capital allowance tax break but only on the proportion of use for business purposes – you can work this out by comparing the business miles conducted vs the private miles. Let’s look at an example: If you purchase the Ford Focus (Car 1 above) brand new and use it 25% of the time for business and 75% of the time for private you will be able to claim 25% of the capital allowance tax reduction which means the tax reduction will be £363.60.

Leasing your cars

Do you really want to tie up £18,000 or more in a car though? I would suggest many property investors could make substantial returns in using such cash for alternative property related activity. Ultimately you must do what feels right for you. Personally I invest my money into business or property and secure a car for my business requirements through an operating lease. So what are the cost differences?

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* Indicative costs researched in the summer of 2015 through lease company websites

So what does this table tell you? This means that through an operating lease you can pay to use a brand new car on a monthly basis without having to stump up significant values of cash up front. For example the cost of purchasing a BMW X3 will be £33,295 compared to a monthly lease cost of £360. The cost of the lease over a three year period would be £12,960.

I appreciate that you do not have an asset you own at the end of this 3 year lease period as you will give the car back. That said if you purchased the car from new at £33,295 it may not be worth more than c£15,000 at the end of 3 years. Selling it at £15,000 at this point would mean you would have spent £18,295 on it over the 3 years of ownership which is £5,335 more than the lease costs in the three year period of £12,960.

If you would like to see what the best option is for you then please use the HMRC’s own car and fuel benefit calculator. (5)

The VAT debate

You may have heard that you can claim some VAT costs back on either the purchase or lease costs of a car for business purposes. You’ll be pleased to hear that this is true but only if you are already VAT registered. Let’s look at the detail of this.

  1. Claim VAT back on the purchase of a car.

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2. Claim VAT back on the lease costs of a car:

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So if you own the car (lets use the example of the X3) your maximum VAT reclaim is £5,395 whereas the leased car VAT reclaim, over the course of the 3 years you run it is £864×3 = £2,592. All this assumes you use the car 100% for business only.

The big difference is of course if you use the car for business and private activities: In this case, your VAT reclaim on owning the car is £0 but your VAT reclaim on leasing the car is £1,296 (assuming you use the car equally for business and private). Leasing therefore means less money paid out over the use of the car (ie hire costs per month rather than a one off lump sum payment) and a bigger VAT reclaim – that’s definitely a win:win!

As you can see from the details above the amount of VAT that you can claim is very small in the grand scheme of things, especially when you consider the amount of P11D Benefit In Kind tax you will pay for having the car (11).

The same applies for fuel too. If you utilise the car 100% for business use then you can claim the VAT back on all fuel purchases. If you do not use the car 100% for business then you can only claim a % of the VAT back that relates to the business use vs private use.  You may decide, like many other people I know, that the administration time and effort required to secure your VAT reclaim far outweighs the benefit.

Summary for the employee – having a company car

You might imagine as an employee that it is hugely beneficial to have your company provide you with a car – less hassle for you. Yes…. But that (as does everything in life) comes at a price. In this case the price is something called “Benefit in Kind” which will be shown on a statement each year provided by your employer called a P11D. This statement summarises the tax an employee will pay for the benefit of certain “perks” provided by the company to them – a car being a good example.

Lets build an example where 3 employees each secure one of our brand new sample cars as a company car and also secures a package where the employer pays for all fuel too. As a consequence the employees in question use each car for 25,000 miles a year – 10,000 of those miles for business and the rest for private use.

Employee savings by having a company car:

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Employee additional costs (Benefit in Kind tax bill) by having a company car:

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The benefit in kind cost of the fuel is also based upon the emissions level of the car you drive so you can see how the two elements of car value and fuel are heavily impacted by the emissions of the car picked.

Having said all of this , you can see it is still more beneficial for all of our sample car drivers above when you weigh the cost savings against the costs to take a company car. The Ford driver is £2,751 better off, the BMW driver is £4,520 better off and the Toyota driver is £3,878 better off – even at the worst case 40% tax bracket.

Company Summary – paying for company cars for its employees

What happens however if you are the employer? What are the things that can be used to offset the cost of the fuel, car lease and associated other costs such as maintenance and insurance?

Let’s remind ourselves of the annual running costs of each of our sample cars:

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The total running costs are clearly a lot of money each year per car.

There are 3 elements that will help to offset some of the above cost for the employer:

  1. VAT reclaim on the lease costs
  2. VAT reclaim on the business miles fuel costs
  3. No additional mileage claim by the employee at £0.40 per mile

What we need to remember though is that we will claim only a proportion of the benefits from the 3 above items – this is because the car is used for a mix of business and private covering a total of 25,000 miles each year in the proportion of 10,000 miles business and 15,000 miles private which works out to the car being used 40% of the time for business purposes (ie 10,000/25,000 x 100).

So what do these savings look like for the 3 sample cars?

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So the employers net costs for offering the car and fuel per year to their employee is £1,577 for the Ford, £2,660 for the BMW and £784 for the Toyota.

Most employers don’t tend to offer a company car and fuel package to their employees these days. Typically where an employer provides a company car they allow the employee to reclaim business mileage costs of c£0.10-£0.20 per mile to cover just the costs of the fuel the employee has purchased for the journey. This will of course have an effect on the benefits and taxes the employee will pay (eg reduced Benefit in Kind tax but more fuel costs since they are now paying for their own private miles fuel use) and the reclaim the employer can secure (ie no fuel VAT reclaim but lower fuel costs and higher business mile expense claims).

When might it be advantageous for an employer to offer a company car vs pay private miles, (ie allow the employee to use their own car and claim the fuel cost for the business miles they have conducted at say the government rate of £0.45 per mile)? This all depends upon the number of business miles the employee will be doing each year. The higher the mileage the more beneficial it is to provide a company car.

Lets look at an example. An employee conducts 10,000 business miles per year for their employer. They currently claim £0.45 per mile on their expenses for this since they use their own car.

Total current employer costs are therefore per year:

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If they provide a leased company car and allow the employee to charge £0.15 per mile for fuel costs on business trips then the total employer costs are:

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As you can see it will work out cheaper for the employer to provide a lease car in this example than continue to pay private mileage to the employee if Car 1 or Car 3 are picked.

If annual business mileage drops then it might be worth considering moving to a fuel reimbursement scheme (ie paying £0.45 per mile) on the own employees car however this may require significant discussions with your employee if this means removing a company car from their use.

Other considerations are how your car strategy will be managed regarding health and safety. Allowing an employee to use their own car for business may seem a good option for low business mileage use, however you need to make sure that their car is insured for business use (that is appropriate for the business you ask them to carry out), that their car is roadworthy and safe and is unlikely to breakdown every few weeks preventing them from doing their job.

Claiming mileage 

You may decide that it is not worth having a car through the business and as such you are allowed as an employee / sole trader to charge the company business mileage as we have described above.  HMRC sets certain levels at which mileage allowance can be claimed and combine with a tax allowance and these are:

Kind of car Business miles in a year Cost of travel claimable (2011-12 onwards)
Car or van First 10,000 / After that 45p / 25p per mile
Motor cycle All 24p per mile
Bicycle All 20p per mile

You may decide that it is not worth having a car through the business and as such you are allowed as an employee / sole trader to charge the company business mileage as we have described above. HMRC sets certain levels at which mileage allowance can be claimed and combine with a tax allowance and these are:

You will note that the cost of travel claimable rates reduce once the employee exceeds 10,000 miles. If however the employee works for more than one company they are allowed 10,000 miles at 45p per mile per employment rather than adding the mileage together. (2)

If you are carrying passengers to or from a business event or meeting then you are also allowed to claim an additional 5p per mile over and above all the rates shown above. (3)

Lets look at an example of how the travel costs claimable, affect your tax bill. Sarah uses her car for business and drives 10,000 business miles in the year. Her cost of travel is calculated as 45p per mile x 10,000 miles = £4,500. If she is a basic rate tax payer then her personal tax bill would be reduced by £900 (10,000 miles x 45p x 20%).  All Sarah needs to do is to keep a record of her mileage that she performs. She can do this by keeping a log in her physical / electronic diary.

What does the mileage allowance value cover? In HMRC’s opinion the mileage allowance covers the following costs of your travel:

  • Fuel
  • Wear and tear on your car
  • Road tax

It is worth noting that you cannot claim any other costs to reduce your tax bill associated with your car if you choose to take this route of expenses claim relating to a car for business. In my opinion claiming mileage is far more beneficial than running a company car in terms of:

  • Taxation as HMRC are less likely to challenge documented mileage than if you claimed for your car and fuel receipts.
  • Administration as it is easier to log your mileage than it is to assemble all the car receipts for leases, maintenance, fuel and on top of this to calculate a % of personal vs business use.
  • Not having a benefit in kind charge as shown above for having a company car.

In summary, it’s clear that there are lots of points to consider in choosing which car ownership model is the most efficient – cost and tax wise for you. Your accountant can help you think through your personal situation and advise you on the latest case law and HMRC rules that could affect your decisions.

If you are looking for an accountant or thinking of changing your current accountant because they do not understand property investing and tax implications then please book a call today.

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References:

(1) EIM31240 – Employees Using Own Cars For Work

(2) EIM31280 – Employees Using Own Cars For Work: More Than One Employment

(3) Travel – Mileage And Fuel Allowances

(4) Capital Allowances On Cars

(5) Company Car and Car Fuel Benefit Calculator

(6) Company cars – Advisory Fuel Rates

(7) Cars with low CO2 special rates

(8) Capital allowances on cars

(9) Fuel costs per gallon

(10) Operating lease costs examples

(11) Claiming VAT back on cars



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Telephone: 0115 939 4606
Email: simon@optimiseaccountants.co.uk