Limited company cars provided to directors and tax issues

simon

Simon Misiewicz

22nd June 2020

company car rules for directors - is it worth having a company car?

This article is relevant to the tax year 2020/21

It’s to focus on whether or not limited company directors should purchase a car through their own limited company or in their own personal name. A company car for directors can provide some benefits. Company cars for directors can also have some tax disadvantages that you need to mitigate.

The company car rules for directors is a complex area of UK taxation and we need to study it carefully

Tax considerations of having a company car

You need to think about the tax issues surrounding the purchase of a car through a limited company. There are several tax dis-benefits:

We need to answer the critical question of “is it worth having a company car?”

– Income tax for the employee for the car

– Income tax for the employee for the fuel paid for by the limited company

– The limited company charges national insurance for providing you, the director/employee, the company car

We also need to consider several tax benefits when deciding whether or not to buy a car within your own limited company.

– Capital Allowances claims to reduce corporation tax

There was just one tax benefit after all. This is why it is vital for you to understand the company car rules for directors, as they can be tricky to navigate around.

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Example of the benefits in kind charge - company car for directors

Sarah’s own limited company provides her with a Diesel BMW 218i M Sport Coupe. The car has a car list price of £30,000 and a Co2 emissions value of 170g/km. From a cash flow perspective, it is worth working out the difference between buying the car outright and paying a money lease payment.

She knows she will do 8,000 business miles per year. She may spend a further £4,000 per annum on the road tax and fuel.

From the HMRCs car benefit online calculator, we can see that:

Basic rate taxpayerHigh rate taxpayer
Car benefit charge (List price) (2021/2022)£11,100£11,100
Company Car Tax (2021/2022)£2,220.00£4,440.00
Company Car Fuel Tax (2021/2022)£1,820.40£3,640.80
Total tax charge (2021/22) for the individual£4,040.40£8,080,80
Employer national insurance charge of providing the above (based on the car benefit and fuel benefit) £11,100 X 13.8%£1,531.80£1,531.80
Total tax paid by Sarah (given she owns the company)£5,572.20£9,612.60
   
Less: corporation tax  saving on the actual fuel and road tax costs £4,000(£760)(£760)
Less corporation tax saving of the employers 13.8% NIC charge (£1,531.80 X 13.8%)(£291)(£291)
Net ongoing tax for having the car £4,522.20£8,562.60

As a limited company owner, Sarah will pay a total tax liability of £4,522.20 as a basic rate taxpayer and £8,562.60 as a high rate taxpayer by having a company car.

Putting this into perspective, the tax paid as a high rate taxpayer is 28.5% (£8,562.60 divided by £30,000). This is a lot of tax to pay.

In addition to this, she will be required to complete a benefit in kind P11D form to notify HMRC that her limited company has provided her with a company car. A P11D form needs to be submitted to HMRC no later than 22nd July each year.

Company cars for directors may mean that directors have higher tax rates to pay than they did without a company car. That is because they will have a benefit in kind charge

So, is it worth having a company car for you?

You also need to consider the below costs to say who will pay for them and if there is an equal benefit in kind tax charge for them

– Car itself (answered above)

– Care maintenance

– Car insurance

– Care repairs

– Car fuel (answered above)

All of the above costs need to be taken into consideration for the UK limited company as it will get a corporation tax relief and for the individual who may pay greater BIK rates of tax.

 

Is it better to charge the company a mileage rate rather than to have a company car?

Vehicle leasing can mean different things, which can significantly impact the tax reliefs available.

Leasing a company car is essentially ‘renting’ it with the intention to hand it back in the future. This is classified as an operating lease.

This is different to Personal Contract Purchase (PCP).

If the car has emissions under 110g/km, you can get tax relief on all of the payments.

From April 2021, this threshold went down to 50g/km. Only cars with CO2 below this get full relief on monthly rental payments.

Let us continue with the example of Sarah that users the Diesel BMW 218i M Sport Coupe to do 8,000 business miles.

Let us not forget that she could lease the same car for circa £300, but rates will vary from company to company and car to car. Select Car leasing may be able to provide a discount on your desired car.

The cost of leasing the car per annum would be £3,600. She may spend a further £4,000 per annum on the road tax and fuel. This is a total cost of £7,600.  Sarah could get tax free money out of the company amounting to £3,600 (8,000 miles at the HMRC approved rate of 45p per mile for the first 10,000 miles and then 25p thereafter).

The net cost of having the car in her own name would be as follows

£3,600 for the car lease in her own name

£4,000 cost of mileage and road tax

£7,600

(£3,600) mileage costs she charges the limited company

£4,000

Sarah’s own limited company would also benefit from a 19% corporation tax saving against Sarah’s mileage claim of £3,600 (£8,000 X 19%)

This is significantly cheaper than the total tax of having the car in the company of £9,484. Let us not forget that the company still needs to pay for the car.

How much tax will you pay by having a company car? Will you now pay higher rates of tax by having a company car as a UK limited company director?

No benefit in kind charges for having an electric company car for directors

From 6 April 2020, the BiK brackets were substantially revised, with the taxable figure for a zero-emissions electric vehicle dropping from 16% to 0%.

The taxable figure rises marginally from 1% in 2021 and 2% in 2022, while the Budget confirmed that the 2% rate would be maintained through to the 2024/25 tax year.

The Government sets BiK tax rates to encourage employers and company car drivers to choose vehicles with lower CO2 emissions like pure electric cars or plug-in hybrid company cars for directors.

The Benefit in Kind tax band change was also changed retrospectively, meaning that company car drivers who took delivery of a fully electric company car before 06 April 2020 also benefit from the 0% change.

If you’d like to save tax on the BiK of your company car, please get in touch with one of our tax team.

Capital allowances to reduce corporation tax by having a limited company car

A further tax break on electric cars is that you can claim capital allowances for your business when you buy vehicles that are used in the business.

This enables you to offset the cost of an electric car purchased for your business from your profits before you pay tax.

For expenditure incurred before 1 April 2021, a 100% First Year Allowance (FYA) was available for a new electric car.

The government announced in the 2020 Budget that for expenditure incurred on or after 01 April 2021, the FYA will be restricted to new electrically propelled and zero-emission cars.

HMRC has provided clear information on claiming capital allowances on company cars to review.

Our specialist tax team can advise you on how to claim capital allowances on your electric car today.

Electric V Petrol V Diesel cars and tax benefits

Looking at the above, it makes more sense for people that run either petrol or diesel cars to own them in their own personal names. They would then claim a mileage rate against their own limited company. The tax charges for having your own limited company to provide a car could cost you more in tax than the car itself.

However, there is no employee tax benefit in kind charges for having an electric car provided to you by your own limited company. There are no employer’s national insurance contributions charges for providing an electric company car for an employee. To boot (pardon the pun), the limited company would benefit from a first-year allowance capital allowances claim.

A £100,000 electric car in a company would provide a £19,000 corporation tax saving with no employer or employee tax benefit charges.

Company cars for directors may not just give the individual a benefit but there may be one for the limited company too.

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Purchasing a van through a limited company

Vans are classified as ‘Plant and Machinery’ for tax purposes. As such, they qualify for 100% allowances under the Annual Investment Allowance regime. This means you get a deduction for 100% of the cost to reduce your company’s taxable profits.

Where there is an “insignificant” level of private use, HMRC acknowledges that there is no benefit arising, and these amounts do not apply.

Insignificant private use would be classed as, for example, visiting the dentist on the way home from an assignment. Using a van to do the weekly shopping would not qualify as insignificant private use. If there is an insignificant level of private use, there are substantial tax benefits in utilising a company van compared to a vehicle with high CO2 emissions.

Just because a vehicle “looks” like a “light commercial vehicle/van” does not mean HMRC treat it as such for tax purposes.  Here, a list of vehicles that HMRC has confirmed will fall under van/LCV tax treatment rather than a car.  This list is not exhaustive, and if you are for example looking at a double row of seat “pickup” then there are additional criteria to consider and review to determine how HMRC will view it… (including the fact it cannot weigh more than 3.5tonnes, must be able to carry a payload of at least 1 tonne etc.)

A van may be a more suitable solution than a company car for directors.

Benefit in kind charges of having a van

The use of a van would still be part of your P11D and would need to be submitted to HMRC by 6th July each year as part of your payroll process. Any employer’s NIC payments need to be made by 22nd July

– Employer PAYE reference
– Your employee ID
– Description (make, model, CO2 emission, diesel or petrol)
– Dates the vehicle was made available from
– Dates the fuel was fully paid for by the company

The process will involve:

– Complete and post to HMRC the paper form P11D Working Sheet 3
– Fill in and post to HMRC the paper form P11D
– Complete the online P11D (B) form and send it to HMRC

Forms will be sent to:

P11D Support Team
BP1102
HM Revenue and Customs
Department 1250
Newcastle-upon-Tyne
NE98 1ZZ

 

You now need to work with your tax advisor and explore the question is it worth having a company car at all given the tax issues?

Should I opt for Salary Sacrifice with an electric car?

Salary sacrifice enables you to exchange part of your salary for a non-cash benefit from your employer, such as a company car.  This is another example of where both your company and employee can benefit from the tax breaks on electric cars

Salary Sacrifice on fully electric vehicles is a cost-effective way of driving.

Once enlisted on a scheme with a suitable electric car, a single monthly payment covering leasing, maintenance and insurance is taken directly from an employee’s salary before income tax and National Insurance (NI) contributions.

This means that both the employee and employer save money, as the employee pays tax on a lesser portion of their salary. In contrast, the company pays fewer NI contributions while helping to support more zero-emissions driving.

Salary Sacrifice can be utilised regardless of an individual’s role or the size of a business.

To discuss how Salary Sacrifice can help you save tax, contact our tax team today.

Can I reclaim VAT on an electric car?

An electric car will still be viewed as a car for VAT purposes.

If there is any private use of the car, VAT is not recoverable on purchase.

The VAT can be reclaimed if the electric car is used 100% for business purposes, although this can be difficult to prove to HMRC.

A similar restriction also applies to leased company cars.

Where there is any private use of the car, only 50% of the VAT on the leasing charge can be claimed.

Full VAT recovery is available on ongoing maintenance of leased cars, subject to partial exemption and business use tests.

Vans and motorbikes are not classified as cars, so input VAT is claimable.

Related Articles

You may be interested in our main article “buy to let tax for UK landlords”. This article discusses all the different types of tax that you need to be aware of as a UK landlord. You may also be interested in reasons why people should and should not use a limited company to buy a property.

There are many ways in which you can pull tax free money out of a limited company.

Someone that is employed may be asked whether or not they want a company car or an additional amount of salary.

How does this affect Hong Kongers that are looking to move or invest in the United Kingdom from Hong Kong?

The concept of using a UK limited company as a Hong Konger can be difficult to understand. Mix this in with a com[any car may cause overwhelm. It is important for Hong Kongers to understand the implications of owning a company car through a UK limited company.

There are no tax implications in Hong Kong because the income serviced by the limited company is not taxable by the Inaldns Revenue Department.

Learn more about our International services to help Hong Kongers move or invest in the United Kingdom

How does this Americans readers that are looking to move to the United Kingdom from the United States?

Americans need to be especially careful if they use a limited company and use a company car. The benefit in kind will not only be taxable in the UK, but the income will also be taxable by the IRS in the United States. There is a tax relief to be obtained in the United States by the amount of tax that they have suffered in the United Kingdom. That said they still need to be careful.

Americans also need to consider Global intangible low-taxed income.  This is where the IRS in the United States will tax your UK limited company profits as though they have been extracted in your personal name. It is a form of double taxation for Controlled Foreign Corporations.

Learn more about our International services to help Americans move or invest in the United Kingdom

How does this affect our British readers that are looking to move or invest in either the United States or Hong Kong?

If you are moving to either Hong Kong or the United States of America it is not going to be an issue of having a company car through the UK limited company. You are unlike;y to want a company car through a UK company. That said you may wish to have a car in either the USA or Hong Kong, which will once more bring into question how the money provided by the company should be taxed, despite you being in another country.

Learn more about our international tax services to help British people that wish to invest or move to the United States or Hong Kong

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