Cars and Companies (Part 1)
I get a lot of questions about the tax and accounting treatment of your car if you operating a Limited Company. Although in theory it ought to be simple, in practice there are probably more complications for this area of tax and accounting than anything else that I regularly deal with. So I felt I should put something on the Blog for everyone. Any comments on it would be gratefully received.
To begin with, the rules on running cars in businesses other than Limited Companies follow below.
If you are self-employed and using your car for business purposes, then the normal procedure is to include in your records all the costs of running the car. These would include fuel, servicing, MOTs, road tax, insurance, congestion charges, tolls, and parking. You then assess how much you use the car for business, and how much you use the car for personal use.
Thus, if your total vehicle running costs are £3,500 for the year and you use your car 5 days a week for business and 2 days a week for personal use, then the tax deductible cost in your accounts will be £2,500 which is 5/7 of the total.
I am for the time being leaving aside questions such as VAT and leasing. I intend to deal with them in future blog posts.
If you decide to incorporate your business into a Company for tax purposes, then it starts to become more complicated. If your Company is now paying for the car running costs, then for tax purposes you have a car provided to you by your Company which is available to you for personal use. It does not matter for these purposes how much personal use you make of the car.
You will be treated for tax purposes as if you received additional taxable income which is worked out based upon the value of the car when new. This is usually referred to as “benefits in kind”.
Let us suppose you are now running an elderly “gas guzzler” for which you paid a bargain price of £2,000 because it had little service history and high mileage, but it has plenty of room for you to fit your family into and it is comfortable for long business trips. Suppose the original list price of the car when new was £35,000 and its C02 emissions rating is 240g per kilometre, and your Company is paying for all the running costs including the petrol. You would be treated for income tax purposes this tax year as having received a taxable benefit in kind of £21,608 per annum .
This will cost you in the order of £4,321 in income tax if you are a basic rate payer, or between that and £8,643 if you pay income tax at higher rates. The tax may well be considerably more than the running costs of the car.
There are a number of alternative options available to you, other than the above, you may wish to consider and they will be dealt with in future blogs. I am now going to deal with Option Number 1 here, the Petrolhead Option.
The Petrolhead Option
Suppose you want to put the costs of a Ferrari or an Aston Martin, or even perhaps a top of the range Range Rover, Audi or Mercedes, through your business. It may be worth considering converting your business into a Limited Liability Partnership.
The advantage of so doing is that you get limited liability. It is the same protection of personal assets from business creditors as you get from a Limited Company. You would also not pay any additional tax on benefits in kind from running an expensive car. There would just be a tax disallowance of part of the cost for private use. It is the same principle as if you were running the car through a self-employed business.
The disadvantage of Limited Liability Partnerships is that you have to publish accounts and submit documentation to Companies House as to who owns the Partnership. These accounts have to comply with Limited Liability Partnership rules and can be complicated to prepare. Nevertheless it may be worth considering if you would like to protect your personal assets from business creditors but feel it would be disadvantageous to be a Limited Company.
Further option will be outlined in future blogs. Please bear in mind that the tax regime on which I will be basing my calculations is that of the income tax year 2018/19 in which I am writing the blog. The UK tax regime is subject to change by the Government. No responsibility for any action or inaction as a result of reading this blog is accepted unless you have consulted ourselves for specific advice in your situation.
– By Stephen Handley, FCCA