Company/Business Vehicle Tax Implications
There are a variety of options available to consumers when deciding what type of company/ business vehicle to have and how this can be financed (e.g., cash purchase, hire purchase, hire contract, etc). Each of these options have differing tax implications, both for the business as well as the individual. An overview of the main tax implications on these various options is outlined below.
Tax implications for employees
From an employee’s tax perspective, there is no difference in the tax implications regardless of how the business acquires the vehicle. However, whether the vehicle is a commercial vehicle or a car will have a significant bearing on the tax position for the employee.
Where an employee is provided with a commercial vehicle, such as some vans or pick-up trucks, it is possible that there may be no charge to income tax, in the form of a Benefit in Kind (BIK) if there is insignificant private use. HM Revenue & Customs provide the following examples for what may constitute insignificant and significant private use:
Insignificant use – a driver who:
- Takes an old mattress or other rubbish to the tip once or twice a year
- Regularly makes a slight detour to drop off a child at school or stops at a newsagent on the way to work
- Calls at the dentist on the way home from work
Significant use – a driver who:
- Regularly uses the van to do the supermarket shopping
- Takes the van away on a week’s holiday
- Uses the van for social activities
Where a commercial vehicle is used for significant private use, irrespective of the price of the vehicle, the BIK for use of the vehicle is charged as flat amount, which for the year ending 5 April 2023 is £3,600 (potentially increasing to £3,960 from 6 April 2023). If the employer provides fuel for private use, this is also charged at a flat amount, which for the year ending 5 April 2023 amounts to £688 (potentially increasing to £757 from 6 April 2023).
Where an employee is provided with a car, the rules are considerably stricter. Unlike with a commercial vehicle, a car merely needs to be available for private use to result in a BIK. This means that a car BIK could arise even if the employee does not actually use the car privately. It should also be noted that travel between home and normal place of work is deemed private use and would therefore be sufficient to give rise to a car BIK.
Where a car BIK arises, the amount of the benefit is calculated by reference to the list price of the car, plus the cost of any additional accessories, multiplied by a set percentage which is based upon the type of fuel the car runs on and its CO2 emissions. The list price of a car is the undiscounted price of the car when brand new as published by the car’s manufacturer, importer, or distributor inclusive of any delivery charges.
- Electric cars and other cars with no CO2 emissions – The set percentage is currently 2% of the list price.
- Hybrid cars with under 50g/km CO2 emissions – The set percentage depends on the number of miles the car can travel on the electric battery with a longer range resulting in a lower BIK (see table below).
- Petrol or diesel cars – The set percentage is per the below table. It should be noted that where a diesel car is provided, these percentages are normally increased by 4% subject to a maximum percentage of 37%.
Follow this link for the HMRC table to work out the appropriate percentage for company car benefits: https://www.gov.uk/guidance/company-car-benefit-the-appropriate-percentage-480-appendix-2
These set percentages are currently due to remain frozen until the 2024/25 tax year.
Where the employer also provides private fuel for the car, this will result in a fuel BIK. This BIK is calculated by reference to the car’s set percentage (see above) multiplied by the annual fixed sum which is currently £25,300 (potentially increasing to £27,800 from 6 April 2023).
It should be noted that electricity is not considered a “fuel” for these purposes. Therefore, an employer may allow an employee to charge their company car at the employer’s premises without giving rise to a fuel BIK.
As an alternative to providing an employee with a company/business car, an employer may reimburse an employee that uses their personal car for business purposes up to 45p per mile for the first 10,000 miles in a tax year and 25p per mile thereafter without giving rise to a tax or national insurance charge for the employee.
Tax implications for businesses
Employer’s National Insurance
Where an employer provides an employee with a company/business car which results in a BIK for the employee, as well as the acquisition and running costs (for which details of how tax relief is obtained for the business is set out below), the business will also incur a Class 1A national insurance liability at the rate of 14.53% (13.8% from 6 April 2023) based upon the value of the benefit to the employee (detailed above).
Deductions from profits
As well as being able to offset the Class 1A national insurance liability arising on any BIK, the business will also be able to obtain relief for the costs it incurs on running the vehicle as they arise. The business may also obtain relief for the acquisition of the vehicle as set out below:
- Bought outright – Providing the business has not otherwise utilised its Annual Investment Allowance, and has not acquired the vehicle from a related party, the business may be able to claim relief for 100% of the cost of the vehicle at time of acquisition. Where this is not available, the business will normally obtain relief for the cost of the vehicles at 18% per year on a reducing balance.
For companies only: If the vehicle is acquired prior to 31 March 2023 and is unused and not second-hand at time of acquisition, the company may be able to claim up to 130% relief for the cost of the vehicle at time of acquisition under the super deduction. Where the vehicle is an ex-demonstrator vehicle, this is generally deemed unused and not second-hand for these purposes.
- Bought on hire purchase – Subject to a slight difference on timing of relief, which takes into account when the vehicle is first brought into use for the purposes of the business, relief for the cost of the vehicle is the same as that for commercial vehicles bought outright.
As well as the relief for the cost of the vehicle as outlined above, the business will also obtain relief for the interest and charges relating to the finance agreement as they arise.
- Contract hire – Tax relief is available on 100% of the net payments when they are made and therefore the tax relief is spread over the terms of the lease.
- Bought outright – Unless the car is unused and not second-hand and produces no CO2 emission, the business will normally obtain relief for the cost of the car at 6% per year on a reducing balance, or 18% per year on a reducing balance if the car’s CO2 emissions are less than 50g/km.
Where the vehicle is unused and not second-hand and produces no CO2 emissions the business may claim relief for the full cost of the vehicle in the period of acquisition as a first year allowance.
For completeness, it should be noted that the super deduction and annual investment allowance cannot normally be claimed in respect of cars.
The following example is based on a car bought for £100,000 car with 60g/km CO2 emissions:
Year 1: Tax deduction: £100,000 x 6% = £6,000. Carrying value: £100,000 – £6,000 = £94,000
Year 2: Tax deduction: £94,000 x 6% = £5,640. Carrying value: £94,000 – £5,640 = £88,360
Year 3: Tax deduction: £88,360 x 6% = £5,302. Carrying value: £88,360 – £5,302 = £83,058
- Bought on hire purchase – Subject to a slight difference on timing of relief, which takes into account when the car is first brought into use for the purposes of the business, relief for the cost of the vehicle is the same as that for cars bought outright.
As well as the relief for the cost of the car as outlined above, the business will also obtain relief for the interest and charges relating to the finance agreement as they arise.
- Contract hire – Where the car has CO2 emissions of 50g/km or less, tax relief is available on 100% of the net payments as they arise. If the car’s CO2 emissions are over 50g/km, then relief for the lease payments is restricted by 15% of the net payments, i.e. the business will only obtain relief for 85% of the lease payments.
Restriction of relief where individual is self-employed
Where an individual conducts the business alone or in partnership and uses a business vehicle privately, rather than being subject to a BIK, the relief for the acquisition and running costs are simply restricted proportionate to how much the vehicle is used privately compared with how much it is used for business purposes.
VAT implications on acquisition
Please find set out below the VAT implications on a VAT registered business acquiring commercial vehicles and cars for use within the business.
- Bought outright or on hire purchase – Can reclaim 100% of the VAT on the initial purchase.
- Hire contract – Can reclaim 100% of the VAT on the lease payments made.
- Bought out right or on hire purchase – Generally, cannot reclaim any of the VAT on the initial purchase, subject to very few limited exceptions.
- Hire contract – Generally, can only reclaim 50% of the VAT charged on the lease payments.