Tax Accountant

Understanding Tax Implications When Buying a Company Car in the UK

Posted on by Kamlesh Rajput
27
Dec

For many businesses in the UK, the decision to purchase a company car involves navigating a complex landscape of tax implications. Both employers and employees need to understand these to manage costs effectively. This blog post explores the key tax considerations associated with buying a company car.

  1. Company Car Tax (Benefit-in-Kind – BiK)

Employees provided with a company car for personal use must pay a tax known as Benefit-in-Kind (BiK). This tax is calculated based on the car’s list price, CO2 emissions, and fuel type. Lower-emission vehicles often attract lower BiK rates, making electric and low-emission cars financially appealing due to their tax efficiency.

  1. Employer National Insurance Contributions (NICs)

Employers must pay Class 1A National Insurance Contributions on the value of the Benefit-in-Kind. This represents an additional cost that employers must factor into their financial planning.

  1. Fuel Benefit Tax

If an employer provides free or subsidised fuel for personal use, the employee might face an additional Fuel Benefit tax. Like BiK, this tax is based on the car’s CO2 emissions and the value of the fuel provided.

  1. Capital Allowances and VAT Considerations

Employers can claim capital allowances on company cars, with the rate depending on the vehicle’s emissions. More favourable allowances are available for electric and low-emission cars. When it comes to VAT:

  • VAT Rate: The standard VAT rate is currently 20%, but this can vary for certain types of vehicles, including exemptions for electric vehicles.
  • VAT on New vs. Used Cars: New cars sold by VAT-registered dealerships are generally subject to VAT. Used cars might also incur VAT if sold by a VAT-registered dealer.
  • VAT on Imported Cars: Post-Brexit, the VAT implications of importing cars from the EU have changed, necessitating a thorough understanding of the new regulations.
  • VAT Reclaim: If the car is primarily used for business purposes, VAT-registered businesses can reclaim some of the VAT paid. The exact amount depends on the intended use of the car.

  1. Annual Road Tax (Vehicle Excise Duty)

The Vehicle Excise Duty (VED) is an annual road tax varying according to the car’s emission levels, which needs to be considered in the overall cost assessment.

  1. Mileage Allowances

Employees using their company car for business purposes can claim mileage allowances, intended to cover fuel and running costs. These allowances are typically not taxable.

  1. Salary Sacrifice Schemes

Salary sacrifice schemes allow employees to give up part of their salary for the benefit of receiving a company car. These arrangements can be tax-efficient but must be carefully managed to ensure compliance and mutual benefit.

Consultation Is Key

Given the complexity and frequent changes in tax legislation, it is crucial for both employers and employees to consult with a tax advisor or HM Revenue and Customs (HMRC) to stay informed about the most current regulations and to ensure compliance when buying a company car.

Purchasing a company car in the UK involves careful consideration of various tax implications. By understanding these key areas, businesses can make informed decisions that optimise tax efficiency and contribute positively to their overall financial strategy.