Company Cars: Tax Implications

Contents

Following our blog post on company car rules we thought it would be useful to outline the tax implications of purchasing a company car through your company. Please note that there are different rules when purchasing a company van, and these will be discussed in a separate blog post.

As the purchase of a company car has a number of different tax implications, we will break this article down into sections based on each relevant tax.

VAT on Company Cars

Company Car Purchase

Where a company car has even the slightest element of personal use by an employee, HMRC will not allow any of the VAT on the purchase to be reclaimed. 

You might be thinking ‘what if I argue/say that I’ll never use the company car for a personal journey’. However, the rules on this are very strict and even if you think that no personal journeys will ever be made, unless you can prove this to a high degree of certainty (see: Zone Contractors Ltd vs Revenue and Customs, TLDR; cars to be locked on business premises overnight, directors driving to/from business premises in personal cars, keys kept in company offices, etc) HMRC will reject the claim.

Key point: For an ecommerce business, you might use a company car for business purposes, but it would be incredibly unlikely that you would be able to reclaim any VAT from the purchase.

Company Car Lease

The tax treatment of leases can become quite complicated, but in general, if you have an operating lease for a company car, then, even if there is an element of personal use, 50% of the VAT on the lease can be reclaimed.

Corporations Tax

Company Car Purchase

When purchasing a company car as an asset, any tax deductions are accounted for via capital allowances. This means that the value of the purchase is not necessarily fully tax-deductible when made (at least straight away).

General Pool

In general, 18% of the value (cost price minus any prior capital allowance deductions) of the asset is ‘claimed’ and offset against the corporation tax each year. 

General Pool Example: An asset purchased for £10,000
  • Year 1 £1,800 (£10,000 @ 18%) claimed and written down value of £8,200 carried forward into year 2 - meaning your year 1 taxable profit would be written down by £1800. Since the corporation tax rate is currently 19%, your tax bill would be reduced by £342 (19% of £1800) in the first year.
  • Year 2 £1,476 (£8,200 @ 18%) claimed and written down value of £6,724 carried forward into year 3. Since the corporation tax rate is currently 19%, your tax bill would be reduced by £280.44 (19% of £1,476) in the second year.

Although there are general rules (as outlined above), there are also specific rules to apply where certain conditions are met. These are usually based on how environmentally friendly a car is and are outlined below.

First Year Allowances (FYA)

Under certain (environmentally friendly) conditions, a company car may qualify for ‘First year allowances’ (FYA). Where these conditions are met, the full cost of the car will be deducted from the pre-tax profits.

The conditions are:
  • The car must be new and unused
  • If the purchase was after 31st March 2021 the CO2 emissions should be 0g/km (the car is fully electric)

The conditions for qualifying for FYA varied slightly each year as qualifying emissions levels were slowly reduced to 0g/km in 2021. Therefore if you purchased a car prior to 2021 you can see whether or not your car qualified for FYA here: https://www.gov.uk/capital-allowances/business-cars

FYA Pool Example: An asset purchased for £10,000
  • Year 1 £10,000 (£10,000 @ 100%) claimed and written down value of £0 carried forward into year 2 - meaning your year 1 taxable profit would be written down by £10,000. Since the corporation tax rate is currently 19%, your tax bill would be reduced by £1,900 (19% of £10,000)
  • Year 2 £0 (£0 @ 100%) claimed and written down value of £0 carried forward into year 3 (note: calculation in year 2 not necessary, just provided as an example)

Special Rate ('high emissions' cars)

Conversely to environmentally friendly cars, non-environmentally friendly cars have a ‘special rate’ which is lower than the general rate. This is to discourage businesses from purchasing cars with higher emissions.

The special rate is 6%, meaning that only 6% of the carrying value can be used to offset corporation taxes each year, vs 18% in the general pool and 100% in the FYA pool.

Special Rate Example: An asset purchased for £10,000
  • Year 1 £600 (£10,000 @ 6%) claimed and written down value of £9,400 carried forward into year 2. As the corporation tax rate is currently 19% this means that your year 1 tax bill would be written down by £114
  • Year 2 £564 (£9,400 @ 6%) claimed and written down value of £8,836 carried forward into year 3. As the corporation tax rate is currently 19% this means that your year 2 tax bill would be written down by £107.16
The criteria for being ‘special rate’ (high emissions) have been changed each year up until 2021, when the rate was set as 50g/km or higher. If you are looking at a car purchased prior to 2021 you can use the same link provided above to see what the rates were each year.

What CO2 rate is my car?

If you’re unsure what CO2 rate applies to your car, you can use the database provided by the Vehicle Certification Agency here: https://carfueldata.vehicle-certification-agency.gov.uk/

Benefits in Kind (Income Tax & National Insurance)

The use of a company vehicle is a company benefit and so has benefit in kind implications for the employee who has access to the vehicle. Benefits in kind have both personal tax and national insurance (including employees' and employers') implications. See our blog post on benefits in kind in order to get an overview of how this works.

Similar to the capital allowance rates, the benefit in kind rate is calculated based on a combination of the market value of the car, whether the car is petrol, diesel or fully electric and the applicable CO2 emissions rate. Therefore the tax implications can vary significantly between zero emissions and high emissions cars.

If an employee receives benefits in kind, these must be accounted for via the limited company either through payrolling benefits each month or a P11D each year. 

Conclusion

As there are so many factors at play, calculating the tax implications, of purchasing a company car can be quite technical. However, in general, if you are purchasing a fully electric car compared to a high emissions vehicle, then the tax liabilities are likely to be substantially lower.

If you know which car(s) you are thinking of buying and want to calculate the tax implications you can use the calculator link on HMRC's vehicle tax page. Alternatively, if you are looking for something a little more user friendly, the search term ‘company car tax calculator’ on your preferred search engine should give plenty of results (link not provided as we don’t want to link to any external sources).

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