Buying a car or van for your business can be expensive and have significant impact on cash flow, therefore it is important to explore different options available. In this article we look at purchasing or leasing your vehicle and tax implications each brings.
However, If you are still unsure whether you should buy or use your personal car, you can find more information in my blog post Should I use own or company car? in #expenses. Note that all figures included in the post are valid for 2018/19 tax year.
Purchase
If the cash flow is not a problem purchasing a car outright could be beneficial as it will mean it becomes company’s asset.
Car as an asset
Once having an asset, you could sell it or trade it at anytime. If needed this asset could also be used to offset any outstanding debt. Purchasing the car also means that the company is bearing the depreciation costs, which is specially significant if the car is bought brand new. Additionally, once the car is owned by the business there are not mileage restrictions implied.
Corporation tax
The company would be able to claim capital allowances, which are reducing the corporation tax payable by the company. The amount of the capital allowances depends on the CO2 emission of the car and whether it was purchased brand new or not.
Additionally, as the company will be liable for maintenance and repair costs, expenses will be deductible against the profit and lower the corporation tax.
VAT
The company won’t be able to claim any VAT on the purchase of a car. However your business will be able to claim VAT on the costs of running it.
Lease
When taking the lease on the car you will have to pay relatively low initial deposit and then regular monthly instalments, which can help with the cash flow.
Instalments
Having the regular payments will help your business to manage and predict the undertaking. Additionally the lease agreement could be negotiated to include the servicing and maintenance in the monthly payments. This way it takes the worry away of unexpected expenses and allow to budget the future expenses better.
Corporation tax
The company can claim the cost of the annual lease against corporation tax. However we have to take the CO2 emission into account once again.
If the car emission is over 130g/km company has to restrict the amount deductible against tax and only 85% of the cost is allowed to be claimed.
If the car emission is lower, then the amount is not restricted and 100% can be claimed.
If you will be obtaining new lease after April 2018, the new CO2 emission is coming into place of 110g/km
VAT
The lease instalments payable will be including VAT, however you could only recover 50%, if your business is not on the flat rate scheme.
Example
You lease the car through your limited company for £666.66 per month or £8,000 per annum plus VAT. You can reclaim 50% of the VAT of the lease, so in this case would be
£8,000 x 20% x 50% = £800 per annum
The company can also claim corporation tax on the annual lease amount at 19%
£8,000 x 19% = £1,520 each year
but only if the CO2 emission is lower than 130g/km, otherwise we have to restrict it and claim only 85% of this amount
£1,520 x 85% = £1,292 each year
Other points to consider
Usually lease agreements include mileage allowance, which states how many miles you are allowed to clock up on the annual basis. It is not ideal situation if you are expecting to travel a long distances for business, so this has to be consider before taking a lease.
On the other hand you will have more flexibility at the end of the lease, where you could buy the car or look for further refinance or just return the car.
What if you want to lease or buy a company van or pickup instead?
The company tax for using a van or pickup is calculated differently than a car, as it is based on the fixed rate, rather than its P11d value.
The current fixed rate is £3,350 for vans which emit CO2 and £1,340 for vans which don’t emit when driven. Additionally the fuel benefit charge is £633 irregardless of the miles driven.
If your business would benefit from a van or pickup, then this could be a very good option, as the tax amount payable is significantly lower.