Finance Options for Purchasing a New Company Car

3rd March 2011

Once you have decided which car (or other vehicle type) to acquire and whether to own the vehicle within the company or personally, the next consideration relates to how to finance this transaction.

The main factors of relevance should be taxation (corporation tax and VAT), cashflow, control and the accounting affect. Within business, conventional wisdom is that the term of the finance should match the life of the asset. However, business owners often wish to factor in other issues:

Contract Hire (Operating Lease and Rental)

Under this method the car is never owned. The leasing company owns and manages the running of the car, paying all running expenses except fuel. The lease contract will run for a fixed period, after which the car is simply returned or the lease extended.

The cost of contract hire is treated as a deduction in the profit and loss account. This is used as the starting point for the tax computations. Adjustment may be necessary for the statutory restriction where the CO2 emissions of the vehicle exceed 160g/km. This amounts to a disallowance of 15% of the hire costs. It should be noted that VAT scale charges apply where fuel is provided by the business but is available for both business and private use. Input VAT can be reclaimed on 50% of the hire element of the monthly instalments. Recovery of input VAT on fuel is restricted by scale charges where there is both business and private use of the vehicle.

Advantages: Ability to reclaim 1/2 of VAT, easy (low maintenance) and convenient if  you regularly want a new car.

Disadvantages: Can work out expensive.

Finance Lease Purchase

Like contract hire above, under a finance lease, ownership of the asset remains with the lease company. Ongoing rentals are paid over the fixed primary lease term. All operating responsibilities and costs rest with the company. At the end of the primary term, the company will usually have the option to purchase the car, return it to the lease company or extend the lease to a secondary period.

The tax treatment is broadly the same as contract hire, with the total cost of the lease spread over the expected term of the agreement. This is by way of capitalising the asset and allowing the notional depreciation and finance charges as tax deductions. The same CO2 disallowance considerations apply as for contract hire. Once again, half of the monthly input VAT cost can be reclaimed.

Advantages: Readily understood and available through main dealers.

Disadvantages: Lease liability (and asset) shown on balance sheet.

Cash Purchase

This is the simplest and most common acquisition method, whereby spare cash resources are used to make an upfront purchase of the vehicle. All running responsibilities and costs rest with the company.

Normal running costs pass through the profit and loss account and are allowed for tax. Recovery of input VAT on the cost of the car is not permitted unless the car is used for 100% business use. Capital allowances are available based upon the cost of the car. The cost of the car does not qualify for the Annual Investment Allowance. A writing down allowance (restricted to £3,000 where the car cost over £12,000) of 20% (where CO2 emissions are less than 160g/km) or 10% (where emissions exceed 160g/km) is given each year, on a reducing balance basis. No balancing allowance is available on disposal. Low emission cars (below 110g/km) qualify for 100% first year allowance.

Advantages: Simple and popular, with maximum control.

Disadvantages: Responsible for all ownership, running and sale issues. Large upfront cash outflow.

Hire Purchase

This form of purchase spreads the cashflow affects of the transaction over the life of the asset. Ownership passes when the final instalment has been paid.

The tax treatment is as per the aforementioned Cash Purchase.

Advantages: Most common/understood form of borrowing for vehicle purchase.

Disadvantages: Risk of repossession if company defaults on payment plan.

Purchase on Bank Loan or Other Borrowings

This method is the same as Hire Purchase above, other than that the vehicle ownership rests with the company immediately. The tax treatment is as per the aforementioned Cash Purchase.

Advantages: Probably cheaper than aforementioned finance types.

Disadvantages: May have already fully used credit limit from company bankers.

Purchase on Overdraft

This financing option is the same as Cash Purchase above, other than that unstructured bank overdraft funds are used for the purchase. The tax treatment is as per the aforementioned Cash Purchase.

Advantages: Debt can be cleared as quickly as business cashflow permits.

Disadvantages: May never repay debt if cashflow management is undisciplined.

For purchasing of cars within a sole trader or partnership, although most of the aforementioned will be relevant, it is noted that some of the tax rules will be different. Similarly, not all of the above tax factors will be correct if the vehicle is a van or classic car



 
Other items in Business Support
 
Lucy Bayliss
8th January 2020 It’s the final countdown!

There are only 23 days until the self-assessment tax return deadline of 31 January 2020. If your return is not filed electronically by this date, an automatic £100 penalty will be applied. Please note that the deadline for filing a paper tax return was 31 October 2019 and therefore all returns are required to be…

Read More »

Jonathan Moore
6th June 2019 Don’t take record keeping for granted

It is common for entities who undertake research and development to receive grant funding for projects that they undertake. Grants will often be paid on the basis of expenditure incurred or a proportion thereon and may be awarded with certain conditions attached.   One such condition for grants above a certain level will be the…

Read More »

Chris Ridgeon
1st March 2019 Mind Your Own Business

So, you’ve decided to go it alone. You’ve identified a niche for your idea, your product or the service you can offer. It may just be that you want independence and greater recognition for your expertise.   We have many start-up businesses looking to us for help and advice. These range from spare room endeavours…

Read More »

James Cater
27th February 2019 Brexit – What does it mean for Farming?

Britain’s withdrawal from the EU’s Common Agricultural Policy (CAP) means British farmers will no longer be able to receive EU subsidies and will not have to comply with a number of regulations. Agriculture is a small sector in the UK economy, contributing less than 1% to GDP and employing around 1.2% of the workforce. But…

Read More »

Peter Brown
13th January 2019 5 things you need to know about Making Tax Digital

  Making Tax Digital (MTD) is the hot topic this year. It’s one of the most fundamental changes to the UK tax system since the introduction of self-assessment. From April 2019, VAT registered businesses with a turnover of over £85,000 will be required to keep records using software approved by HMRC.  We have condensed the…

Read More »

Stephen Malkin
11th January 2019 Financing your self-build project

  Borrowing to build Self-builders require more money up front than conventional homebuyers. This is because they have to buy their building plots and fund their planning applications before they can apply for any loans. Self-build mortgages tend to be interest-only as fixed-rate loans have substantial exit fees for those who change loans when the…

Read More »