This is a question we are often asked. Choosing the right method to purchase a company car depends on several factors like the type of business you run, your cash flow, your tax situation, and personal preferences.
Here’s an outline of the most common options, along with their tax implications.
If your business has sufficient cash flow and the purchase doesn’t hinder operational costs or growth, then buying outright may be an option.
Tax implications: 100% first year allowances are available on the purchase of brand new EV’s, but other than that , the cost of the car cannot be claimed as an immediate tax deduction. Instead, capital allowances are spread over several years, with the rates depending on the CO2 emissions of the car.
Generally VAT can be reclaimed on the purchase of the car only if it’s used solely for business purposes and not available for private use. Many past tribunal cases have shown this to be extremely difficult to prove.
A bank loan may be a good choice if you want to spread the cost, but do not wish to lease the vehicle.
Tax implications: Interest on the loan is tax-deductible, and like outright purchase, you can claim capital allowances on the car’s cost.
This allows you to spread the cost of the car over a fixed term while you make monthly payments. At the end of the term, you may have the option to pay a “balloon payment” to own the car outright.
Tax implications: Interest payments are tax-deductible, and you can claim capital allowances as if you had bought the car outright.
With a lease, you don’t own the car but make regular payments to use it over a specified period. This option may be useful if you like to change vehicles regularly, or don’t want to worry about depreciation or selling the car later.
Tax implications: Lease payments are usually fully tax-deductible as an operating expense, but VAT can only be reclaimed up to 50% for cars. If you’re considering a contract hire arrangement, be aware that if the car’s CO2 emissions are above a certain threshold, you may not be able to claim the full lease payment as a deductible expense.
The above is correct as at August 2023 but remember that tax laws can change, so it’s always a good idea to consult with a tax professional or your accountant before making a decision. The best method for you will depend on your specific situation and needs.
Do get in touch if you would like to discuss any aspect of your personal tax or company tax.
You may also be interested in the tax implications of electric company cars/vehicles.