If a business decides to purchase a car for use in the business there are a number of tax implications that need to be considered and below is a brief summary of some of these taxes.
As a general rule, when a business buys a car the VAT cannot be reclaimed unless the car will be used exclusively for business purposes and will not be made available for the private use of anyone. If you purchase an excepted car then the VAT may be reclaimed.
An excepted car would be:
• A car that is intended to be used as a taxi, driving instructor’s car or self hire drive.
• A car that is exclusively for business use and not made available for private use.
• A car that is a stock in trade of a car dealer.
VAT can be reclaimed on any car repairs that the business has paid for regardless if the car has been used privately at any time.
Reclaiming the VAT on fuel is not as straight forward and any private use of the car limits the amount of VAT that is reclaimable. There are a number of different methods that you can chose from when reclaiming the VAT on fuel and these are as follows;
* Claim the full amount of VAT charged if the car is used solely by the business.
* Claim the full amount of VAT and apply the fuel scale charge for any private use of the car. In this instance you reclaim all of the VAT that has been incurred but you then deduct a flat rate of VAT which accounts for any private use of the car. This flat rate is dependent upon the CO2 emissions of the car.
* If the car is used for both business and personal matters and you do not want to apply the fuel scale charge then you could keep detailed mileage records. This separates any private use from the business use and the VAT is then reclaimed on the business use element.
* Claim no VAT.
Capital Allowances can be claimed on cars that are bought and used by a business. This means that the Capital Allowances will be deducted from your profits before tax is calculated. The rate used to calculate the Capital Allowances will be dependent upon the CO2 emissions of the car in question.
The amount of Capital Allowances available will be restricted if the car is purchased during the year. In addition to this, if a sole trader or partner of a business uses the car for personal reasons then the capital allowances will be restricted by the amount of time that the car is used privately. But the capital allowances will not be restricted if the car is used for personal use by an employee or director of a company.
Benefit In Kind
If an employee or director of a company uses the car for private matters then this will be treated as a Benefit In Kind and there will be National Insurance implications for the business. At the end of a tax year the business will need to file a Form P11d to HMRC notifying them of the car benefit provided to the employee and pay Class 1A National Insurance on the value of the car benefit.
If the employee does not pay for the fuel that is used when they are using the car for personal use then this will be treated as a fuel benefit. This will also need to be reported on the Form P11d and any Class 1A National Insurance paid on the value of this benefit.