Thinking About a Company Vehicle? Look at the Tax Before You Choose the Car

Buying or leasing a vehicle through your franchise business can seem like a fairly straightforward business decision. You find the car or van that works for you, look at what it will cost the business each month, and decide whether the numbers stack up.

But when it comes to company vehicles, the price you pay for the vehicle is only part of the story. How the vehicle is classified, whether you use it privately, its emissions, who pays for the fuel and even the type of vehicle you choose can all affect the tax position.

And this is one of those areas where making a decision before speaking to your accountant can leave you with a very different result from the one you were expecting!

A company vehicle isn’t automatically tax-free

One of the first things to understand is that if your franchise business provides you or an employee with a car that’s available for private use, that will usually be treated as a Benefit in Kind (BIK).

In simple terms, HMRC sees the use of the car as part of the overall package you receive from the franchise, so there can be tax to pay personally as well as a cost to the business. How much depends on several things, including the type of vehicle, its value, and its CO2 emissions.

That’s why two cars with similar purchase prices can result in very different tax bills. And it’s also why we’d always recommend looking at the tax implications before choosing the vehicle rather than once you’ve already signed on the dotted line.

Electric cars can still offer advantages

Electric vehicles have become a popular choice for company car drivers, and the tax treatment has certainly helped with that. Because the Benefit in Kind position is linked to emissions, a fully electric company car can still be more tax-efficient than many petrol or diesel alternatives.

But don’t make the mistake of thinking that means an electric company car is tax-free.

There can still be Benefit in Kind implications and costs for your franchise, and those need to be considered alongside the purchase or lease cost and the way you’ll actually use the vehicle.

Tax rules and rates also change over time, so something you’ve heard from another franchise business owner who bought their vehicle a few years ago may not necessarily apply to the decision you’re making today.

This is where it’s worth asking your accountant to run through the numbers with you, because we can look at the whole picture rather than simply the headline monthly cost.

Car, van or pick-up? HMRC may have its own opinion!

This is an area that can easily catch people out. You might think you’ve bought a commercial vehicle, but that doesn’t automatically mean HMRC will treat it as a van for every tax purpose.

Double-cab pick-ups are a particularly good example because their tax treatment has changed, and newer vehicles can now be treated as cars for some taxes even though they may still be treated differently for VAT.

So, when it comes to tax, what you call the vehicle and what HMRC calls the vehicle aren’t always the same thing! The difference matters because cars and vans can be treated differently for Benefit in Kind, capital allowances and VAT purposes.

Rather than trying to work out yourself which rules apply, speak to your accountant before committing to the vehicle. It’s much easier for us to check the position beforehand than explain an unexpected tax bill afterwards.

Don’t forget about private fuel

The vehicle itself isn’t the only thing to think about.

If your franchise business pays for fuel that you use for private journeys, there can be a separate taxable benefit. This is another situation where something that feels like a nice perk can become less attractive once you’ve looked at the tax consequences.

Depending on your circumstances, it may make more financial sense to pay for your own private fuel and deal with business mileage separately. But again, there isn’t one answer that’s right for everyone.

How much you drive, what type of vehicle you have, and how it’s being used will all affect the calculation, which is why this is something to discuss with your accountant rather than making a decision based on a general rule you’ve read online.

Think about the whole cost, not just the vehicle

This is really the most important bit to think about.

When you’re considering putting a vehicle through your franchise business, don’t just ask:

“How much will the car cost?”

Ask:

“What will this actually cost me and the business?”

The answer can look very different once you factor in the tax position, Benefit in Kind, National Insurance, fuel, VAT and the allowances available to the company.

Sometimes a vehicle that looks more expensive initially may make better financial sense once everything is considered. Equally, the option that appears to offer the biggest tax saving isn’t necessarily the right vehicle for your franchise.

The tax should support the commercial decision, not make it for you.

Company vehicles and the changes to Benefits in Kind

There’s another reason it’s worth getting your company vehicle records in order now.

As we’ve discussed in our recent blog about P11Ds, HMRC is changing the way Benefits in Kind will be reported, with most moving towards being taxed through payroll rather than dealt with through the traditional annual P11D process.

Company vehicles are part of that wider change, so employers will increasingly need accurate and up-to-date information available throughout the year. It’s another example of why your accountant and payroll provider need to be talking to each other rather than everyone dealing with the information separately at year-end.

Speak to us before you choose the vehicle

If you’re thinking about buying or leasing a vehicle through your company, we’d always recommend speaking to your accountant before making the final decision.

At The Franchise Accounting Specialists, we can look at the different options with you, explain the tax implications and help you understand what each choice could mean both personally and for your franchise business.

That doesn’t mean choosing a vehicle purely because it saves the most tax – it means making the decision with all the information in front of you. Because nobody wants to discover six months after driving away that the company car they thought was a great deal isn’t quite as tax-efficient as they expected.

If you’re considering a new company car, van, electric vehicle or pick-up and aren’t sure which route makes the most sense, get in touch. We’ll help you look at the numbers before you commit so you can make the right decision for you and your franchise business.