Business Vehicles - An Overview

Introduction

A common question asked by business owners is:

“What is the most tax-efficient way to claim vehicle expenses in my business?”

The answer depends on many factors, primarily whether you operate as a sole trader or are a limited company director and how the vehicle is used (business use, private use).  

This article will explain how business vehicles are treated for accounting purposes and where the potential tax advantages are.

What Is a Business Vehicle?

A vehicle can be treated as a business vehicle if it’s used wholly or partly for business purposes.

From a tax point of view, HMRC considers several factors including;

-          Your business structure (sole trader or limited company),

-          The type of vehicle (car, van, etc),

-          The vehicles CO₂ emissions,

-          The level of private use.

Sole Traders

If you’re a sole trader, you and the business are the same legal entity. This is important to consider when purchasing the vehicle.

There are a couple of options available to you to calculate vehicle costs, these are;

- Claiming a mileage allowance, or;

- Claiming capital allowances and the actual costs of the vehicle.

Mileage Allowance

For many sole traders, a simplified mileage allowance is the most beneficial, particularly where the vehicle has mixed business and private use.

In summary, you can claim;

-          45p per mile for the first 10,000 business miles,

-          25p per mile thereafter.

This mileage allowance resets for each tax year.

From a tax perspective a mileage allowance works well because;

-          It directly reduces your taxable profits,

-          It covers all running costs and depreciation,

-          Record keeping is straightforward (I recommend keeping a mileage log).

For many businesses, this option provides efficient tax relief with minimal admin.

Using Capital Allowances and Actual Costs

Where business mileage is high, or the vehicle is used mostly for business, claiming capital allowances and the actual costs of the vehicle can produce a larger deduction against profits than mileage allowances.

Using actual costs, you may claim the business proportion of;

-          Vehicle Fuel (Petrol, Diesel, Electricity),

-          Insurance,

-          Repairs and servicing,

-          Road tax.

As the vehicle is treated as a business asset you will also claim the purchase cost of the vehicle as a capital allowance against profits (or lease costs as a business expense if the vehicle isn’t owned).

The level of capital allowances will depend on the vehicle type, fuel type and business usage.

Limited Companies

Limited company structures offer more sophisticated tax planning options, particularly for directors.

Purchasing or Leasing a Company Vehicle

If your limited company buys or leases a company vehicle it will claim either;

-          Capital allowances on the purchase cost;

-          Lease payments as an ongoing expense.

Both options will reduce company profits for Corporation Tax.

The company will also claim other vehicle costs such as insurance, servicing, and repairs as a company expense.

If the vehicle is available for personal use, a Benefit in Kind (BIK) applies. This will add a portion of the vehicles value to your taxable income. The relevant tax on BIK is calculated in the annual form P11d.

Electric Vehicle

From a tax perspective, electric company vehicles are currently one of the most tax efficient benefits available to directors.

Key advantages include;

-          Very low BIK rates compared to petrol or diesel vehicles (typically 1-3%),

-          100% first-year capital allowances on new electric vehicles (this reduces your profits and Corporation Tax liabilities) ,

-          No fuel benefit charge for electricity.

This option can be significantly more efficient than a mileage allowance.

Note - BIK rates for electric vehicles are scheduled to increase in future tax years. Please consult with your accountant to ascertain the applicable rate.

An Example - Company Electric Vehicle

A limited company has taxable profits (before Corporation Tax) of £50,000.

The company purchases a new EV during the same accounting year for business use and some personal use by the director. The cost of the vehicle is £30,000.

Capital allowances are claimed on the business vehicle which reduces taxable profits by £30,000 to £20,000. This has reduced the company’s tax liability by £5,700 (19% of £30,000).

The director pays personal tax on a £300 BIK for personal usage (£30,000 x 1%) which adds an additional £60 to the directors personal tax bill (£300 x 20% Income Tax). The company also pays 15% Class 1a National Insurance on the £300 BIK which works out as £45. The BIK charge occurs for each year the company vehicle is used on a part private basis.

Overall, the company saves £5,655 less tax (£5,700 minus £45) in the accounting year. The director pays an additional £60 in personal (income) tax.

Note - when the company sells the vehicle at a later date it will pay a balancing charge on the profit from the sale (typically sale price minus the capital allowances claimed).

Conclusion

Before buying or leasing a vehicle, it’s always worth getting professional advice. A conversation at the right time can save thousands in tax later.

For further information and guidance on business vehicles and other accounting matters you can email me at will@matrixaccountancyservices.com or call 01788 486065.