SUB-CATEGORY – CARS AND VANS: COMPANY CAR OR OWN CAR

Assuming that you trade as a limited company, the most important question is whether to run it as a company car or keep it in your own name and claim mileage instead. Company cars incur such high tax bills now that most people just claim the mileage, but if you are planning to buy an electric car or one with very low CO² emissions (or one with very high running costs) it might still be worth going down the company car route. The main points to bear in mind are:

• List price
• CO² emissions
• Tax rates
• Cost of finance
• Running costs
• Fuel costs
• Business use

Tax
You need to consider the tax consequences of running a company car. This is based on the list price according to the manufacturer and the C02 emissions figure as stated on the vehicle registration document. The current tax rates are shown on the AA website and start at 10% for emissions up to 120g/km. Thereafter they range between 15% for emissions between 121-135g/km and go up in 1% increments for each 5g/km increase until the maximum of 35% for emissions at or above 235g/km. For diesel cars you have to add an extra 3% (subject to the 35% maximum) as they emit other greenhouses gasses even though the CO² emissions are usually less than for a petrol fuelled car. You would pay tax on this at the basic rate (20%) or the higher rate (40%) and the company would incur Class 1A Ni contributions at 12.8%.

Cost of finance
Secondly, you should take into account the cost of buying the car. If you buy the car personally you may need to take a higher salary or dividend from your company in order to do so. If you are already a higher rate taxpayer, this would effectively cost you 25% tax on the additional cash withdrawn if you took it as dividend. Alternatively you could take the money out of the company as a loan but this would cost you 4.75% interest at current Treasury rates which the company would then have to pay tax on. Also, it would be classed as a s419 participator loan meaning that the company would have to pay additional corporation tax amounting to 25% of the outstanding balance, which it would only get back if and when the loan was repaid. If you borrow the money externally then you would avoid both these scenarios but you would to pay a commercial rate of interest on the loan. However, if you already have sufficient cash resources of your own to buy the car you would not need to borrow internally or externally or take a higher salary or dividend, so that part of the equation would not apply. If you buy the car in your own name you would also be able to keep the money when you finally sell it instead of owing it to the company. Each case depends on your own individual circumstances.

Running costs
If the company owns the car it can claim all the running costs against corporation tax and save 21%. If you own the car personally you would have to pay all costs yourself and not save any tax. The most you could do is claim 40p per mile for business use plus additional costs like parking and road tolls. If you have an outstanding loan on the car you also could claim a proportion of the interest from the company based on business use and save 21% corporation tax. However, you might need to take a higher salary or dividend from the company in order to pay the running costs, which may cost additional income tax and NI.

You might conceivably be better off putting cars with high maintenance costs in the company name, but this is only part of the equation. You could also get the company to own the car temporarily if you expect a high garage bill as the taxable benefit would be reduced pro-rata in line with the time it was available for your own use, which could be very short if it was off the road for a while. However, you need to take care with this as it could be disregarded as a transaction for which the main or only purpose was to avoid tax, and you probably wouldn’t save very much anyway.

Fuel costs
In addition to the company car tax rates, there is a tax on fuel for private mileage paid by the company and not reimbursed. For the 2009/10 tax year the base value has been set at £16,900 and you then apply the same % as for the car benefit based on CO² emissions. Therefore it can be very expensive if you get the company to pay all the fuel bills.

If you drive an average 10,000 non-business miles a year and your petrol consumption is 8 miles per litre, the cost to you at £1 per litre would be £1,250. If the company pays this you would be liable for tax on a fixed sum of £16,900 at the relevant percentage. So for example if the CO² emissions were 185g/km the rate would be 25% and the benefit would be £4,225. At 40% this would cost a higher rate taxpayer £1,690 a year. In other words, you would pay £440 more in tax than if you’d paid for the fuel yourself. True, the company would save 21% corporation tax on the cost of the fuel, ie £262, but overall you would still be worse off by £178.

Therefore, it is generally better to pay for all fuel yourself and charge the company for business mileage at the tax-free rates. For a car owned by you these rates are 40p per mile for the first 10,000 miles and 25p per mile thereafter (this applies to the tax year). For a company car you must use the advisory fuel rates which were revised with effect from 1 st July 2009 and are now 12p per mile for a petrol fuelled car with an engine size of 1400cc-2000cc and 18p per mile above this. For diesel cars the rates are even less reflecting the lower fuel consumption (see our table on advisory fuel rates). According to the HM Revenue website these rates are based on a current price of 97.5p per litre for petrol and £1.034 per litre for diesel. They are also based on an applied MPG of 36.0 for petrol cars up to 2000cc and 45.8 for diesel cars up to 2000cc.

Business use
Finally, you should take into account the business use of the vehicle. Unfortunately this does not affect the tax charge for a company car but it might make it more beneficial for you to keep the car in your own name as you can claim 40p per mile for all business mileage. Above 10,000 miles the tax free rate goes down to 25p but this is still beneficial if your other running costs are fairly low. Not only are these rates tax free for you but the company can claim these expenses against corporation tax, thus saving a further 21%. For company cars you can only claim the advisory fuel rates on a tax free basis which are somewhat lower, unless you can prove that the actual costs were higher than this, which is only accepted in exceptional circumstances.

Example

Continuing the example of Frank, if he buys a 2000cc petrol fuelled car with a list price of £25,000 and CO² emissions of 185g/km, pays for all fuel himself, drives 25,000 miles a year with fuel costs of 15p per mile, reclaims 15,000 business miles a year at the maximum tax free rates, incurs other running costs of £2,000 per year and sells it after 5 years for £7,500 the position would be as follows:

Company Car
Income tax - £12,500 (£25,000 x 25% x 5 years x 40% tax)
Class 1A NI - £4,000 (£25,000 x 25% x 5 years x 12.8% NI)
Less: Tax saved on NI - £840 (£4,000 X 21%)
Business fuel - £9,000 (15,000 miles x 12p x 5 years)
Private fuel - £9,750 (25,000 miles x 15p x 5 years minus £9,000)
Less: Tax saved on business fuel - £1,890 (£9,000 x 21%) Other running costs - £10,000 (£2,000 x 5 years) Less: Tax saved on running costs - £2,100 (£10,000 x 21%)
TOTAL TAX AND RUNNING COSTS - £40,420

Own Car
Tax on additional dividend in Year 1 – £6,250 (£25,000 x 25%)
Total fuel – £18,750 (25,000 miles x 15p x 5 years)
Less: Tax saved on business mileage - £5,512 (10,000 x 40p + 5,000 x 25p x 5 years x 21%)
Other running costs - £10,000 (£2,000 x 5 years)
Less: Tax saving on lower dividend in Year 5 - £1,250 (£5,000 x 25%)
TOTAL TAX AND RUNNING COSTS - £28,238

Additional Cost of Company Car = £12,182

These figures show the usual result – that company cars cost a lot more to run for owner-managers of limited companies as a result of the extra income tax and NI. If you can afford to finance the car yourself instead of taking higher dividends, the saving becomes even more pronounced.

However, if you trade as a limited company and keep the car in your own name, you would not be entitled to capital allowances on the net cost of the car, which in this example would save £4,800 for a sole trader on higher rate tax or £4,200 for a trading company (eventually).

Notes This example is based on 2009/10 tax rates and does not take account of the proposed increases in corporation tax for small companies and income tax for people earning more than £100,000 a year that are planned to take effect from 6th April 2010.

Acumen Tax Solutions
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Tel: 020 8406 9425 Mobile: 07813 582890 E-mail: info@acumentaxsolutions.co.uk

For information of users: Although every care has been taken in compiling this material, it only provides an overview and does not take the place of an individual consultation. We strongly advise all users to consult the detailed legislation or seek professional advice. Therefore no reponsibility for loss occasioned by any person acting or refraining from action as a result of this material can be accepted by the authors or this firm.