Why You Should Talk To Your Accountant Before Purchasing A Vehicle For Your Business
Purchasing a new vehicle for your business can be extremely beneficial. It lets you become less reliant on external delivery companies, and can be used to get your employees to and from important meetings and appointments. However, not only is a new vehicle a major purchase in itself, but there are also numerous other factors to consider. What sort of vehicle it is, your financing options, and your status as either a Sole Trader or a Limited Company can all have significant tax implications when using the vehicle for your business.
One thing you should know before choosing a vehicle is that, surprisingly, the costs that you can claim for capital allowances on a car are not based on the amount you actually pay for it but rather the CO2 emissions. Capital allowances can be claimed when you buy assets such as machinery (or in this case, a vehicle) which you will be using as part of your day-to-day business, and some or all of the value can be deducted from your profits before paying income tax.
For any car that you buy which has CO2 emissions of less than 156 g/km, the cost is deemed to be €24,000. You can use this to your advantage by purchasing a car for less than this figure, and effectively get the vehicle for free. For instance, if you bought a car for €10,000, then over the next few years, you could make tax savings of €12,000- so not only would the car end up being free in the long run, but you’d actually make a profit of a couple of thousand! Smart decisions like these can make a world of difference to your finances, so you shouldn’t simply jump straight into buying a new vehicle.
However, things are unfortunately not always this simple. The above situation will work out if you are operating as a Sole Trader, but directors of Limited Companies who have the personal use of a company vehicle need to pay Benefit-In-Kind based on the original market value (OMV) of the vehicle- something which can add to your annual tax bill significantly. Since the OMV doesn’t take into account how much you actually paid for the car, it can be a nasty shock to many to find that they are paying an average of 30% of the OMV, instead of a figure closer to what they paid for the car.
On top of this, there are many other things you need to consider before buying a new company car or van. How you use it will also have a financial impact. If it’s a “pooled vehicle”- one which multiple company members use- then it’s possible to avoid the Benefit-In Kind charge. You will need to meet a specific list of criteria to qualify for this, though, so you’ll need to be careful with how you use the vehicle. It may be more advantageous to use a personal car and claim the civil service mileage rates, but only if you fill out the right paperwork, and use the vehicle in the right way.
If you are buying a commercial vehicle then how you finance the purchase can have significant implications with significant differences for reclaiming VAT depending on whether Hire Purchase or Lease is used.
As you can see, then, there are a plethora of financial decisions to be made when purchasing a vehicle for your business. We’ve only touched on some of the major issues in this article, but there are plenty of other things to consider, too, many of which you won’t be aware of unless you have considerable experience with accounting. If you get things right, then you’ll be making some great savings, but if you aren’t careful, you could find yourself spending far more than you anticipated.
The above is intended as a guide. Whether you’re buying a car for your business for the first time, or just think it’s time for an upgrade, make sure you come to us for specific advice for your circumstances. E&OE.