Can you use a business car for personal use?
One of the perceived perks of running your own business is the ability to provide yourself with a company car, with all the running costs and depreciation covered by your company.
In reality, it’s not that simple and even taking your business car on the shortest journey for personal reasons will mean you will incur additional personal taxes through a benefit in kind, writes chartered accountant Helen Christopher, operations director at Orange Genie.
Company cars: more taxing than they sound
Unfortunately, in the eyes of HMRC, personal journeys include travelling to and from work. That means using your company car for the daily commute, popping to the shops, or dropping the kids off at school will result in you having to pay tax for the privilege of having use of the car.
Company car tax is based on three factors:
- The car maker’s list price, including VAT, delivery, and optional extras.
- The amount of C02 emissions the car makes
- Your personal tax bracket (either 20% or 40%).
How to calculate company car tax
To calculate your tax liability, take the value of your car and multiply it by the company car tax rate for your car’s given emissions.
This will provide you with your benefit in kind rate, that you then multiply by your marginal tax rate. This tax charge is an annual charge and not just a one-off at the point of purchase. So it’s important to take this into account when deciding how to fund your next car.
In simple terms, the more expensive your car and the higher the emissions, the more tax you will pay. So if you are looking to minimise the tax cost of a company car consider lowering the value or your car, your emissions, or even think about ‘going green’ and embracing electric technology where the benefit in kind rates are much lower.
Tempted to have your company pay for all the fuel in your vehicle? Be aware that the personal use of the car then triggers an additional benefit in kind for fuel costs which can add a significant amount to your tax bill!
However paying for your own fuel and re-claiming business miles will reduce your tax bill. Electricity is not deemed to be fuel in the same way as petrol or diesel, so again opting for an electric car will reduce your benefit in kind.
Can the company car tax be avoided?
The only way to be exempt from the company car tax charge will be to avoid using your company car for private journeys.
To do this successfully, you will have to leave your vehicle at your work premises overnight and at weekends, only use if for business purposes. For many contractors, all of this is impractical and does not negate the ownership of a personal car.
But you could consider registering the car as a “pool car”, meaning it stays at the place of work overnight and at weekends, and is shared by other employees to carry out business-related journeys. Again though, this still may mean you need a personal vehicle for family and day-to-day life!
Interestingly, if the company vehicle has been adapted for ‘Motability’ reasons, company car tax will not be payable. But tread carefully because these exemptions will apply to only a small minority.
Take a company van instead...
Tax liability on a company van is calculated very differently to a car. The tax is based on a fixed rate of £3,150 which is then applied to your personal tax rate. So, for example, a basic rate taxpayer will pay tax of 20% of £3,150 which is £630 per annum or £52.50 per month.
This tax can be lowered further, if one of the following apply:
- You cannot use the van for 30 days in a row
- You pay your company to use the van privately
- Other employees use the van
Taxman has taken notice, so you must too
If you are considering a company car, it’s worth talking to your accountant to consider all the options. Once seen as a perk of the job, HMRC has steadily been increasing the tax cost of this ‘perk’ over the last 10 to 15 years, so it’s vital to make sure you understand all the potential pitfalls.