Questions we are regularly asked are whether it’s better to purchase a car personally or through the business and whether it’s better to lease/rent a car or buy it outright. Other factors such as access to finance may affect the decision, but the tax situation can be summarised as follows.
For a sole trader the options are fairly straight forward. They can either claim HMRC’s recommended rates for business mileage or alternatively put all the costs through the business and then make a deduction for personal usage. Obviously the higher the proportion of business mileage the greater the tax saving.
However for the owners of small limited companies it is more complicated. Corporation tax can be saved by putting the costs through the company but there is little point if these savings are outweighed by the additional tax and national insurance payable on the car benefit in kind charge. This benefit in kind is calculated as a percentage of the list price of the vehicle. The percentage is dependent upon the CO2 emissions of the vehicle.
Where the vehicle is purchased outright, either on HP or a finance lease, then the business can claim capital allowances and any interest paid on any loan. However capital allowances on all but the most green vehicles have been reduced in recent years so in most cases the tax on the car benefit in kind will be more than the capital allowance.
Where the vehicle is on a contract hire or operating lease agreement then the business can claim the full amount of the rental payments, although there are restrictions for cars with high CO2 emissions.
There are definite tax benefits of having an electric vehicle but for most people this is not yet a practical option. We therefore advise that for most people they should record their business mileage and claim HMRC’s mileage rate of 45p per mile. It should be remembered that this rate covers all vehicle running costs, not just the fuel.