It’s a familiar question – if complex.
You run a small business – and you need a car for business. Should your company run the car? Or should you buy a car privately and then re-charge the company for business mileage?
Most companies are what I call ‘lifestyle’ companies – run by one or two family members. The idea is to produce a reasonable income for the owners to maintain a decent lifestyle.
The company earns its profit, which is then paid down to the business owners. Any company transaction which saves it tax means there is more to hand down to the owners. But, if the owners’ tax situation is affected by the company’s tax saving, is it really worth it?
What matters is how much cash (tax) the ‘operation’ has to pay out following the purchase. Let’s take a look at a three-year period (the figures are generalised to give you a flavour, rather than actual figures).
Your company buys a decent mid-range car. Running costs and capital allowances are set against corporation tax. Saving: £4000. Off-setting this are Class 1A National Insurance. Cost: £2000.
So the net saving is reduced to £2000. But you – as the company car recipient – need to pay benefit-in-kind tax, a charge of £3250 (at 20%), or £6500 (40%).
Between you and your company, someone has to pay for this car. But if the net outflow to the tax man is as high as these typical values, then you must question its worth.
The alternative is for you as a private car owner to claim the approved mileage rate from your company. Currently this is set at 45p per mile for the first 10,000 annual business miles, and then 25p thereafter.
These figures reflect the running costs and depreciation of a new mid-range car. If your car is of lower value than average, or if you carry out a higher annual mileage than average, then these reimbursement rates are highly advantageous.
The figures used are typical rather than precise to provide a broad means of illustration. Before taking any decisions, you should seek advice from your accountant or a professional adviser who can advise on the best course of action for the particular needs of your company.