Should you buy your own car and charge it to the company, or purchase it as a company car through the company? This article explains the issue.
Company car taxation
Tax rates on company owned vehicles have increased as successive governments
have sought to discourage the practice of company car ownership.
The present tax charges are based on CO2 emission, generating taxable benefits
in kind of up to 35% of the car’s original list price!
If the company pays for your petrol, you will have to pay the relevant
percentage (of up to 35%) on a car fuel benefit figure of £14,400 for 2004/05.
Also your company will have to pay Class 1A National Insurance Contributions on
the total car and fuel benefit in kind figures at the rate of 12.8%.
Should contractors purchase company cars?
the answer in most cases will be that you would be better off owning the car privately
If you are operating a “one man” service company, then the answer in most cases
will be that you would be better off owning the car privately. You would then
charge your company tax free mileage of 40p per mile for the first 10,000
business miles and 25p per business mile thereafter.
As director and 100% shareholder of your own company, you are effectively
financing the car yourself, so if your own company takes ownership of the car,
you are not only spending your own money on the vehicle (unlike an employee of
a large organisation) but you are also suffering not only the employee benefit
in kind charges but also the employer Class 1A National Insurance charges.
When are company cars advantageous?
D J Colom & Co Chartered Accountants
David Colom qualified as a Chartered Accountant in the City of London in 1981 and is the founder and principal of D J Colom & Co Chartered Accountants established in 1989.
Started specialising in serving IT contractors in 1993 and is now one of the longest standing suoppliers of accountancy services to computer contractors.
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There are a few exceptions to the general rule above:
If the car is a highly depreciating vehicle, it may pay to own it for a period
of six months, following which the director can purchase the car for it’s much
reduced market value. In these circumstances, the company would bear the
substantial loss arising in the short period of ownership, which may well be
greater than the tax and Class 1A charges arising.
If the car costs more than average to maintain and service, the running costs
may be greater than the tax and national insurance charges.
If the car is a “classic car” as defined by HMRC, then special
rules apply which may make company car ownership attractive, particularly if
the maintenance costs are high.