It wasn't so long ago that the mark of success was a big, shiny company car sitting on your driveway. But when you have a car available to you for personal use there is a tax liability: HRMC view the use of the car as part of your salary package and so there is a benefit-in-kind tax to pay. You should also downgrade your dreams of a huge engine for tearing up those motorway miles: the benefit in kind is assessed on a combination of the car list price and its CO2 emissions, making it much more sensible to drive something more, well, sensible.
He's got a brand new car, looks like a Jaguar
The first thing to consider is that if you are the owner-manager of a company is whether you are shifting tax liability from Corporation Tax (Capital Allowances) to your personal Income Tax (benefit in kind) and potentially creating a scenario where your personal tax flowing from the car is greater than the company tax saving over the life of the car would have been. In this situation a company car is not for you, you would be better off by running your own car and expensing business milage.
In this article we're going to concentrate on the decision of whether it's better for a limited company to lease or buy a car for an employee. I warn you now, this is going to be one of those articles where we'll say things like "it depends on many variables" and "case-by-case" a few times because, well, it does. It comes down to numbers around list price, CO2 emissions, business vs private miles and those will be different in every case.
It's got leather seats, it's got a CD player
From a tax point of view, there are two methods of car finance contract when you lease a car. The first is where your business owns or will own the car at the end of the contract (Finance Lease). The second is more or a rental model, where the business leases the car but will never actually own it (Operating Lease).
If you go for the first plan and your company leases a car which will end in the company owning the car, it can claim Capital Allowances, which is a form of depreciation for cars. If your ego will allow you to run a car with CO2 emissions of less than 75g/km or less then congratulations! Not only are you an eco-warrior but you also received a Capital Allowance on 100% of the cost for the year of purchase. If your car emits more than 75g/km but less than 130g/km you're still rewarded with a higher rate of Capital Allowances: 18% of the car's cost annually on a reducing balance, so for a £35,000 car you will receive tax relief of £29,000 after eight years. If you opt for a car that emits over 130g/km then you'll receive a lower annual rate of 8% annually on a reducing balance, which means that after 20 years you would have received tax relief on £29,000.
The second route, where the company only rents the car and never actually owns it at the end of the contract (contract hire) is taxed differently: the company can claim a tax deduction on the rental lease payments and once again the percentage of this is dependent on the efficiency of the car engine: emit less than 130g/km and you can claim the full cost of your lease or rental charges, over 130g/km you can claim a tax deduction for 85% of the rental payments.
So, what's best for you? Well, it depends on many variables and you need to do the calculations on a case-by-case basis (see, I told you).
If you are the owner and manager of the company, then you will need to understand the income tax implications for you. The company might get a higher Corporation Tax deduction, but you don't want to transfer that charge to yourself as an individual (do you?).
You would also need to take into consideration your cash flow: can your company afford the greater initial outlay to buy a car versus leasing?
But I don't want to talk about it anymore.
Actually, that's not true. We love this kind of debate, in fact we've been playing Fantasy Company Car here in the office and it's a toss-up between these Tesla beauties, or one of these from Renault.