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Thinking of getting a company car? There are several key considerations. How will you use it? Do you want a diesel, petrol, electric or hybrid model? What about finance? Whatever you decide, consider the tax implications of a company car.

 

Vehicle use

The key question is vehicle use. Will you use the car for demonstratable business use only? In other words, there’s a prohibition on any private use. For example, a pool car kept at the business premises. Alternatively, it may be available for private use by a director or employees.

 

Business use only

Where usage is for business purposes only, electric is potentially the most cost-effective. Certain electric cars come with a plug-in grant. It’s a discount of up £2,500 off the purchase price. It doesn’t matter whether cars are purchased or leased. The deal still applies.

 

Aside from the final purchase and leasing costs, engine choice has little bearing.  VAT on the purchase price can be claimed in full. If the company buys the car, it is treated as a capital allowance for Corporation Tax purposes. If the company opts to lease it, the cost is treated as a company expense.

 

Private use

However, where private use is allowed, things get more complicated. If the company buys the car, it cannot claim VAT on the purchase price. This is directly due to the private use element. Yet, leasing is a different matter. The company can reclaim 50% of the VAT.

 

Tax implications of a company car

Furthermore, personal tax and National Insurance come into play. Irrespective of purchase or leasing, the car’s ‘list price’ remains the same. The main consideration is emissions. This is the level of CO2 grammes/km that the engine produces. The cleanest is an electric car. The worst performer is the diesel engine. That said, check the official range on one charge for electric models.

 

Example

Take an electric car with CO2 emissions of less than 50g/km. The mileage on one charge is more than 130 miles.  In 2020/21 car benefit was calculated at 2%. There’s no potential change before 6 April 2023.

 

Compare this with a RDE2 (Real Driving Emissions) compliant diesel. It has a CO2 emission rate of 120g/km. The percentage for car benefit purposes was 27% for 2020/21. Not that this percentage rises to 29% by 5 April 2023. If the car is not RDE2 compliant, the percentages are even higher. For 2020/21 the car benefit percentage was 31%. It increases to 33% by 5 April 2023. 

 

Certainly, these figures allow an element of tax planning. But take care when leasing. The figures could change during the period of the lease.

 

Fuel

Also, don’t forget fuel. Does the company provide private fuel? And can you prove it? If not, a company fuel benefit charge will be payable. Fully electric cars are the exception. Electricity is not treated as a fuel.

 

Seek advice

So, it pays to understand the tax implications of a company car. Is it right for you? If you need advice, call us on 01785 243276.