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Automotive & Transport

Business owners warned to look into tax implications of car contracts

Stuart Smallwood, Director of E-Drive West Midlands

Business owners and fleet managers are being urged to ensure their finances are right when it comes to car contract hire.

Stuart Smallwood, Director of E-Drive West Midlands based near Shrewsbury, said it was important to understand the benefits and pitfalls of tax implications.

“Car contract hire can be confusing and it’s important to get it right. There are a number of things to consider, things like is car contract hire tax deductible, what are Benefits in Kind (BIK) and how it’s calculated,” he added.

“I would always recommend speaking to your accountant for any financial advice – but there are some things people may like to think about. In terms of is car contract hire tax deductible, the short answer for businesses is yes.

“For VAT registered companies, 50% of the VAT on all business monthly rentals can be reclaimed, 100% for commercial vehicles and 100% on the maintenance element if you opt for a fully maintained contract.

“A business customer will be able to recover 50% of the VAT incurred on the monthly rental if there is any private use of the vehicle. Some businesses that are exempt or partially exempt for VAT purposes, because they supply VAT-exempt goods or services, such as insurance, finance and training, may only be able to recover a proportion of the 50% of recoverable VAT. Where there is no private use, for example with a pool car, then 100% of the VAT can be recovered by a business customer.

“VAT recovery is limited to 50% on the finance element of the rental charge. This is referred to as blocking the VAT. It does not apply to any services rendered under a contract hire agreement, such as maintenance, for which VAT is fully recoverable by a business customer, subject to normal partial exemption rules. 100% is recoverable on commercial vehicles

“Emissions are another important consideration, whether through renting or buying through a business, which will make a difference to the tax.

“Benefits in Kind are things received from the firm which are not included in wages. They are sometimes called perks or fringe benefits. They include things like company cars, so something that needs to be in your thinking when considering them as an option.

“As a small business owner myself there seem to be very few perks to running your own business – one is potentially having a company car, but beware! Selecting the wrong one may result in paying more tax.

Tax is payable on a company car if it is available for private use. In nearly all cases, private use includes journeys between home and work. The tax charge is lower for cheaper cars, cars with lower CO2 emissions and cars that can run on alternative fuels.

To work out the BIK value of a company car, you multiply the car’s P11D value (its list price including optional extras, VAT and delivery charges, minus the first year registration fee and annual VED car tax) by the percentage banding the car sits in.

“From April 2018 a 4% surcharge was applied to diesel cars unless they meet new Real Driving Emissions stage 2 (RDE2) targets. To get the amount your company car will cost you in tax per year, you then multiply the BIK value by your income tax banding.”

For more information about car contract hire, call 03332 220065, email: stuart@edrivewestmidlands.co.uk or visit: https://www.edrivewestmidlands.co.uk/contact-us/.