If you run a limited company in the UK, you might be wondering whether the business can purchase a car. The simple answer is yes—a limited company is a separate legal entity and can buy assets, including vehicles, in its own name. But before you head out to the dealership, it’s important to understand the financial, tax and administrative implications involved.
Why Would a Limited Company Buy a Car?
There are several reasons why a limited company might consider purchasing a car:
- Business Use: If you or your employees frequently travel to meet clients, suppliers or partners, having a company-owned vehicle can make daily operations more efficient.
- Professional Image: Arriving at meetings in a company-branded vehicle can enhance the business’s professional image and brand visibility.
- Cost Management: Some businesses find it easier to manage costs when a car is owned by the company rather than an individual, as expenses can be consolidated and tracked through business accounts.
- Potential Tax Benefits: Under certain circumstances, there can be tax advantages to owning a car through the company, depending on how the vehicle is used and what type of car it is.
Tax Considerations
1. Corporation Tax Relief on Costs
- Running Costs: Expenses such as fuel, insurance, repairs, servicing and road tax can typically be treated as allowable business expenses, reducing the company’s taxable profits.
- Capital Allowances: Instead of a tax deduction for the full cost of the vehicle in the year of purchase, you’ll usually claim capital allowances. The amount and rate of these allowances depend on the car’s CO₂ emissions and type (e.g., electric, hybrid, petrol, or diesel).
2. VAT (Value Added Tax)
- If your company is VAT-registered, you may be able to reclaim VAT on certain aspects of the purchase and running costs. However, VAT can only be reclaimed if the car is used exclusively for business. If there’s any private use, VAT recovery is typically restricted or not allowed.
3. Benefit-in-Kind (BIK) Tax
- If a company car is provided for the personal use of a director or employee, it’s classed as a benefit-in-kind. This means the individual using the car will incur BIK tax, and the company will pay National Insurance contributions on the benefit.
- The BIK rate depends on the car’s list price and CO₂ emissions. Generally, low or zero-emission cars (like electric vehicles) incur much lower BIK tax, making them an attractive option.
Choosing the Right Vehicle
1. Consider the Purpose: Will the car be used solely for business trips or also for personal journeys? A vehicle used strictly for business may offer more tax advantages and fewer complications.
2. Fuel Type and Emissions: Since BIK and capital allowances can be influenced by CO₂ emissions, choosing a low-emission or electric vehicle can offer substantial tax savings over time.
3. Cost vs. Benefit: Think about the long-term costs, including maintenance, insurance, depreciation and fuel. Sometimes leasing or hiring a car might be more cost-effective than purchasing one outright.
Administrative Steps
- Board Approval: Ensure that the decision to buy a car aligns with the company’s objectives. Directors should formally approve the purchase, noting it in board minutes if appropriate.
- Keep Clear Records: Maintain thorough records of all car-related expenses. This includes purchase invoices, insurance documents, fuel receipts and servicing bills.
- Mileage Logs: If the car is used for both business and personal journeys, keep detailed mileage logs. This helps in accurately assessing the proportion of business use versus personal use, which is vital for VAT and tax calculations.
- Consult a Professional: Working with an accountant or tax advisor can help you navigate the complexities of BIK taxation, capital allowances and VAT. They can also ensure that the company meets all HMRC requirements.
Potential Drawbacks
1. Personal Use Costs: If you’re a director or employee using the company car personally, you’ll face BIK tax. In some cases, this may reduce the tax savings you hoped to achieve.
2. Depreciation: Cars are depreciating assets. If the car’s value falls faster than the benefit it provides, it might not be the best use of company funds.
3. Administrative Burden: Keeping accurate records, filing returns, and staying compliant with HMRC rules can be time-consuming, especially if you’re a small business owner managing many responsibilities.
When Is Buying a Car Through a Limited Company a Good Idea?
- Regular Business Travel: If most of your journeys are business-related and can be well-documented.
- Eco-Friendly Options: If you choose a low-emission vehicle, as this can significantly reduce tax liabilities.
- Long-Term Asset Use: If your company plans to use the car extensively over several years, making the administrative efforts worthwhile.
If you mainly need a car for personal use and occasionally for business trips, buying the car personally and claiming business mileage may be simpler and more cost-effective.
Final Thoughts
Yes, a limited company can buy a car, and in some cases, it can be a smart financial decision. However, the true value depends on your company’s circumstances, the nature of the car’s use and the effort you’re willing to invest in managing the tax and administrative implications.
Before proceeding, consider seeking professional advice from an accountant or tax specialist. Their guidance will help you understand the best route for your company, ensuring that purchasing a car benefits your business rather than complicating it.
If you’re looking to set up a limited company or need guidance on structuring your business assets, get in touch with our team. We’re here to help you make informed decisions that support your growth and success.
Related Reading
Can a Limited Company Buy Property?