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Cars: Buy, lease or charge mileage – tax efficiently

July 30, 2013

Posted by Simon Misiewicz on 25th May 2015

Do you use a car for business purposes?

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

This article is written to provide people who use their own transportation for business purposes. For the purpose of this article we are going to examine the financial and tax implications of three cars.

image 1

Buying a car

You may be thinking of buying a car. If you purchase a car for business purposes then you can claim capital allowances (8) which will help you to minimise your tax. Let us look at the above three examples of how much tax will be reduced.

image 3

As you can see from the above that the lower the CO2 emissions the better tax breaks you will receive. However if you are very, very good and think of the environment you can offset 100% of the car cost against your property profits if you purchase a car that has 75g/km or less CO2 emissions (7)

Leasing your vehicles

I would suggest that buying a car is not a good use of your money. Let’s think about this. Would your investment of £10,000 in a new car be higher or lower than if you invested the same amount of money into a house? Personally, I invest my money into business or property and have a car in an operating lease.

Untitled

This means that I pay for a brand new car on a monthly basis without having to stump up all the cash up front. The cost of a BMW X3 will be £32,635 compared to a monthly lease cost of circa £360. The cost of the lease over a three year period would be £12,960.

I appreciate that that you do not have an asset at the end  of this term as you will give the car back. That said if you purchased the vehicle from new at £32,635 I am sure it would not be worth much more than £15,000. You would have spent £17,635 which is 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

There is a lot said about VAT and how you can claim it back on the purchase price or on the monthly lease payments. This may be true. Let us take look at this in more detail.

vat

You need to use the car 100% of the time without exception to claim all of the VAT.

If you use the car for private use then you cannot claim the VAT on the purchase of a car at all. You can however claim 50% of the VAT if you lease the vehicle and you use it for business and personal use.

Please note that you need to be a VAT registered business to claim any VAT back. In all honesty 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 use the car 100% for business use then you can claim the VAT back. If you do not use the vehicle 100% for business then you can only claim a small %. Again for the hassle factor it is not worth while.

Summary for the employee – having a company car

 

Cash savings

cash 1

If the company pays for the car and the fuel the employee will save on these costs. We are assuming in each case that the employee drives 25,000 miles. 15,000 miles being personal use and 10,000 miles for business.

As you can see that these amounts will vary by the below variables

  • The lease costs of the vehicle
  • The miles per gallon and cost of fuel
  • The other costs of running a vehicle such as maintenance and road tax

For the purposes of simplicity we will assume that each car is leased from new.

Tax impact of having the car paid for by the company 

There is of course a downside of having the company pay for the car purchase and the ongoing running costs as can be seen from the below:

tax 1

You will notice that there are two types of benefits that are taxed for having a company car:

  • The car itself
  • The fuel costs of running the vehicle

You will see front he above two tables that it is better for the employee to have the company pay for the car and fuel irrespective if they are a standard tax rate payer or a high rate tax payer.

Company Summary – paying for company cars for its employees

co save

From the above you will see that there are a number of costs that will be incurred by the business because it provides a car to the employee. There is the car lease payments, fuel and maintenance costs. There are some savings that the business will make by leasing and looking after the car for the employee:

co save2

The company will make some savings for the:

  • Circa 50% VAT it can claim back on the fuel
  • 50% saved on the lease payments
  • Not having to pay the employee 40p per mile they travel , albeit they have the costs in the first table

There is very little benefit of having a company lease a car and pay the fuel costs for an employee. It is better for the business to pay the mileage costs at 45p per mile. The  consideration here is the amount of miles that the employee undertakes.

  • More mileage = consider buying the car for the employee
  • Less than say 10,000 miles = pay the employee a mileage rate + increase salary

The other consideration is the amount of money that the company will have to pay the employee as an incentive because they are about to lose they car. If employees are to be given more salary because they are being “disadvantaged” by losing the car then the amounts of money will need to be considered against the savings made. In the majority of cases you will see that it would be advantageous to pay the employees between £1,500 and £2,500 extra per year and pay them a mileage rate of 45p per mile.

The company will also benefit (from the below) by giving employees a salary increase and take the car back:

  • The business will not be paying for a car that is sat idle in the event of headcount reductions
  • The maintenance & insurance costs are paid by the employee
  • Reduced administration and costs for fleet management, supplier management, MOTs, road tax etc

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.

Kind of vehicle Business miles 2011-12 onwards
Car or van First 10,000After that 45p / 25p
Motor cycle All 24p
Cycle All 20p

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

If you are carrying passengers for the sake of a business event, meeting then you are also allowed to claim an additional 5p per mile. (3)

Example:

Sarah uses her car for business use and drives 10,000 miles in the year. Her cost of travel is calculated as 45p per mile X 10,000 miles. This being £4,500. If she is a basic rate tax payer then her tax 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 cover?

The mileage allowance covers the following costs of your travel:

  • Fuel
  • Wear and tear
  • Road tax

You cannot claim any other costs associated with your car. In my opinion claiming mileage is far more beneficially 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 V business use.
  • Not having a benefit in kind charge as shown above for having a company car

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 Click Here To Book an “Initial Free Consultation”.

References:

(1) EIM31240 – Employees Using Own Vehicles For Work

(2) EIM31280 – Employees Using Own Vehicles 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