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Company car or purchase/lease in own name?

This might start as part of a conversation with friends, one says to the other that he has purchased a car through his business, and that his accountant says that he can claim 60% of the cost against his business – the other friends are excited about the thought of doing the same. However, as is usual in these types of conversation, there are lots of other parts missing.  The accountant might not actually have said what the client thought he heard!

Here are some of the other questions that one should ask if discussing this topic:

1. Is the business being run as a sole trader business or a Ltd company or perhaps even a partnership? The tax outcome will be very different depending on the type of business structure used.

2. What is the nature of the business of the client? For example a self-employed taxi driver who uses his car for both his trade and personal use is likely to have a claim of around 90% + of his car costs due to the nature of his trade – and the car would be treated as “plant & equipment” for the business.

3. What type of car is the client considering purchasing? The Government are keen to incentive the purchase of environmentally friendly cars, and so a car with a low CO2 emission is tax favoured – with low (or sometimes NIL) benefit in Kind charge arising for the taxpayer.

4. Is the car a “genuine” pool car – HMRC are very strict on their criteria of a pool car, so it must:

  •  Be kept at work overnight – not at the Directors’ residential address
  • Must be capable of being used by more than one employee – and must in practice be used by more than employee
  • Not be used for any private purposes – not even one private journey in the whole tax year

5. Need to consider if you will buy the car or lease the car – this impacts on the VAT treatment – as you can claim 50% of the VAT incurred if leasing the car through the company

6. Purchase of a car by Ltd company and for use by the Directors/employee will be treated as 100% business use – and so depending on the CO2 emissions of the car, the allowable expense in the tax return each period will be:

  • Over 130 g/km = 8% writing down allowance, per annum
  • 95 g/km to 130 g/km goes into main pool and subject to 18% allowance each year
  • Less than 95 g/km then would be allowed to claim 100% allowance in the accounting period in which bought.

However, the employee/director would be subject to taxes on the benefit derived from the car, and the employing company will be subject to employers’ NI contributions. The rates of tax will depend on the CO2 emissions of the company.

– See more at: http://mgcontractors.je-hosting.co.uk/company-car-or-purchaselease-in-own-name-what-should-ltd-company-contractors-do/#sthash.cdXnRKcu.dpuf

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