Author: Ralph Morton
IT’S a familiar question we often see asked here at Business Car Manager, especially from business start ups.
New to business, sole traders or incorporated firms want to know what are the taxation implications for running business cars.
To help understand the issues more clearly, I’ve enlisted the help of accountant David Croucher-Jones from DCATS Accountants.
Let’s start with sole traders before moving on to limited companies.
The first scenario is easy. If there is no private use – and don’t forget, commuting from home to office is private use – then a sole trader can claim capital allowances on the cost of the vehicle and all running costs as an expense against profits.
But I don’t know any sole trader that does no private miles in their business car. Different if you run a business van for your trade, then that’s all likely to be business mileage. There are some dispensations for business vans.
For example, some limited private use is allowed – such as the odd trip to the dump to get rid of household rubbish; taking the van away for a weekend break, though, would count as private mileage.
Anyway, for most sole traders with cars, let’s assume there will be some private use of your business car. What do you do?
“You have to make an adjustment for private use,” says David. “The simplest way is to take a note of the mileage at the beginning of the tax year and again at the end, and separately keep a note of all private mileage. You then simply deduct that private mileage from what you claim against expenses.”
So that’s all fairly straightforward.
The tax position of company cars and vans
What about sole traders thinking of incorporating, or those starting in business as a limited company?
The situation here is very different. If you have a company car or a company van then any private usage is liable to benefit in kind company car tax or company van tax.
Let’s take cars. If you have a company car then tax is payable at the individual’s applicable tax rate on the car benefit which varies with the CO2 emissions of the car and its P11D price (manufacturer’s original list price plus and optional extras). Generally, the lower the CO2 emissions and P11D the lower the benefit in kind company car tax.
The tax bands run from 10% to 35% of P11D price; diesels include a 3% supplement (up to a maximum of 35%) to account for their sooty exhaust particles.
Company van tax has a flat benefit in kind rate of £3000 – to arrive at the correct figure to pay for you company van tax, multiply it by your marginal rate of tax (currently 20% or 40%).
What about free fuel?
If free fuel is supplied then you must also pay the free fuel benefit. The taxable benefit is set at £18,800 which is then multiplied by the CO2 emission banding of your car to arrive at the benefit. So for a car in the 16% company car tax band the benefit in kind company car tax allowance would be £3008 multiplied by your marginal rate of tax.
“This is important to watch,” advises David. “If you take just one drop of free fuel then you are liable to pay the fuel benefit. You can avoid this by paying for fuel yourself and then claiming back business mileage at the Approved Mileage Rate (APR).
“If van drivers cover private mileage and receive free fuel, then there is a flat rate of £550.”
Capital allowances are available on company cars purchased by your firm; if they are leased then the leasing costs can be claimed against the p&l account (a restriction of 85% exists for those company cars with CO2 emissions over 160g/km).
“For small businesses – generally one man bands – that are incorporated, the decision whether to run a company car is complicated,” continues David. “The decision changes depending on individual circumstances.”
If you are incorporated, you can still run your private car on business and then claim the tax-free Approved Mileage Allowance Payment (AMAPs), which is 45 pence per mile for the first 10,000 miles and 25p for each mile thereafter.
As you can see, running a business car if you are a sole trader is an easier decision than if you are a limited company. As ever, before you take any decisions you should take professional advice .
The figures quoted are for the 2011/2012 tax year and may be changed by the forthcoming Budget (21 March 2012).
My thanks to David Croucher-Jones for his assistance in the writing of this article. David can be found at www.dcats-accountants.co.uk.