When you need to use a vehicle regularly for work and you own your own business, you have two basic options: Purchase a car as a company asset, or buy the car yourself and then charge your company. Read on to understand the benefits and drawbacks of going the company car route.
Tax Implications of Company Cars
Many of the past few governments have taken a dim view of the company car model. This means that tax rates on company vehicles have been climbing steadily. Right now, tax charges for company vehicles are derived from CO2 emissions. The overall benefits subject to taxation can be as high as 35 percent of the car’s listed price.
Using a company car also requires you to the same percentage (up to that 35 percent) in tax on any petrol purchased for you through the company. The fuel benefit figure used for this calculation is £14,400.
Finally, the company is responsible for paying National Insurance Contributions (Class 1A) for both the car and the fuel benefit. The rate for the Contributions is set at 12.8%.
Do Company Cars Make Sense For Contractors?
The short answer to this question is that most contractors would be better served by owning their car in their own name. For contractors that operate as “one man” service businesses, owning your vehicle privately makes more sense than assigning the car to company ownership. As a contractor, you could charge mileage to your company (at a rate of 40p per mile) up to 10,000 miles without tax. Additional miles can be charged at a rate of 25p per mile.
When you’re the full owner and director of your company, you end up in the position of financing the car on your own. Assigning the vehicle to company ownership makes you responsible not only for purchasing the car yourself but also the additional National Insurance charges and benefit in kind charges.
When Do Company Cars Make Sense?
In a few cases, the advantages of the company car model outweigh the drawbacks described above.
Vehicles which depreciate rapidly are one prime example. It often makes sense to purchase such cars through the company and hold it as a company asset for a short time, perhaps six months. After this period the director purchases the car from the company at a cost far below its price when new.
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This leaves the company bearing the depreciatory loss for the vehicle. If that loss exceeds the Class 1A insurance and tax charges on the car, the company comes out ahead.
A similar situation may arise in the case of specialty vehicles with very high maintenance costs. Running costs can outweigh insurance drawbacks of commercial fleet cover.
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Finally, “classic” cars which meet HMRC’s fairly stringent requirements are subject to specialised rules. This may make purchasing such cars in the company’s name the preferable option, especially if they require a great deal of maintenance.