Buying a new car is a very exciting thing. Even if you are not really a car person, the process of looking through glossy brochures, comparing specs and booking test drives can be quite exhilarating. As a business owner, there is another layer involved in leasing a car. Do you take the lease out in your own name, or do it through your limited company? There are pros and cons to both, so how do you make sure you’re making the right decision? If you are not sure what you need to consider when choosing which option to go for, we have compiled a few points to help get you started.
Using your business to lease a car
If you run a business, using your company to lease a car might be your first impulse. To be honest, there are a lot of benefits to going down this route, however there are also a few things to consider. For example:
- Keep your business and personal liability separate. This way if your business were to unfortunately fold, you would not have to pay for the car out of your own pocket.
- Lease payments can be used to offset your corporation tax bill.
- Simpler process to get the lease set up.
- Group discounts available from many dealers for business customers.
- You can claim back 50% of the VAT on lease payments (100% if you are a driving instructor or taxi driver).
- The business is responsible for insurance, repairs and maintenance costs.
There are also some pretty hefty disadvantages to using your business for a car lease. The first is cash flow. As your payments are now reliant on your business funds, if you cannot make those payments, you may risk the car being repossessed. If your business is well established with cash flow protection in place this is not an issue, if you are a newer business or might have issues with cash flow on the horizon, it might not be the best option for you.
The biggest drawback is Benefit in Kind tax, or BIK. This tax is applied to employees who use a company car for private use. Since you are gaining a private benefit from the car, you are required by law to pay BIK tax to HMRC. The rates for this will depend on the CO2 emission of the car, the P11D value of the vehicle and your own personal income tax bracket. So, the higher your CO2 emissions, the more company car tax you pay. The standard rate is currently at 24%, but you can reduce this to just 2% by opting for a hybrid car, or 1% by choosing an electric car.
The personal route
The other route you can choose is to ignore your company completely and instead lease the car in your own name. In fact, this is the main way new cars are purchased now, with 90% being bought under either hire purchase or PCP finance agreements. This means there are thousands of different options available to you meaning you can choose something that suits your exact plans and budget. Due to the nature of HP and PCP agreements, you have the option to exchange your car for a new model every 3 years if you choose to.
Since the car would have nothing to do with your business in this scenario, you would not be liable for any of those extra taxes including BIK or company car tax. It also means that no matter what happens with your business in the future – you sell it, move on or just shut it down – your car stays with you and is completely unaffected. You can also claim back any mileage you travel for business purposes, so you will not be left out of pocket for your business expenses if you choose this route.
However, personal financing does have some drawbacks too. Specifically:
- You are liable for all insurance, servicing, repairs and maintenance costs.
- You cannot claim any of the VAT back (even if your business is VAT registered) – you have to pay it in full.
- You cannot use the payments to offset your corporation or personal tax bills.
So, which is the better option? It really does depend on your personal and business situations. Determining the most cost-effective option takes time, thought and analysis of your finances, which is something that we, at Purple Lime, are very good at. We work with a lot of business owners, not only keeping their business finances running smoothly but assisting in making decisions such as these. We can help you understand the pros and cons of each option so that you can make the most informed decision possible. If you would like to know more, please get in touch by emailing hello@purplelime.uk.com or calling us on 01249 263 333.