There are numerous factors to consider when deciding which method of buying and using a car for business is the most tax efficient.
As a sole trader there is no concept of a ‘company car’ as there is no legal difference between you and your business. There are 2 options for claiming tax relief on business journeys:
If you have not claimed capital allowances on your car then you can use the mileage method. To use the mileage method add up all of your business mileage for the tax year and then apply HMRC’s approved mileage rate. For cars this is 45p per mile for the first 10,000 miles and then 25p per mile thereafter.
If you cannot use the mileage method or believe that your car costs more than 45p a mile to run you can use the actual cost method. To use this method add up all of your mileage (business and personal) and then work out the business mileage as a percentage of the total mileage. Then add up all of the running costs of the car, e.g. fuel, repairs, MOT, insurance etc. and apply the percentage to this total.
If you use this method you can also claim capital allowances on the business proportion of the car.
If your business is a limited company it is a separate entity from yourself so you need to work out who should own the car – you or the company.
If you personally own the car you should use the mileage method as discussed above. The company would put this cost through its accounts and then would pay you back this amount tax free (as it is reimbursing costs you’ve incurred personally).
If the company owns the car then the company would normally pay for all of the running costs. These costs would reduce the company’s profit and therefore its corporation tax bill, capital allowances could also be claimed on the purchase of the car.
However, if the company owns the car any private use will create a taxable Benefit in Kind on you as an individual. This is calculated as a percentage of the market list price of the car, based on the CO2 emissions. Your limited company would be liable to pay additional National Insurance on these benefits and a P11D form must be completed. This discloses the car details and the value of the benefit(s). Taxable benefits are treated as income and are therefore included in your total earnings for the tax year (and will be entered onto your personal tax return).
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