In a previous blog we have talked about how you can use your own car for your business. If your business is a limited company then it can own a car that you can use for the business, which is known as a company car.
How a company car affects the company
From the company’s point of view it is similar to how you would include a car in a sole trader business, record all of your motor expenses such as fuel, repairs and insurance to set off against your profits.
How a company car affects the individual
If the car is only used for business purposes there is nothing more to do. If the car is used for private journeys it is classed as a benefit provided to you by the company. It can even be classified as a benefit by just being available for private use, for example being parked outside your home instead of your workplace.
The result of this is that you will have to pay additional tax as private use of the car is treated as additional income. You need to declare the car along with other benefits in kind on your P11d.
How the tax is calculated
Before you can tell how much tax needs to be paid you first need to know the amount that will be taxed. This is calculated in a somewhat complicated process that begins by taking the list price of the company car. This list price is how much the car would be worth when it was brand new including the price of any modifications or accessories when brand new. This information is normally found on your car purchase documents.
Next you multiply this by a percentage which is determined by the CO2 emissions of your car. Diesel cars have an extra three percent added to the percentage. The resulting figure is known as the taxable benefit and is taxed at the same rate as income tax. You can find a list of the percentages used in the calculation by clicking this link.
Fuel for the company car
If the company pays for fuel for the car which is used in private journeys there will be an additional taxable amount known as the fuel benefit. To calculate the fuel benefit you use the same calculation as above, but instead of a list price you use the figure £22,100 (for 2015 to 2016). Please be aware that the figure of £22,100 is subject to change each year with the budget so be sure to double check this figure before you do any calculations.
Reducing the taxable benefits
You can reduce the taxable benefit on a company car in two ways. The first is to use your personal money to assist in buying the car, the effect of this is that the amount you spend from your own funds will be taken off your list price, therefore reducing the benefit.
The other method is to pay towards to running of the car out of your own money which is then subtracted from the calculated benefit for the year you make the contribution in. Both of these methods can reduce the taxable benefit, but please be aware that paying contributions just to reduce tax will likely end up with you spending more money than you save.
The fuel benefit works differently, you cannot pay a contribution to reduce the benefit. If you pay back all of the privately used fuel however, you can remove the fuel benefit entirely. HM Revenue and Customs (HMRC) do have an advisory amount per mile to save complicated calculations on how much fuel was used privately.
Please remember that they are just advisory figures and sometimes HMRC may decide you have to pay more, or allow you to pay less than these rates. You will need to provide evidence if you wish to pay less, although being asked to pay more is unlikely with engines below three litres in size. The list of the advisory figures can be found by clicking this link.
Is a company car beneficial?
If there is no reason to suspect the car is being used for personal use then there is a distinct advantage through the expenses you can claim along with capital allowances. Once you start using the vehicle privately then this advantage is rapidly reduced by the additional tax you will have to pay personally.
The use of list price for the benefit means if you buy a second hand car cheap you still have to use a ‘brand new’ price for the benefit. This has a bigger impact when you only use the amount you actually paid when calculating capital allowances.
Cars with lower CO2 emissions will generally have less tax to pay and allow you to claim capital allowances easier. Making it beneficial to opt for a lower emission car where available.
In short, if you do have to use a company car for private use, having a brand new car with very low emissions and paying back any fuel will help reduce the additional tax and hopefully still keep a company car as a benefit to your company.
Company pool cars
A company pool car is a company car available to all employees to make business journeys with. To qualify as a pool car the car must be regularly used by more than one employee, not kept near an employee’s address and only used for business journeys.
If you fulfil the above conditions you do not have to report the company pool car as a benefit and there are no benefits to be paid.
To make calculating any tax due for a company car easier, the official HMRC company car tax calculator can be found by clicking this link. Unfortunately finding the list price of a car can be a difficult task. Luckily the kind people from www.parkers.co.uk have allowed me to provide this link to their car tax calculator where you enter the make of your car and they will provide the list price in the calculation.
If you would like any further help or advice with the above, with P11ds or to see the best way to account for a car in your business, please do not hesitate to contact us.