Limited Company Cars and Vans
Navigating the intricate landscape of self-employment is no easy feat, especially for contractors. Amidst the myriad of regulations, one term stands out prominently: Limited Companies. But how do I buy a car or van through my limited company?
When a limited company purchases a car or van, the business can deduct some of the costs from taxable profits. How much depends on how the vehicle is used, how the purchase is financed and how environmentally friendly the vehicle is.
In this comprehensive guide, we delve deep into the heart of limited companies. Whether you’re an aspiring contractor or a seasoned veteran seeking clarity, this guide aims to empower you with the knowledge to make informed decisions.
Purchasing a Car
How you pay for your new business car will determine the tax allowances you can claim. If the car is leased, the monthly lease payments are allowable as business expenses.
If the car is purchased, the business can claim capital allowances. Capital allowances are a form of tax relief where part of the purchase value is an allowable expense in the year of purchase (known as an ‘allowance’).
The rest of the purchase value goes into a ‘pool’ on the balance sheet, and the decrease in value over time is known as depreciation. Depreciation can be thought of as an ongoing, regular expense. Every year, part of the asset’s value is deducted from your business’ profits.
HMRC uses capital allowances to encourage the use of more environmentally friendly cars, so the rate you can claim tax relief depends on the car’s CO2 emissions. The eco-friendlier the car, the greater the tax relief you can claim up-front.
For cars bought after April 2021:
First Year Allowance (100%)
You can claim 100% of the value if the car is new and the CO2 emissions are 0g/km; in other words, it is an electric vehicle. This is also applicable to charging points.
Main Pool Allowance (18%)
You can claim 18% of the car’s value if the CO2 emissions are between 1g/km and 50g/km, or if it is a second-hand electric car.
Special Rate Pool (6%)
You can claim 6% of the car’s value if the CO2 emissions exceed 50g/km.
You can check your car’s CO2 emissions here.
Reclaiming VAT
Whether you can claim VAT back on the purchase of the car depends on how it is used. If the car is used exclusively for business purposes, you can claim 100% of the VAT.
If it is used for a mix of personal and business journeys, then none of the VAT can be reclaimed. HMRC does not consider day-to-day travel to a regular place of work to be business use, so you cannot claim VAT if the car is primarily used for commuting.
In addition, if the car is used for any private use (including commuting), you will incur an additional tax known as a ‘benefit in kind’.
Leasing A Car
If your limited company takes out a loan to purchase the vehicle (or it is bought through hire-purchase), only the interest payments can be offset against corporation tax. The capital repayments are not an allowable expense. Similarly, the monthly lease payments are allowable as business expenses if the car is leased.
VAT is usually charged on the monthly lease payments, and you can recover 50% of this where the car has a mix of personal and business use. Where the car is used exclusively for business, 100 of the VAT is recoverable.
Insurance and Payments
Other maintenance costs, such as insurance, are allowable business expenses and can be used to offset corporation tax. Whether you buy or lease, you must ensure all documents are in your company’s name, and all payments go through the company’s bank account.
Vans
Unlike cars, vans are classified as plant and machinery for tax purposes, so they qualify for the Annual Investment Allowance. This means that if you purchase a van through your limited company, you can deduct 100% of the cost as an allowable expense in the year of purchase, reducing your business’ corporation tax charge. You can also claim the full VAT on the purchase price.
If you decide to lease instead of purchase, you can’t claim capital allowances as you do not own the vehicle. Instead, the lease payments, interest charges and VAT are allowable expenses.
Given the tax relief for vans is more generous than for cars, you must ensure the vehicle you’re purchasing is classed as a van by HMRC. Broadly, a ‘van’ is any ‘goods vehicle’ that is not a motorcycle and weighs no more than 3.5 tonnes when fully laden.
As with cars, any private use will be classified as a benefit in kind.