Car ownership – what is best for tax relief?
The most frequently asked question I get asked from clients relates to car ownership – should a vehicle that is used partly for business and partly for personal journeys be owned by the limited company or the individual for maximising tax benefits. It is a question that to answer in full takes a few calculations but there are some general rules that apply and it’s worth knowing them, as the tax savings can be significant.
Sole traders and partnerships – how it works
A good place to start is to differentiate between how the tax treatment of a vehicle works when trading as a sole trader or partnership compared to that of a limited company.
Most doctors and dentists started off in this position before incorporating so this scenario may be familiar.
Here, all costs of the car are represented in the financial accounts. This includes:
• Repairs and maintenance
• Car tax
• AA membership, or equivalent
• Lease payments, or interest on hire purchase / loan payments
The original cost of the vehicle iscan also be represented as an asset to the business.
There is then an adjustment made in the personal tax return to represent any private use proportion.
Limited companies – how it works
The same tax treatment does not apply for limited companies.
Taking into account that most dental or medical businesses are structured in such a way that the director is the sole (or joint with their spouse) owner of the business, one of two scenarios typically apply:
1) The limited company owns the vehicle and allows the employee (i.e. director) the use of the vehicle for his or her own private journeys.
2) The director owns the vehicle personally
In scenario 1:
The company claims full tax relief of all expenses related to the vehicle. Costs include everything listed that a sole trader or partnership could claim, however, the only cost that a company would not want to claim is the fuel, as other tax implications arise.
There is no apportionment for private use within the limited company; however, the employee (i.e. director) does have to pay a personal tax for the private use of the vehicle. The tax is based on the original list price and carbon emissions, which is where the calculations come in.
Figurit have a company car tax calculator to work out the exact best route for your personal situation. Call us to run some figures for you.
In short, the higher the carbon emissions, the higher the personal tax due for the private use of the vehicle.
A company car may mean more tax
A very curious situation can then arise.
You could end up paying more personal tax on the private use of the vehicle than the company is getting in tax relief on the costs of the vehicle. Something to of course avoid!
Carbon emissions – broadly how it works
Less than 95g/kg
Very broadly, if carbon emissions are less than 95g/kg it works out to be tax efficient for the company to own the car and claim all costs, except for fuel, and for the director to pay the personal tax on the private use of the vehicle.
Overall, the tax position will be positive for a sole director structure (or structure with a spouse).
More than 95g/kg
On the hand, broadly speaking, if the carbon emissions are more than 95g/kg it typically works better to own the vehicle personally and pay all costs personally. This takes us back to scenario 2.
In scenario 2:
The director simply claims mileage from the company at 45p for the first 10,000 miles and 25p thereafter, for which tax relief can be claimed by the limited company. To the director the income earned from the mileage claim is tax free, as you personally are incurring the running costs of the car, which will no doubt significantly outweigh the mileage claim.
It is important to note that travelling from home to work is considered private, not business; and this claim for mileage from the company is based only on your business
Read our related article: Tax treatment of travel expenses for doctors and dentists
What is best – leasing or paying for a company car in cash?
It is important to also note that tax allowances over the life of the car will be the same irrespective of whether you pay cash, or whether you take a lease.
The lease will be more expensive over the life of the car, because there is a lender making a profit on financing vehicles for non-cash buyers.
The decision to buy or lease is not a tax one
It is a cash flow decision based on whether you want to pay upfront (if you have the cash in the company), or whether you want to spread the cost (in exchange for paying lending fees and interest) over a period of time.
Figurit are specialist medical and dental accountants and tax advisers who answer questions like these for dentists and medical consultants every day. If you have a question please contacts us to ensure you maximise your tax relief before making key decisions for you and your business.
020 7376 9333
– TAX: Company cars are a thing of the past
– Tax treatment of travel expenses for doctors and dentists
– What can I claim for tax relief when I attend a seminar overseas?