Car ownership for SME owners

There is, however, one common question: “what is the best way for me to buy a new car?” 

Usually followed by: “should I have a company car?”, and “should I buy, hire purchase or lease?”, this question can raise a number of important issues relating to tax, remuneration and practical viability. 

In this article we will look at this question from the perspective of an SME business owner with regards to their own vehicle.

There are many factors that can influence this decision, and detailed calculations can be made to demonstrate whether having a car as a company car is worthwhile. These factors do not just include the make, model and price, but also matters related to running costs, expected mileage, length of ownership and now of course CO2 emissions.

The factors to consider – owning the vehicle personally

To calculate this properly, you would need to go into the detail, however, there are some general principles that you can follow in respect of owning the vehicle personally:

• For traditional fossil fuel vehicles, generally it would be better to keep the car outside of the company and run a personal car paid for through extracting dividends.
• Unless the annual personal mileage is expected to be significantly higher than the norm, the provision of fuel by a company will usually cost far more than paying personally.
• In the rare case that a vehicle would have very heavy use, depreciate significantly, with a very low residual value over a couple of years use, it could be worth having as a company vehicle
• The SME owner may be able to pay for the vehicle out of dividends (after corporation tax is paid), making sure that the company has sufficient reserves to enable the dividends to be voted to cover the vehicle costs. There will be no impact from a VAT or Corporate Tax perspective for the company to consider on a personally funded vehicle.
• For an individual’s own vehicle, there are no benefit in kind P11D impacts to consider, and there is the availability of reimbursing 45p per mile (for the first 10,000 miles, 25p per mile thereafter), income tax and NIC free for business mileage for a vehicle. This reimbursement would be deductible for Corporation Tax purposes.

The factors to consider – company vehicle

There are a few circumstances when a company vehicle might be viable or suitable for an SME owner.

A number of SME owners have provided themselves with vehicles classified as vans due to there being no benefit in kind charge where the vehicle is only used for home to work commuting or for qualifying business travel. Where it is used personally, any benefit in kind P11D charge is currently restricted to a flat amount of £3,600 (2022/23 tax year) and £688 for associated fuel benefit. This has meant qualifying Double Cab Pick-Ups have proved popular given that a number are classified as vans due to their payload.

Finally, more recently, there has been significant interest in electric vehicles (EV) given their low benefit in kind P11D values (currently 2%) and the interaction with Corporation Tax and VAT.

• Take for example an EV with a list price of £50,000 will have a benefit in kind value of £1,000, giving a tax charge of £400 for a higher rate taxpayer and an employer Class 1A NIC bill of approximately £150 for 2022/23.
• In comparison to an SME owner receiving a gross dividend from the business of £75,471 (e.g. £50,000 x 100/66.25) to purchase the EV outright, an alternative may be to have the EV as a company car with the small benefit in kind. However, it will be important to consider the cost of the benefit in kind over the expected “life” of the vehicle.
• To build on the previous paragraph, EV vans are completely free from a tax charge where there is private usage.
• EVs are made more attractive given that there is currently a 100% corporation tax deduction for the purchase of a new EV, or the removal of the restriction on the tax allowability of lease payments on EVs. One point to be aware of though is the tax treatment upon the disposal of the vehicle, which would probably attract corporation tax upon the sales proceeds on the disposal of the vehicle, potentially at higher tax rates after 1 April 2023. Disposal values may also be depressed by the fact that the 100% relief does not extend to a second hand EV.
• The provision of an EV charging point by the company and installation at the owner’s home will not create a separate benefit in kind P11D charge when provided alongside an electric company car or van.
• For electric company cars, business mileage can be reimbursed at 5p per mile. As electricity is not a fuel, no private fuel scale charge will arise, but it is important to consider whether any private mileage is being provided by charging at home – there is still some debate over whether this could create a benefit in kind currently, depending on how provided and reimbursed, with clarification being sought from HMRC policy.

With increasing fuel costs, it would appear that the movement towards the greater use of EVs will continue, with improvements in technology, a reduction in cost and a wider range of EVs available, encouraging their use. This does however, put to one side the debate over infrastructure and the potential for the government to change the currently attractive tax regime for EVs .

Getting into the detail

Shifting the focus to the follow up question, “Should I buy, hire purchase or lease?”

Here are a few observations:

The decision will be heavily influenced by the status of the individual SME owner’s business.

If the business is cash rich, with a surplus of cash that is not being used in the working capital of the business or providing the owner with a “degree of comfort”, then the outright purchase of the vehicle is usually worthwhile given the current rate of return upon cash deposits. If as an SME owner you have the capability to use the cash to create a greater return, perhaps through the greater ability to buy and turn stock at a greater volume and frequency, then a finance option may be more beneficial.

There are numerous finance options available, which can be confusing and have different impacts upon the accounting and tax treatment of the vehicle purchase. The individual will have the same benefit in kind whatever the nature of the contract the company enters into. However, be careful where the company enters into the contract, but the SME owner “pays” for the vehicle hire costs through charging the cost to director’s loan account and/or dividends. This will still attract a benefit in kind P11D charge unless the contribution (from net pay and/or dividends) for personal use fully clears the benefit in kind value.

Turning to the accounting treatment; for hire purchase or finance leases, where the substantial risk and rewards of vehicle ownership are taken on by the company, the vehicle can be included as an asset on its balance sheet. When it is treated as an asset the company can claim capital allowances at 18% (and for new EVS 100%).

To account for leased or contract hire vehicles, the monthly payments are simply charged to the profit and loss account as incurred. Tax relief then follows on this cost but note that there is a restriction to the tax relief according to the CO2 emissions of the vehicle.

Given the variables and the widely different finance rates available from finance companies, the deciding factor is often the rate that could be achieved on different contracts but be aware of the different tax treatments mentioned above.

Thank you for reading…

This has been a whistle-stop tour of the factors facing SME owners looking for a new vehicle. It has highlighted many of the factors and given guidance on matters to watch out for. Our next article we will consider the different approaches to providing vehicles for the employees of an SME.

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