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Company Cars Considering investing in a new car for your business? As a business owner, you’ll need to carefully consider the financial and tax implications of getting a company vehicle. You’ll need to decide if it’s better to purchase the car personally or through your business, whilst considering the VAT implications and any Benefits in Kind. First, determine if the car will be used solely for business or if there will be some private use. Private use includes commuting to and from work. HMRC has strict criteria for what qualifies as 100% business use. You also need to consider the CO2 emissions produced by the car, as these will impact the Benefit in Kind and the percentage of Capital Allowances you can claim. The growing popularity of electric and hybrid cars can offer opportunities for a more tax-efficient investment. If a vehicle is used exclusively for business purposes, you can reclaim VAT on the purchase. However, if there is any element of private use, VAT cannot be reclaimed.

Benefit in Kind 

When a vehicle is available for private use, this is classified as a ‘perk’ and will give rise to a Benefit in Kind, meaning the user of the company car will be subject to Income Tax and the company will be subject to Class 1A National Insurance. 

Each vehicle has a BIK percentage banding based on its CO2 emissions The BIK percentage determines the amount of tax payable by the employee or director and also affects the National Insurance contributions the company must pay. 

Fuel 

The taxable benefits relating to fuel depend on whether the fuel is used for business or personal purposes. 

When fuel is provided to an employee for private use, it is considered a Benefit in Kind (BIK). The BIK is calculated using the CO2 emissions percentage multiplied by a fixed amount of £27,800. This calculation remains the same regardless of the actual amount of fuel provided for personal use. 

There is no car fuel benefit for electric vehicles as electricity is currently not treated as fuel. 

If employees purchase their own fuel or reimburse the employer for the fuel costs (equal to or exceeding the original cost), there is no need to report or pay taxes on that fuel. 

Fuel provided solely for business purposes does not incur a Benefit in Kind payment, and therefore, no additional tax is due. However, it is crucial to have proof that no fuel was used for personal purposes.  

Electric vehicles (EV) 

 
Allowing employees to charge their cars at a workplace charging point is not a taxable benefit. 

 
If the company covers the installation of charging points at employees' homes, this expense also remains free from taxable benefits.  

 
Providing charge cards for public charging stations is not considered a taxable benefit either. 

Capital Allowances 

When a company acquires a vehicle, the expense is not immediately deductible. Instead, tax relief is achieved through Capital Allowances. There are specific rules regarding the amounts that can be claimed. For vehicles, the allowable Capital Allowances depend on the level of CO2 emissions produced. For new electric vehicles with no CO2 emissions, 100% relief can be claimed in the year of purchase. However, for vehicles with emissions exceeding 50g/km the relief available is limited to 6% per annum.  

EV charging points 

Your business can claim 100% of the installation costs for an electric vehicle charging point. This includes not only the cost of the charging point itself but also any expenses related to land alterations for installation and modifications necessary to supply electricity to the charging point. 

 

VAT 

VAT on purchase 

VAT can only be reclaimed if the company car is used exclusively for business purposes. You must be able to prove to HMRC that the car is not available for private use 

Exceptions where VAT can be reclaimed include: 

• Vehicles used primarily for taxis 

• Vehicles used for driving instruction 

• Vehicles used for self-drive hire 

As previously mentioned, driving to and from work is known as your 'ordinary commute' and does not qualify as Business Use by HMRC. Therefore, even if the car is used only to travel to and from work, VAT cannot be reclaimed. 

VAT on Fuel  
When fuel is provided solely for business use, the company can reclaim all of the VAT on that fuel. However, if the fuel is also used for private use, the situation changes. In this case, a fuel scale charge must be considered. 

This charge is determined based on the vehicle’s CO2 emissions. 

 

VAT on EV charging 

If you are a sole trader, you can reclaim VAT on the electricity used to charge your electric vehicle for business purposes at home. However, you can only claim VAT related to the business use of the vehicle. Additionally, you can also reclaim VAT incurred when charging your electric vehicle at public locations. 

Directors and employees cannot reclaim VAT on home charging for company vehicles since the electricity supply is made to the individual. When charging a company vehicle at business premises, it's crucial to track both business and private mileage. You can either: 

1. Claim the full VAT (including private use) and adjust for private use on your VAT return. 

1. Claim VAT only for business use. 

Summary 

The kind of vehicle you invest in can have an impact on the type and amount of tax payable, for example, there is a difference in how company car is taxed in comparison to a company van.   

Finding the most tax-efficient option for a company car can be complex, as several variables need to be considered. However, taking the time to explore your options can benefit both you and your employees. 

Get in touch with our tax team to discuss the best options for your situation.