Financing a Company Car
We’re often asked how best to finance a company car, or vehicle for business use, but sadly there isn’t a short and simple answer!
In this post we’ll take you through the most common options for financing a Company Car as well as a vehicle for other business types. There are various options and the best one for you will depend on how your business is set up, amongst other things.
Personal Purchase would be the first and easiest option. If you purchase a car personally, you can then then charge the business the agreed HMRC mileage rate of 45 pence per mile for the first 10,000 miles in a tax year and the 25 pence per mile thereafter for the business miles covered.
If you take an additional passenger on a business trip you can claim an extra 5 pence per mile for that passenger.
If you use this method nothing is reportable to HMRC. If you exceed these rates, you must report the difference to HMRC. If the declaration is for an employee, you’d report the extra claimed by preparing a P11D, while if you’re the business owner and you operate as either a sole trader or in a partnership you must disallow the excess on the relevant Tax Return.
If you have spare cash, it’s unlikely to be earning significant interest in the current climate, and the interest rate it is earning will most likely be below the interest charges on any finance, so use your cash first.
If you don’t have spare cash you will then need to look at the various finance offers that the car dealer has and also any finance available to you personally to work out the monthly cost to you.
If you need to finance the car, the preferred choice probably comes down to the most affordable method for you.
The funding alternatives normally fall into four categories:
- Loan – This is allows you to buy the vehicle outright. The loan is not secured on the vehicle, so if you can’t repay the amount due the lender can seize goods to the value of the loan outstanding; this may be the car, but equally they can choose alternate assets. The car belongs to you from the outset.
- Hire Purchase – Similar to a loan but the agreement is secured on the vehicle concerned, so defaulting means the lender will repossess the car, unless you have paid more than one-third of the purchase price. The car only belongs to you once the final option to purchase payment is made, with the final payment of the Hire Purchase agreement. You will need to pay a deposit to secure both the vehicle and the hire purchase agreement, usually around 10% of the cost of the vehicle.
- Personal Contract Purchase (PCP) – Similar to Hire Purchase but with lower monthly payments, under a PCP agreement you don’t own the vehicle until the agreement is paid in full, including a final balloon payment, which is the calculated value of the vehicle as at that end date. You can return the car to the lender at the end of the agreement with nothing further to pay or you can buy the vehicle outright by paying the final balloon amount due. The deposit is usually higher than a Hire Purchase deposit. Under an agreement of this kind you pay a lot in interest, as you’re borrowing the full sum (less any deposit) for the car and financing that over the term, while only paying back the difference between the purchase price and the final balloon payment.
- Lease – You never own the car and are effectively renting it for a period (usually 3 years but can be as short as 12 months or as long as 5 years), at the end of which the agreement the car goes back. You normally pay a deposit of at least the first three months rentals. If you decide to lease the vehicle through the business you can only claim back 50% of the VAT charged on the rentals if there is any private mileage done by that vehicle. You can lease a vehicle privately and you will normally see different monthly charges quoted for business and personal, the difference is usually only the VAT charged on the lease.
Generally the cheapest monthly payment will be through the lease option, followed by PCP, then Hire Purchase, then a personal loan, but it’s always best to look around to see what deals are available as this can change depending on incentives paid by the finance companies to the car dealer.
What are the tax implications of the different options?
If you trade as a Sole trader, Partnership or LLP:
The car can be financed through the business, but you must maintain extra records that capture the mileage completed for the business and the overall mileage completed in the car each year.
You can pay all costs through the business (Insurance, Road Tax, fuel, and repairs etc) BUT you must disallow the entire personal element of these costs. This is done by working out the proportion of the total personal mileage, which is why you keep track of the split. You then disallow the non-business element.
It is always worth working out whether the 45 pence per mile HMRC rate would actually be a better solution; this is most likely to be the case if the car is second-hand, smaller in size and more fuel-efficient.
If you trade through a Limited Company:
If you decide to finance the car through a company, as a true ‘company car’, the vehicle is reportable as a benefit on forms P11D each year. To ensure the benefit is included in your tax code the initial provision of the vehicle or any changes should be notified to HMRC on a form P46(car) by set dates throughout the tax year.
See our separate post on Company Cars for more considerations.
If you choose to provide fuel for all motoring, ie business and personal, there is an additional benefit charge for doing so. To avoid this additional charge you should claim fuel back for business mileage rather than all fuel purchased. This is done using agreed rates provided by HMRC. You can check the current rates on the gov.uk website here.
Separate consideration should be given to the tax implications of an electric vehicle. These have been attracting preferential tax treatment, but are not suitable for everyone.
What if I want to buy a business van?
Speak to us! The considerations can be very different, so get in touch and we can talk you through.
As you may have gathered from the above, there are lots of aspects to what seems like a simple question!
Our advice would be to do your research as far as your preferred type of business vehicle, and know how you are likely to use it. Then get in touch so we can discuss your best option. Purchasing a vehicle is not a cheap exercise anyway, but using the wrong purchase method can make that worse, and the tax implications worse still! It’s far better to make a slightly slower, fully educated decision than a speedy one you’ll regret.