When deciding to buy a car in the UK, one critical decision for business owners is whether to purchase the vehicle personally or through your business. Each option has distinct financial and tax implications that can significantly impact both personal and business finances. Here we’ll explore the differences between buying a car personally and buying a car through a business, providing a clear understanding of the benefits and drawbacks of each approach.
1. Personal Vs Business Use
The first consideration, which applies to all the following aspects, is what percentage the car will be used for each. A car used 80% for business and 20% for personal use would give a different scenario to consider than a car 80% for personal use and 20% business use.
2. Initial Purchase Considerations
Personal Purchase:
When you buy a car personally, the transaction is straightforward—you pay for the car with your personal funds. The vehicle becomes a personal asset, and you have full ownership without any direct connection to your business. You can claim mileage expenses from your company when you use your car for business purposes.
Business Purchase:
If you purchase a car through your business, the vehicle is considered a business asset. The company pays for the car, and all associated costs are recorded as business expenses. This option is often more complex, involving considerations like VAT recovery, capital allowances and how the car will be used.
3. Tax Implications
Personal Purchase:
When you buy a car personally, you can claim mileage allowance from your business when you use the car for work-related journeys. HMRC allows a tax-free mileage allowance of 45p per mile for the first 10,000 miles and 25p per mile thereafter. This covers the cost of fuel, wear and tear, insurance, and other running costs. When claiming mileage you cannot also claim the cost of things like MOT’s or replacing parts, as the 45p (or 25p) covers these costs.
The advantage of this approach is that you keep your personal and business finances separate. However, you won’t be able to reclaim VAT on the purchase or running costs of the vehicle, and you won’t benefit from capital allowances.
Business Purchase:
Purchasing a car through your business offers potential tax benefits, such as claiming capital allowances on the car’s depreciation. However, if you use the car for personal journeys, you’ll need to pay tax as you are receiving a benefit in kind (BIK). This tax is calculated based on the car’s list price and its CO2 emissions.
For low-emission vehicles, the tax rates are lower, making them more attractive as company cars.
Additionally, if your business is VAT-registered, you may be able to reclaim some or all of the VAT on the purchase price of the car, depending on the car’s usage and the specific VAT rules applicable. For example, personal use of 40% would mean you can reclaim up to 60% of the VAT back on the purchase.
4. Running Costs
Personal Purchase:
When the car is owned personally, all running costs such as insurance, maintenance, fuel, and repairs are your responsibility entirely. Even with 50% business use, 100% of the these costs are personal and cannot be deducted from the business. This is due to these costs being factored into the mileage expenses (45p and 25P per mile).
Business Purchase:
If the car is owned by the business, the company can pay for all running costs, including fuel, insurance, and maintenance. These costs are typically tax-deductible, reducing your overall business tax bill. However, this convenience comes with the complexity of accounting for personal use of the vehicle and the corresponding BIK tax.
5. Benefit In Kind Tax Considerations
One of the most significant factors when considering a business purchase is the BIK tax you will pay. The tax is levied on employees (including directors) who are provided with a company car that is also available for private use. The tax is calculated based on the car’s CO2 emissions and the car’s P11D value (the list price including any additional options).
Personal Purchase:
No company car tax is due when you own the car personally.
Business Purchase:
If the car is bought through the business and used personally, BIK tax can be a significant expense. Electric and low-emission vehicles attract lower rates of company car tax, making them more appealing as company cars.
6. Flexibility and Usage
Personal Purchase:
Owning a car personally provides greater flexibility, as you can use the vehicle without restrictions for personal journeys without the need to account for any business-related tax implications. The car remains a personal asset, and you have complete control over its use and eventual resale.
Business Purchase:
When a car is owned by the business, you’ll need to maintain records of how the vehicle is used—specifically, separating business from personal mileage. This can add a layer of administrative burden. Additionally, the car may be treated as a business asset during financial assessments, such as when applying for business loans or during audits.
7. Resale and Depreciation
Personal Purchase:
The car is a personal asset, so any depreciation or profit on resale affects your personal finances. Depreciation isn’t a deductible expense and any gains from selling the car aren’t subject to capital gains tax.
Business Purchase:
Depreciation of the car can be offset against your business’s taxable profits through capital allowances. However, when you sell the car, any proceeds typically go back into the business, and there could be tax implications depending on the sale price relative to its remaining value on the books.
8. Conclusion: Choosing the Right Option
Choosing between buying a car personally or through your business depends on several factors, including the car’s intended use, your tax situation, and how you prefer to manage your finances.
– Personal Purchase is typically simpler, with fewer tax complexities and more flexibility in the vehicle’s use. It’s often the preferred option for those who use their car for both business and significant personal mileage.
– Business Purchase can offer financial benefits through tax relief on depreciation and running costs, particularly if the car is used primarily for business. However, the potential for BIK tax and the need to manage personal use carefully can complicate matters.
Business owners should consider consulting with their accountant to weigh these options against their specific circumstances. Understanding the long-term financial implications of each choice is crucial for making the best decision for your situation.
