Firstly, thanks to all that got in touch with regards to my first blog on how you could save taxes with trivial benefits. Hopefully you found it helpful, and it allows you to take a benefit from the company tax free!
Now for the second of one of my highly anticipated tax saving blogs, (well, maybe not highly anticipated but that’s what I like to tell myself) the purchase of electric vehicles through the business! Now, some of you may find this odd. For years now, accountants have been saying not to purchase the car through the company, it’s just too expensive!
Well, all has now changed, and the reason for this is the government’s drive to get us all to go electric and reduce the country’s carbon footprint.
I lay out below the different tax considerations and the reasons going electric could be great for tax.
The one point I always make to a client is not to purchase an asset for the sake of saving tax. The tax saving will never exceed 100%, so from a cash flow perspective you will always be worse off!
So, this advice applies where you are looking at:
In days gone by, it’s always been the case that cars purchased through the business would not be written off in full in the year of purchase.
However, this has now changed, subject to you meeting the following conditions:
The electric condition is easy to meet, the unused and second-hand condition is not quite so clear, I include HMRC’s definition below.
“HMRC accepts that a car is unused and not second-hand ‘even if it has been driven a limited number of miles for the purposes of testing, delivery, test driven by a potential purchaser, or used as a demonstration car”.
So, it doesn’t have to be brand new, and that point could clearly save you some money.
If the above conditions are met and the car is purchased either outright or through finance, the full cost of the vehicle would be deductible in the tax/accounting year of purchase (subject to my point below).
As a company, this would save tax at 19% and if you are a sole trader or partnership, it could attract a tax saving of up to 45%! If you purchase the car through a monthly lease plan, then the payments made would be deductible in full from the profits of the business, instead of the value of the car.
For a company, the full cost of the vehicle is written off irrelevant of the private use as this is covered by a benefit in kind adjustment (see below). However, if purchased as a sole trader or partnership you can claim the full cost in the year purchased although this cost is then adjusted for the private use element.
As an example, say you purchase a vehicle through your sole trade for £70k, and then use it for business 75% of the time. You would be able to claim 75% of the £70k, so £52,500 against the profits of the business; the remaining balance would not be claimable as that relates to private use.
In most circumstances the VAT cannot be claimed on a car, and this applies to any type of car. The only time you would be able to is if it is not available for private use.
The conditions to meet this requirement are very onerous, and HMRC would class using the car for commuting as private, meaning this point alone would exclude nearly all purposes.
So, I would expect most, if not all to have the car available for private use, meaning the VAT would not be claimable. However, if you believe you may meet this condition, please get in touch and we can go through this in more detail to ensure compliance.
The only circumstance when you may be able to claim some of the VAT back would be if you lease the car. In this case you can usually claim 50% of the VAT charged on each lease payment.
If you decide to purchase an electric vehicle through a company, you will require a P11d each year. This then discloses the benefit you receive from the company for private use of the car.
This is where electric company cars are so cheap, as at present the benefit is calculated as a percentage of the list price rather than the price paid. For fully electric vehicles this is just 2%, and this has been frozen until 2025. So, as an example case study, a car with a list price of £70k would result in a taxable benefit of £1,400, if you are a basic rate taxpayer that results in tax due of just £280, even at a higher rate that is still just £560.
The company would also pay Class 1A National Insurance at 15.05%, that would be an additional £210.70 payable. However, this is deductible for the company, so you save tax at 19% on this amount, leaving a net cost of £170.67.
If nothing else, all this should illustrate how proper accounts preparation can make all the difference for your business.
I hope the above has helped provide some clarity to the purchase of electric vehicles through your business. If you have any questions or queries in relation to the above, please contact us. In addition, you could also learn more about other savings your business could be making by browsing our accountancy packages.
My next blog will be on employee entertainment, keep an eye out for this!
Thanks for reading.
Daniel Routcliffe FCA CTA
Email: dan@sidaways.co.uk
Tel: 01392 360008
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Dan Routcliffe
Email: dan@sidaways.co.uk
Tel: 01392 360008
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