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Car ownership for SME owners
There is, however, one common question: “what is the best way for me to buy a new car?”
Usually followed by: “should I have a company car?”, and “should I buy, hire purchase or lease?”, this question can raise a number of important issues relating to tax, remuneration and practical viability.
In this article we will look at this question from the perspective of an SME business owner with regards to their own vehicle.
There are many factors that can influence this decision, and detailed calculations can be made to demonstrate whether having a car as a company car is worthwhile. These factors do not just include the make, model and price, but also matters related to running costs, expected mileage, length of ownership and now of course CO2 emissions.
To calculate this properly, you would need to go into the detail, however, there are some general principles that you can follow in respect of owning the vehicle personally:
There are a few circumstances when a company vehicle might be viable or suitable for an SME owner.
A number of SME owners have provided themselves with vehicles classified as vans due to there being no benefit in kind charge where the vehicle is only used for home to work commuting or for qualifying business travel. Where it is used personally, any benefit in kind P11D charge is currently restricted to a flat amount of £3,600 (2022/23 tax year) and £688 for associated fuel benefit. This has meant qualifying Double Cab Pick-Ups have proved popular given that a number are classified as vans due to their payload.
Finally, more recently, there has been significant interest in electric vehicles (EV) given their low benefit in kind P11D values (currently 2%) and the interaction with Corporation Tax and VAT.
With increasing fuel costs, it would appear that the movement towards the greater use of EVs will continue, with improvements in technology, a reduction in cost and a wider range of EVs available, encouraging their use. This does however, put to one side the debate over infrastructure and the potential for the government to change the currently attractive tax regime for EVs .
Shifting the focus to the follow up question, “Should I buy, hire purchase or lease?”
Here are a few observations:
The decision will be heavily influenced by the status of the individual SME owner’s business.
If the business is cash rich, with a surplus of cash that is not being used in the working capital of the business or providing the owner with a “degree of comfort”, then the outright purchase of the vehicle is usually worthwhile given the current rate of return upon cash deposits. If as an SME owner you have the capability to use the cash to create a greater return, perhaps through the greater ability to buy and turn stock at a greater volume and frequency, then a finance option may be more beneficial.
There are numerous finance options available, which can be confusing and have different impacts upon the accounting and tax treatment of the vehicle purchase. The individual will have the same benefit in kind whatever the nature of the contract the company enters into. However, be careful where the company enters into the contract, but the SME owner “pays” for the vehicle hire costs through charging the cost to director’s loan account and/or dividends. This will still attract a benefit in kind P11D charge unless the contribution (from net pay and/or dividends) for personal use fully clears the benefit in kind value.
Turning to the accounting treatment; for hire purchase or finance leases, where the substantial risk and rewards of vehicle ownership are taken on by the company, the vehicle can be included as an asset on its balance sheet. When it is treated as an asset the company can claim capital allowances at 18% (and for new EVS 100%).
To account for leased or contract hire vehicles, the monthly payments are simply charged to the profit and loss account as incurred. Tax relief then follows on this cost but note that there is a restriction to the tax relief according to the CO2 emissions of the vehicle.
Given the variables and the widely different finance rates available from finance companies, the deciding factor is often the rate that could be achieved on different contracts but be aware of the different tax treatments mentioned above.
This has been a whistle-stop tour of the factors facing SME owners looking for a new vehicle. It has highlighted many of the factors and given guidance on matters to watch out for. Our next article we will consider the different approaches to providing vehicles for the employees of an SME.
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