Term
Company car
A passenger or commercial vehicle among the business assets of a company or sole trader. It is depreciated and its running costs are tax-deductible insofar as it serves the business, while private use creates taxable income or cuts the deductible costs.
Updated
What it means
A company car is a passenger or commercial vehicle among the business assets of a company or sole trader, whether bought, held under a finance lease or used on an operating lease. Each form has different accounting and tax consequences.
A purchased car is added to the assets and depreciated, usually in the first depreciation group. For expensive passenger cars the law limits how much of the cost can be depreciated for tax. Running costs such as fuel, servicing, insurance and the motorway vignette are deductible to the extent that the car serves the business.
The car also brings motor vehicle tax, which the company pays for vehicles used in the business, and the VAT question of how much input tax on the purchase and running costs can be deducted if the car is also used privately.
How it works in practice
If an employee or director also uses the car privately, they are taxed on a benefit in kind under the rules for a company car for private use. For a sole trader, expenses are instead reduced in proportion to private use.
The extent of business use is shown by a mileage log. The law also allows a flat-rate method for fuel costs under which a full mileage log is not needed, but only a limited share of the costs is deductible. We work out with the client which method pays off, based on the kilometres driven.
When choosing between buying, a finance lease and an operating lease, we compare the total cost, the effect on cash flow, the VAT deduction and how the car will look on the balance sheet for the bank. It is not just about the monthly instalment.
What to watch out for
The most common mistake is a car registered to the company but used almost entirely privately, with no mileage log and no benefit-in-kind taxation. At an audit the tax office cuts the expenses and assesses additional tax, plus contributions for an employee.
The second risk is selling the company car to the director or a shareholder cheaply. Between related parties the price is compared with the usual market price, and the difference may be taxed for both the company and the buyer. The price should be backed by a valuation or market comparison.
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