Car Finance for Business

fr33zy

I'm a self-employed freelance chauffeur.  I currently rent my vehicle and have been doing so for a couple of years.  I would now like to buy my own vehicle, the cost of which is around £40,000 approved used from Mercedes.  I would need to get the car on finance.

I haven't checked my eligibility with Mercedes but I assume due to one active default on my credit file, normal lending will be challenging.  I do not own a home or assets to secure a loan.  I file my tax returns each year but I do not have a seperate business bank account.  I can show turnover of approx £80,000 a year.

What lending options would be available to me at reasonable costs? Business lending? Personal loan? Direct car finance?

Ebe_Scrooge

When you say you're self-employed, what is your status - sole trader, Ltd. Company?  I'm thinking of the business loan aspect - lenders tend to be more willing to offer business loans to Ltd. Companies.

What's the active default on your credit file, and how old?  In isolation, that may not be the end of the world in an otherwise clean history.

All other things being equal, I'd be tempted to look at the direct car finance side of things.  You're likely to be offered a lower APR simply by dint of the fact that the lender can repossess the car if you don't keep up repayments.

I'm not sure whether there would be any tax implications though, and how the car would be viewed - a personal or business asset.

Are you VAT-registered?  If you say you're turning over £80k a year, you're getting close to the £85k limit where you need to register.

Aside from the financing of the car, it may well be worth speaking to a proper accountant to see what your options are, and what would be the most tax-efficient way of doing it.  I know it can be quite daunting to work out the various pros and cons of buying a car personally versus buying it through the business.

fr33zy

Ebe_Scrooge said:

When you say you're self-employed, what is your status - sole trader, Ltd. Company?  I'm thinking of the business loan aspect - lenders tend to be more willing to offer business loans to Ltd. Companies.

What's the active default on your credit file, and how old?  In isolation, that may not be the end of the world in an otherwise clean history.

All other things being equal, I'd be tempted to look at the direct car finance side of things.  You're likely to be offered a lower APR simply by dint of the fact that the lender can repossess the car if you don't keep up repayments.

I'm not sure whether there would be any tax implications though, and how the car would be viewed - a personal or business asset.

Are you VAT-registered?  If you say you're turning over £80k a year, you're getting close to the £85k limit where you need to register.

Aside from the financing of the car, it may well be worth speaking to a proper accountant to see what your options are, and what would be the most tax-efficient way of doing it.  I know it can be quite daunting to work out the various pros and cons of buying a car personally versus buying it through the business.

I'm currently registered as a sole trader but if required I can set mysef up a limited company.

The default on my file is from Jan 2018.  I settled with the company at 80% of the debt but they marked me as 'defaulted'.

Not VAT registered, I don't work the full year so around 80k goss turnover but don't think I will see any benefits of being VAT registered unless as you say I am forced to if I hit the threshold.

I did just speak to Barclays after I posted this message who confirmed the same as you say - buying a car on business as a sole trader will check your personal credit file so hardly any difference to a personal loan.

All I know is long term its better to buy than rent (if I am not strung badly on finance).  Even with depreciation, maintenance and servicing, it won't cost me the £24,000 i'm paying now over two years to rent.

Ebe_Scrooge

fr33zy said:

Ebe_Scrooge said:

When you say you're self-employed, what is your status - sole trader, Ltd. Company?  I'm thinking of the business loan aspect - lenders tend to be more willing to offer business loans to Ltd. Companies.

What's the active default on your credit file, and how old?  In isolation, that may not be the end of the world in an otherwise clean history.

All other things being equal, I'd be tempted to look at the direct car finance side of things.  You're likely to be offered a lower APR simply by dint of the fact that the lender can repossess the car if you don't keep up repayments.

I'm not sure whether there would be any tax implications though, and how the car would be viewed - a personal or business asset.

Are you VAT-registered?  If you say you're turning over £80k a year, you're getting close to the £85k limit where you need to register.

Aside from the financing of the car, it may well be worth speaking to a proper accountant to see what your options are, and what would be the most tax-efficient way of doing it.  I know it can be quite daunting to work out the various pros and cons of buying a car personally versus buying it through the business.

Even with depreciation, maintenance and servicing, it won't cost me the £24,000 i'm paying now over two years to rent.

I'd check the figures carefully on that one.  You said the car is going to cost in the region of £40k.  Then you need to add in however much interest you'll pay on whatever finance package you end up going for.  And don't underestimate the cost of maintenance - I'm guessing a Merc will be on the high side for parts compared to something like a Ford.  And I assume you'll need to keep it maintained to a very high standard (minor niggles that you'd put up with if it's just your own car will need to be sorted if you're using it to chauffeur paying guests around in).

I don't dispute that buying may very well work out cheaper than renting, but just take the time to factor in all the costs properly.

And good luck - I hope your business thrives and you are able to make a decent living from it!

fr33zy

The car will be less than a year old and under Mercedes warranty for at least two years so maintenance will just be planned servicing and perishables (tyres, discs, pads, wipers).  Depreciation and interest are the big costs. 

The only reason I didn't buy sooner is I liked the flexibility of a rental agreement.  I think its pretty much a no brainer from a financial perspective if i can get the car finance right to purchase.  With hindsight I should have taken the bounceback loan last year and got a car when demand was low but its never too late I guess.

Grumpy_chap

The rules around cars and tax and VAT for business are complex and not always obvious how things are best structured to ensure the most beneficial financial outcome.  It may be worth engaging professional advice.

fr33zy said:

I did just speak to Barclays after I posted this message who confirmed the same as you say - buying a car on business as a sole trader will check your personal credit file so hardly any difference to a personal loan.

I suspect that is likely to also be the case if you were to set up a Ltd Company as a Director's Personal Guarantee will almost certainly be required, especially for a new Ltd Co with no trading history (which would all belong to your sole trader business).

fr33zy said:

Not VAT registered, I don't work the full year so around 80k goss turnover but don't think I will see any benefits of being VAT registered unless as you say I am forced to if I hit the threshold.

The disadvantage of registering for VAT is that it reduces your nett fee from every fare.  I assume that the price for a chauffer transfer from Heathrow to the Ritz is the same and is a market-priced value.  If you are not VAT-registered, then that is all income to the business.  If you are not VAT-registered, that same gross income includes the 20% that has to be paid to HMRC as VAT, so the income to the business reduces by 16%.

Against that, you need to weigh up the cost of living increases and not being VAT-registered meaning you will restrict your turnover while the price of everything goes up.  AIUI, the Vat-registration threshold last changed 2017 and has been frozen until at least 2024.

VAT is very rigid and strict penalties if you get it wrong. 

You'd also need to understand the input VAT (charged on expenses) that can mitigate the effect of the output VAT (applied to sales).  This is, again, not absolutely simple for a business where motoring costs make the dominant input VAT.  Along with this is the need to understand whether or not VAT associated with the vehicle purchase can be reclaimed - this is not always the case (if the vehicle is available for any personal use) and the vehicle has to be VAT-Qualifying if input VAT is eligible subject to the other rules.  There are different rules between a vehicle that is purchased and a vehicle that is leased.  Definitely worth finding out through professional advice (Accountant - paid for) to get this all correct.  You would not want to buy a car at £40k and then find in the next year you are forced to register for VAT and would have done the car differently...

Are there any industry forums that can give informal advice around the car purchase and VAT decision?
If your gross turnover is around the £80k mark, and that is "typical", then there must be a whole community of drivers in a similar position and with the similar impending VAT-registration threshold.

Good luck with the business

MrFrugalFever

When you say ‘rental’ can you elaborate?

how many miles per year do you drive?