Company cars have long been considered a luxury perk and status symbol of successful businesspeople. If you run your own company, you have the freedom to choose whether or not to buy yourself (and maybe some staff) a company car. Your choice will not only affect your company’s tax and VAT but will also impact the car user’s personal tax. This blog cover key issues around tax on company cars.
This is how tax on company cars may affect you:
These are annual forms that report to the Revenue the quantified benefits any directors or employees have of using the company’s assets for personal use, or the company paying for personal expenses. Company cars are one of the more typical benefits that trigger a “taxable benefit” to be reported on a P11D.
There are two taxable benefits to consider for company cars: the value of the asset, the car, itself that is enjoyed by the director or employee, and the fuel that is provided for personal journeys – which includes commuting to a permanent place of work.
The taxable benefit of the car is based on the vehicle’s list price (not its current market value), the CO2 emissions and the type of fuel. More expensive cars with higher emissions that run on diesel (as opposed to petrol) give a higher taxable benefit. If the company pays for fuel, the fuel benefit must also be calculated, which is affected by the same factors.
The resulting taxable benefit has two effects: the company must pay Class 1A National Insurance of 13.8% on the taxable benefit. The Revenue also reduces the individual’s tax code by the taxable benefit, thus causing the car user to pay more tax.
The whole cost of the car cannot be normally fully claimed against tax in its year of purchase, but rather a proportion over several years by way of “capital allowances”.
Unlike vans, businesses cannot recover the VAT on the purchase of a car. If a car is being leased, half the input VAT may be recovered.
If the business is reclaiming input VAT on diesel or petrol for a car, fuel scale charges must be paid. This represents the input VAT in respect of the private fuel used, and it is calculated by the Revenue based on the CO2 emissions of the car. It is not affected by the quantity of the fuel purchased nor the volume of private journeys.
Buying and running a company car can be an expensive and complicated business. Many small business owners prefer the simplicity of buying a car privately and being reimbursed by the company for business journeys. Providing records are kept to support a mileage claim, 45p per business mile may be claimed by directors and employees using their private car. This allowance applies to the first 10,000 business miles claimed in a year by each director/employee, after which 25p per business mile can be claimed. Especially if you have a fuel efficient car, or you change cars infrequently, you may find this “mileage basis” of claiming car expenses more tax efficient than claiming the actual costs.