As an accountant practising in the UK, I am often asked whether it is possible to buy a car through a limited company. The short answer is yes, but you need to be aware of the tax implications to the company and to the individual using the car. As with anything involving tax, the answer is not always straightforward.
It can be a tax-efficient option to buy a car through a limited company. The amount of tax relief available depends on many factors, such as the type of vehicle, CO2 emissions, and whether the car is for business or private use. There are strict rules and regulations to adhere to.
In this article, we’ll explore the relevant rules and tax reliefs around buying a car using a limited company in the UK. If you are a sole trader, please see the FAQs section for details on buying a car through your business.
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Buying a car through a limited company
It is possible to buy a car through your limited company, but whether it’s the most tax-efficient option depends on many factors, and there are strict rules and regulations.
Let’s examine the company and personal tax implications based on how the car is used, i.e. for business or personal use.
Note that ‘personal use’ includes the commute from home to your regular place of work.
Buying a car through your business – business use only
If the car is used exclusively for business purposes, there are certain tax reliefs for the company.
The VAT on the purchase price of the car can be claimed in full as long as the car is used exclusively for business.
Where your company car is leased (as opposed to purchased outright), unless there is exclusive business use, then the company will only be able to recover 50% of the VAT charged on any lease payments.
The company can also use its capital allowances to offset the cost of the car. The government incentivise the purchase of greener vehicles, and this dictates how much can be claimed. See the gov.uk website for more details on capital allowance rates.
As the vehicle is owned by the limited company and is solely for business purposes, all associated running costs, such as fuel, maintenance and insurance, are tax-deductible business expenses.
As for the individual using the car, there are no tax implications.
Buying a car through your business – for personal use
If the car is used for personal purposes, the tax treatment is different.
Generally, you can only reclaim the VAT on a car if it is used exclusively for business and is not available for private use by yourself.
Individual Tax implications
If the car is used for private purposes, it is classed as a taxable benefit, and the employee will be liable for company car tax. This is known as a Benefit in Kind (BIK) and is deducted from the employee’s salary. The tax rate is based on the car’s list price, CO2 emissions and the user’s tax bracket and currently ranges from 1% to 37%.
If your company pays for your private fuel costs, this is also a BIK, and you must pay tax on it. If you pay for fuel personally, you are entitled to claim a tax-free allowance from your company for any qualifying business mileage.
Penalties for non-compliance
It’s important to note that failure to comply with the HMRC and tax laws surrounding buying a car through your company can result in penalties and fines. If the car is found to be used for private purposes, the company may have to pay back the VAT claimed on the purchase, as well as interest and penalties.
Frequently asked questions about purchasing cars through the company
If you’re still unsure of whether purchasing a company car through your company is right for you, check out our FAQs here or contact us today for more information:
How are capital allowances calculated on a car?
Brand new electric cars and those with 0% carbon emissions qualify for a 100% first-year allowance (FYA), i.e. the company can claim 100% of the purchase price in the year of its purchase (regardless of whether it is bought outright or with finance).
For second-hand electric cars and those with fuel emissions above 50g/km, other rates apply (currently 18% or 6%).
If the car is used for personal as well as business use, the capital allowances are reduced proportionately.
Who pays road tax on a company car?
If the company owns the car, it pays for the road tax regardless of whether it’s used for private or business purposes.
Can I buy a car through my business as a sole trader?
Yes, you can buy a car through your business as a self-employed sole trader. Note, however, if the car is for personal as well as business use, the tax reliefs mentioned below must be proportioned to the business use of the car. It is advisable to speak to your accountant to ensure you are fully aware of what you can and cannot claim to avoid penalties from HMRC.
Buying a car outright as a sole trader
A sole trader car purchase qualifies as a capital allowance when the car is bought outright and can be claimed via the sole trader’s income tax return. The rate depends on the car’s CO2 emissions.
Buying a car with finance as a sole trader
A sole trader car lease is an alternative to buying outright. You can claim the lease payments as an allowable business expense as well as expenses such as fuel and insurance (but remember, only the proportion that is for business purposes).
You can also purchase a car as a sole trader with hire purchase. In this case, the tax treatment is the same as if you buy the car outright, so you can use your capital allowances.
Are there tax reliefs if I buy my car personally?
As a business owner – whether that’s a limited company or sole trader business – you cannot claim the costs involved with purchasing or running a car if you buy it personally. However, it is possible to claim back qualifying business mileage on business journeys.
Get tax advice from Audtax tax consultants
Audtax is a trusted tax advisor to many businesses throughout central and east London. We can provide valuable advice on how to purchase your company car in the most tax-efficient way for your company and for you as an individual.
Along with tax matters, we can provide a whole range of accountancy services, such as bookkeeping and payroll. Our dedicated and highly responsive team has years of experience and can help you make the most of your company and personal finances.
For a discovery call, please get in touch.
In summary, it is possible to buy a car from a company, but HMRC has strict rules and regulations when it comes to claiming tax. There are tax reliefs available, such as VAT, capital allowances and business expenses, but they can only be claimed for the proportion of business use in most cases.
If the car is for personal use, the individual incurs tax as a Benefit in Kind.