CARS - 23.11.2006

Chill out Dad

Get the company to buy it

Problem. If you were considering buying a car anyway, all you have to consider now is the most tax-effective purchase option. Funds permitting, you could simply write them a cheque for, e.g. £10,000, to enable them to buy the car they want/can afford.

However, to give them this kind of money from taxed income you’d have to take cash out of your company and treat it as an extra dividend to you (and other shareholders). If this pushes you into the 40% tax bracket the tax cost to you of this dividend will eventually be £2,500. Then there’s the cash flow effect on your company of taking £10,000 out in one go. But what if your company were to lease a car instead?

Solution. Assuming you’ve got one already, there’s no reason why you couldn’t take a second company car. The company buys (or leases etc.) the car and assumes all the running costs too. It can even pay for the insurance (for you with an extension covering your family members of course). What’s more the company can claim these expenses against its profits for Corporation Tax purposes (the VAT position is the same as for the first vehicle, i.e. it can’t be reclaimed). So this solution seems the ideal one.

Tip. The car needs to be provided as part of your remuneration package to gain the Corporation Tax deduction for the company; as a cost wholly and exclusively for the purposes of its trade. There will be no tax for you to pay on these individual expenses themselves because they are covered by a benefit-in-kind charge on you for a second car. However, how much is the second car going to cost you in tax?

Your tax bill

CO₂. Since April 6, 2002, the taxable benefit of most company cars is now based on their CO₂ emissions ratings. The lower the rating, the lower the percentage of list price used to calculate the taxable benefit of having a company car.

Green light. Thecleaner, i.e. the lower the CO₂ emissions figure, the lower the percentage of list price that’s taken to calculate the taxable benefit. If you take, for example a £10,000 car with a CO₂ emissions figure of 160g/km then the taxable benefit is 19% of £10,000. So, at 40% tax you’d pay only £760.

For example, if your company buys a Fiat Punto (petrol) with a list price of £8,000 and CO₂ emissions figure of 136 g/km and provides this to your son or daughter, the tax cost to you as a benefit-in-kind would have been:

Tax position. £8,000 x 15% = £1,200 taxable on you at 40% = £480. That’s the cost of the car plus all its running costs for less than £500 pa from now until 2009 when the CO₂ rates change!

Warning. Be aware of the possible insurance implications. Work with your broker to ensure that the insurer is aware of your student’s interest in the car.

Just in time for Christmas

If the second car arrives as a Christmas present, the tax cost for 2006/7 is even less because the car will have only been available for just over three months of the tax year. In our example this means a tax cost to you of only £120 (£1,200 x 3/12 months = £300 x 40%). In practice you can calculate it to the nearest day.