Should your small business have a company car?
It’s a question we are frequently asked. Should I put my car through my business?
Typically, there are a number of issues affecting the answer. Let’s start with the type of business you run. If you’re a sole trader and are VAT registered then you don’t have a choice, the car is going to be included in the business. You will still need to keep mileage records as you will be allowed tax relief based on the business percentage of the total annual running costs. You should be keeping all bills, maintenance, insurance, fuel, the cost of the car, road fund licence; basically everything linked to the vehicle.
If you’re a sole trader and not VAT registered you have a choice: either claim a mileage allowance for business journeys or use the same basis as above. So, relatively simple for the sole trader, what about the limited company owner?
Here’s where it can get a little more challenging to decide which route is best. First question to answer is whether you are able to use the vehicle privately – even one trip to the supermarket would cause you an issue? If there’s no private use, then there is no tax liability for having a company car in your business – crack on!! Unfortunately, this is unlikely to be the reality and HMRC would likely look very closely at your records to try to establish private use if you’re investigated.
So, assuming you do use your vehicle privately, what options do you have?
Putting the car into the business means that you will have a personal tax charge on the value of the benefit you receive from the car but, in addition, the company will be charged employers’ National Insurance on the same benefit value (currently at a rate of 13.8%). The key in deciding whether to put the car into the business or keep it outside and claim a business mileage allowance is linked to the tax and National Insurance charge compared to the annual running costs of the car.
The tax charge is directly linked to the list price of the car when new (not what you paid) including any additions/accessories and the CO2 emissions figure for the car. Basically, the more money you spend on a high emitting car, the more tax you’ll pay. Buy yourself a very low emitting car (up to 75 gm/km of CO2) and you would only be charged 5% of the purchase price.
So that’s the tax charge calculated… what about the running costs? You would need to work out the maintenance, fuel costs and other expenses for a year and then compare the after tax costs of the two approaches.
Remember that you will have corporation tax relief on the running costs of the vehicle in the business but additional dividend income if the car is privately owned which would then be used to pay for the operation.