DMS Posts

How to make company car purchases cost effective

Tax and NI charges can make company cars expensive. However, if you use your business to run a car for a family member, say a son or daughter, there are steps you can take to make it cheaper than personal ownership. What are they?

Expensive but still cost effective

In April 2018 the tax and NI charges for company cars crept up again. While the maximum charge didn’t increase, the CO2emissions bands moved so that the majority of company car drivers will pay more in 2018/19 and in 2017/18 for the same car. Despite this, financing a car through your company can be more cost effective than doing it personally. This is something to keep in mind if your spouse, son or daughter needs a new set of wheels.

Example. Peter is a director shareholder of Acom Ltd. He is a higher rate taxpayer. His daughter Katy needs a car and Peter agrees to fund the purchase. His budget is £13,000. To keep annual costs down Katy picks one with CO2 emissions of under 95g/km. Katy will pay the running costs, e.g. insurance, servicing, etc. How do personal and company ownership stack up against each other?

Katy as owner. The idea is for Katy to keep the car after four years and buy a replacement herself. At that time its expected value is £4,750. This means the net cost to him is £8,250 (£13,000 – £4,750). He takes extra dividends of £12,222 from Acom to cover this, which after tax at 32.5% leaves £8,250.

Acom as owner. The cost over the four years to Acom would also be £8,250, but it receives corporation tax (CT) relief at 19%, which makes the net cost to it £6,683. Peter must pay tax on the company car of £988 per year. He takes dividends each year of £1,464 to cover the tax bill. That’s £5,856 over four years. After 32.5% tax that’s £3,952. Acom has to pay Class 1A NI on the car benefit, which after CT relief is £1,104. The total cost to Acom for the car is £13,643 (£6,683 + £5,856 + £1,104). The calculations indicate that personal ownership by Katy is the cheaper option, but that’s not the full story.

Reimbursed costs

If Acom (and not Katy) pays the running costs and Peter reimburses Acom, and Katy reimburses him, this reduces the tax and NI payable on the company car option. This can tip the balance in favour of Acom owning the car.

Tip. For the reimbursed expenses to reduce the tax and NI, Acom must make it a condition of it providing the car. This should be put in writing in case HMRC asks questions.

Less tax and NI. Assume the average annual cost of insurance, road tax, servicing etc. is £1,700. If Acom pays this and requires Peter to reimburse it, the corresponding amount on which he is taxed for the car is reduced by the same amount. Over the four years of ownership that’s a tax saving of £2,720. Therefore, Peter needs correspondingly fewer dividends from Acom to cover the cost. Acom also saves money. Katy’s financial position is neutral, it’s just that she reimburses Peter for the running costs instead of paying them direct.

Tax saving makes the difference. In our example, the tax savings achieved by simply changing how the running costs are managed is over £4,500 (see The next step ). This makes company ownership significantly the cheaper option.

If your company buys the car and pays the running costs, but the family member reimburses it the latter, the usual company car tax and NI is reduced. The savings mean that overall company ownership can be cheaper than the family member buying the car themselves by up to several thousand pounds.
DMS Posts

Annual accounting – how to make it work for you

A business associate says that his firm uses VAT annual accounting to help with its cash flow. What are the conditions for joining the scheme and can it offer you the same cash-flow advantages?

Annual accounting

As the name suggests, VAT annual accounting is an HMRC scheme that allows you to submit a single VAT return each year instead of the usual four. That alone makes the scheme attractive, but it also means you pay fixed VAT payments plus an annual balancing payment. Monthly payments are the norm, but you can ask HMRC to go quarterly.

Choose your date carefully

The annual accounting scheme rules allow you to choose the starting point for your annual return. Picking the right date to suit your business can give you a cash-flow advantage.

Tip. If your trade is seasonal, choosing an annual return period that starts at the beginning of the seasonal boom gives you the best result.

Example. Bill and Ben own three restaurants in seaside towns. 75% of their £800,000 (excluding VAT) annual turnover occurs in July to September. Before annual accounting they made VAT returns for calendar quarters meaning that £120,000 of their annual VAT was payable at the end of October each year, while the remaining £40,000 was spread over the other three VAT quarters.

They applied for an annual accounting year starting on 1 July. This meant their VAT bill in October was just £40,000 which allows them to hang on to the difference of £80,000 (£120,000 -£40,000) an extra three to nine months.

The annual return and payment

When you’re in the scheme your monthly or quarterly payments are based on your VAT bill for the previous twelve months. This means if your turnover is growing you gain another cash-flow advantage.

Example. In the first year of using the scheme Bill and Ben’s turnover increased so that their annual VAT bill rose to £200,000. However, their first three quarterly payments in the second year remain at £40,000. Of course, they must pay the difference and this is due one month after making their annual return, which must be submitted by 31 July. Their VAT payments for their third year in the scheme are based on their second year and so are £50,000 per quarter.

Beware a reducing VAT bill

If the VAT payable for a year is less than the previous one, say because of falling turnover or increased purchases, your fixed payments under the annual accounting scheme will exceed your actual liability. If you think that’s going to happen you can apply to HMRC to reduce your payments.

Joining the scheme

You can apply to HMRC to use the annual accounting scheme if you expect to make VATable supplies of up to £1,350,000 (excluding VAT) in the next twelve months (see The next step ). But you can’t apply if you’re registered for VAT as part of a group, have stopped using annual accounting in the previous twelve months or owe VAT which is overdue.

Your expected VATable supplies over the next twelve months must not be estimated at more than £1,350,000 (excluding VAT) and your business must not be part of a VAT group registration. You can usually gain a cash-flow advantage if your business income is growing or is seasonal.