SB: Tax on buying car through company?

koru

I've been thinking about buying a new car, and I am trying to work out if it would be cheaper to buy it via the company that I own. Does anyone know of any website that explains all the factors you need to take into account in deciding this?

Or perhaps someone can tell me if I seem to have missed anything:

I'm thinking about a Toyota Prius T3, which is one of the reasons I am wondering if buying it as a company car might be cheaper, because it benefits from the lowest rate for calculating the taxable benefit. The rate is currently 12% of the list price, falling to 10% next year. List price is £17,780. So, I would be taxed on £2,133 (£1778, next year). I pay higher rate tax, so that's £711, next year.

I understand the employee pays no NICs on company cars, but my company would have to pay class 1A NICs, at 12.8%. That's £227, but the company gets a tax deduction on that, so after 19% corporation tax the NICs reduce the company's profits by £184. But the profits come out as a dividend, which is taxable at an effective rate of 25% after tax credit, so the NICs would cost me £138. Total tax & NIC cost = 711+138 = £850, next year.

There are two tax benefits. I reclaim the VAT on buying the car and I claim tax deductions (as capital allowances) for the cost of buying the car. I can buy the car for £16,000, on the road, so if I buy it personally, I have £16,000 less cash, immediately. (Let's assume I am a cash buyer.)

If the company buys the car, it claims a VAT input deduction which reduces the cost of the car by £2383, to £13,617. This cost is then slowly claimed as a deduction against profits, by claiming capital allowances over the life of the car. So, assuming I keep the car for 8 years (long enough that its value has fallen to near zero) the company would build up a tax deduction of £13617, which would save corp tax @19%=£2,587, so the net reduction in profits available for dividends is £11,029. If the company had not bought the car, I would receive extra dividends of £11,029, on which I would have paid 25% income tax, leaving me with £8,272 after tax.

Therefore, by buying the car through the company, I keep £16,000 cash in my own bank account at the beginning, but over the life of the car I earn £8,000 fewer dividends from my company, after tax. I also pay £850 extra tax and NICs per year on the benefit in kind, so after 8 years that will have cost me £6,800.

But if the company buys the car, it will pay for insurance and road tax and maintenance and all of that will be tax deductible for the company and it can claim back VAT on the maintenance. Assuming total running costs (except fuel) of £1000 per year, that's a tax/VAT saving of £400-500 per year, which is £3000 over 8 years.

Therefore, the benefit of buying through the company is £16,000+£3000-£8,000-£6,800=£4,200. I think there would also be some timing benefits, so I would probably earn some extra interest from buying through the company.

Anything I have got wrong or missed?

I guess that, in practice, there will come a point at which it is cheaper for me to buy the car from the company at the market value, because the taxable benefit stays the same no matter how old the car is, but the capital allowances decline over time, with the value of the car.

WHA

You can't claim back the input VAT on the purchase of a car, so that is £2383 to take out of your net savings.

You need to compare how much you would save if you bought the car personally and claimed the 40p/25p per business mile from the company. If you do a lot of business miles, it is usually better to do this, but if you do few business miles, then a company car may be better.

What are you doing about fuel? If the company pays for any fuel you will also have to pay the fuel tax benefit unless you repay the full cost of any private fuel used back to the company. If you will pay personally for fuel, then you claim only the fuel portion of the mileage rate back from the company - either way it needs to be factored in - again depends on business versus private mileage proportion and could turn the calculations either for or against.

missile

You seem to have done your homework thoroughly, but you are ignoring the cost to the (your) company.

You may like to consider:
1)Buying the car private at a discount (there are good deals to be had on Toyotas) and selling to your company at full list price. Thus getting tax free money out of your company. I have done this.
2)If you do many business miles you may find it beneficial to own a private vehicle and charge company milleage.
3)If you are into classic cars, they are treated very favourably.

koru

WHA wrote:

You can't claim back the input VAT on the purchase of a car, so that is £2383 to take out of your net savings.

Blimey, glad I asked! It never occured to me that you could not claim the input VAT. You would have thought that remunerating employees was a legitimate business expense. You are right, this significantly reduces the benefit.

WHA wrote:

You need to compare how much you would save if you bought the car personally and claimed the 40p/25p per business mile from the company. If you do a lot of business miles, it is usually better to do this, but if you do few business miles, then a company car may be better.

What are you doing about fuel? If the company pays for any fuel you will also have to pay the fuel tax benefit unless you repay the full cost of any private fuel used back to the company. If you will pay personally for fuel, then you claim only the fuel portion of the mileage rate back from the company - either way it needs to be factored in - again depends on business versus private mileage proportion and could turn the calculations either for or against.

My business mileage is pretty low - maybe 2000 miles. The fuel benefit is weird, because you pay the same tax whether you travel 1000 miles per year or 50,000 miles per year. For me, I don't think it would be worth it, as I don't do enough private mileage.

koru

missile wrote:

You seem to have done your homework thoroughly, but you are ignoring the cost to the (your) company.

I think I have taken this into account by way of calculating the reduction in my post-tax dividend income as a result of the company having bought the car. I distribute all profits, every year.

missile wrote:

You may like to consider:
1)Buying the car private at a discount (there are good deals to be had on Toyotas) and selling to your company at full list price. Thus getting tax free money out of your company. I have done this.

A clever idea, but I would have thought a tax inspector would, if he realised what you had done, argue that you are taxable on the profit you made from buying the car and reselling it for a higher price. In practice, you might get away with this, but only because the inspector did not catch you.

missile

I think it is called tax avoidance :T and it is perfectly legal to make a profit on a private sale. You would only become liable to tax if you were considered to be a car dealer.

koru

missile wrote:

I think it is called tax avoidance :T and it is perfectly legal to make a profit on a private sale. You would only become liable to tax if you were considered to be a car dealer.

If you buy something for the purpose of selling it at a profit, I promise you that this is trading and is taxable, even if you only do it once. Most private sales of cars are of course not taxable, but that is because the car was bought for the intention of using it, not for the intention of immediately reselling at a profit.

missile

Whatever you say