Pros of Buying a Car Through Your Business
- Tax Deductions: One of the primary benefits of purchasing a car through your business is the potential for tax deductions. You can claim capital allowances on the purchase price of the car. This allows you to write off the cost of the car against your business profits.
- VAT Reclaim: If your business is VAT registered, you may be able to reclaim the VAT on the purchase of the car. This can be a significant saving, though it’s essential to note that this generally applies to cars used exclusively for business purposes.
- Simplified Accounting: Keeping business and personal finances separate can simplify your accounting. By having the car as a business asset, all related expenses, such as maintenance and insurance, can be directly attributed to the business.
- Benefit-In-Kind (BIK) Considerations: For electric vehicles or cars with low CO2 emissions, the Benefit-In-Kind tax rate can be quite favourable, potentially offering significant tax savings compared to more polluting vehicles.
Cons of Buying a Car Through Your Business
- Benefit-In-Kind Tax: For petrol and diesel cars, especially those with higher emissions, the Benefit-In-Kind tax can be substantial. This tax is based on the car’s list price and CO2 emissions, which can result in a high taxable benefit for the employee or director using the car.
- Limited Personal Use: If you intend to use the car for personal journeys, this can complicate the tax situation and might reduce the overall benefit of owning the car through the business. The business use must be clearly documented and justifiable.
- Depreciation: While capital allowances can offset some of the car’s cost, depreciation can still be a significant factor. Business cars often experience rapid depreciation, which can impact the value of your business assets
Tax Implications
Understanding the tax implications is crucial when deciding whether to buy a car through your business. Here are some key points to consider:
Capital Allowances: You can claim capital allowances on the purchase of the car. The amount you can claim depends on the car’s CO2 emissions. Lower-emission cars qualify for higher allowances.
VAT: You can reclaim VAT on a new car if it’s used solely for business purposes. However, VAT reclaim is restricted to cars used for both business and personal use.
Benefit-In-Kind (BIK): The BIK tax is based on the car’s list price and CO2 emissions. For low-emission and electric vehicles, the BIK rate is lower, which can offer tax savings.
Benefits of Electric Vehicles
Electric vehicles (EVs) offer a more efficient and tax-friendly option when purchasing a car through your business. Here are some benefits:
Lower Benefit-In-Kind Rates: EVs attract significantly lower BIK rates compared to petrol or diesel cars. This can result in substantial tax savings for both the business and the employee.
Environmental Impact: EVs have a lower environmental impact, which aligns with corporate social responsibility goals and can enhance your business’s green credentials.
Government Incentives: There are various government incentives for businesses purchasing EVs, including grants and tax breaks, which can reduce the overall cost of the vehicle.
Running Costs: EVs typically have lower running costs compared to traditional vehicles. This includes savings on fuel, maintenance, and repairs.
Alternatives to Buying a Car Through Your Business
- Mileage Allowances: Instead of purchasing a car through your business, you can claim mileage allowances for business travel in your personal vehicle. The HMRC-approved mileage rate is 45p per mile for the first 10,000 miles and 25p per mile after that.
- Pool Cars: If your business requires occasional use of a vehicle, a pool car can be a cost-effective solution. Pool cars are shared among employees and are not assigned to any one individual, which can simplify tax implications.
- Leasing: Leasing a car through your business can offer flexibility and potentially lower upfront costs compared to purchasing. Lease payments can be deducted as a business expense, and you avoid the issues of depreciation and resale.
Making the Right Decision
The decision to buy a car through your business should be made after considering all factors and consulting with your accountant. Every business has unique circumstances, and what works for one might not be suitable for another. Key considerations should include the intended use of the vehicle, the type of car, and the financial implications for both the business and personal taxation.
Final thoughts
Buying a car through your business can offer several advantages, particularly in terms of tax savings and simplified accounting. However, the decision is not straightforward and comes with potential drawbacks, especially concerning Benefit-In-Kind tax and depreciation. Electric vehicles present a compelling option due to their lower tax rates and environmental benefits. Always consult with your accountant to understand how this decision aligns with your business’s specific circumstances and financial strategy.
