There are many reasons why you might want to get a company car for your business. From providing reliable transportation for employees to increasing brand awareness, a business vehicle scheme can have many advantages for staff and employers.
However, company vehicles can come with hefty tax obligations and legal limitations that can sour the arrangement. So, with both leasing and buying options available, it’s essential to understand the various implications of acquiring a company car to ensure you choose the best option for your business.
To buy or not to buy?
One of the first questions business owners have about company cars is whether to buy or lease. In short, the answer totally depends on your budget and requirements. But what’s the difference between the two options?
Purchasing a vehicle outright is the more traditional route. Doing so allows owners to use the car as they please without customisation or mileage restrictions. Plus, they can sell it when they no longer need it, providing some return on investment.
On the other hand, leasing a car involves paying monthly towards a vehicle, essentially renting it instead of buying it. These deals usually include regular car maintenance, and you can easily trade-in for a new vehicle at the end of your lease agreement — a bit like a phone contract. Leasing is an increasingly popular option for businesses that may not have the cash to purchase one or multiple vehicles outright, splitting the financial commitment into more manageable installments.
Both options can work well for different companies depending on how the vehicle will be used and who’s using it. Still, there are a few tax requirements to cover before getting your company car scheme on the road.
What are the tax implications for leasing vs buying?
Tax is one of the primary deciding factors for employers weighing up the pros and cons of business vehicles.
Company cars don’t provide any tax benefits for employers. Still, a limited company can claim the cost of purchasing a new vehicle through capital allowance, reducing taxable profits, and may also be eligible for maintenance and loan interest payment relief. Alternatively, businesses can claim 50% of the VAT for leased company vehicles. Zero-emission electric cars with 100% business use can be 100% written off against profits in the first year using the first-year allowance.
The government makes further tax concessions for low-emission and electric or hybrid vehicles. According to 2022/23 regulations, businesses can claim 18% of the value of a car bought with emissions below 50 g/km compared to 6% for models over this threshold. All leasing costs can be deducted from taxable profits and expenses for vehicles with emissions below this emissions level.
However, business vehicles often invite additional tax payments. Employees using a company car for private use must pay benefit in kind (BIK) tax on their income, which involves filing a P11d form annually. The rate of this expense is based on the list price of the car when it was new and its CO2 emissions, with efficient electric and hybrid vehicles incurring lower costs.
There are also various tax implications for employers and employees concerning fuel costs. For example, if your business pays toward fuel for personal use — such as if a member of staff or their family member uses a company vehicle to commute — the employee must pay income tax on this benefit at a rate dependent on engine efficiency. So, keeping an accurate record of all fuel expenses is crucial to avoid getting caught out by HMRC.
What’s the best option for your business?
If you’re thinking of buying a car through your company, there are a few questions you should ask yourself to determine what type of vehicle you should get and whether buying or leasing is most suitable for your business.
What’s your budget?
It’s important to work out how much you’re able to spend upfront, what you can afford to have tied up in vehicles and whether your business will be able to keep up with regular lease payments.
Leasing is generally considered the more affordable option but requires committing to a contract that can be expensive to end early. So, think about how long you’ll need your company car and whether buying outright might work out cheaper in the long run.
Who’s going to be using the car and why?
If you’re using the vehicle for business purposes only, leasing can be an excellent tax-deductible option. But taxation can become more complicated if the employer or their relatives use the car for other activities. In this case, purchasing the vehicle outright may be more cost-effective and offer better flexibility.
Mileage allowance may be a significant factor in this decision; if you’re leasing, you’ll need to stay within the mileage limit agreed in your contract to avoid buying extra miles at the end of your arrangement.
What type of vehicle do you need?
In the current market, we’d recommend investing in an electric vehicle. Every model in carwow’s list of the top 10 best company cars in 2022 is either fully electric or hybrid due to their sustainable credentials and low BIK rates. Plus, various government grants are available for installing charging points at homes and workplaces. So, leasing through your limited company can be a great way to make these next-generation cars accessible to your employees.
Confused by the complicated world of business vehicle tax? You’re not alone. Our team of online accountants is here to help — book a consultation today!