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Company Cars - are you better off using your own vehicle?

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Recently HMRC released new rates for business mileage for company cars effective from July 2008. Interestingly enough, the FPMS rates that many of us claim (fixed profit mileage scheme) remain unchanged since 2002!

When the FPMS rates were set at 40p for the first 10,000 miles reducing to 25p per mile thereafter, petrol was an average of 44% cheaper than it is of today, currently averaging at £1.25 per litre of super unleaded. And not only have fuel prices gone through the roof; this also has a knock on effect to most other related costs including servicing and insurance.

Many business owners and accountant’s advice alike, would be to “steer away from having company cars”, but in view of today’s economic climate and spiralling fuel costs surely a small amount of time making the comparisons has got to be time well spent. As with any business decision, re-evaluations should be made periodically taking market changes into consideration.

For the basis of this example we are going to assume that Joe Bloggs sells his 1.6L car to his company for a value of £15,000. Joe has no ‘extras’ added to the car. The company pays for all the petrol and private mileage of 3000 miles is paid back by Joe to the company under official HMRC rates. He drives 10,000 business miles a year. The figures we have used are for illustration of the example only and by no means represent true costs.

Cost of Car	£15,000
CO2 emissions 183g/km rounded down to 180	24%
Benefit in kind charge calculation (BIK) = £15,000 x 24%	£3600

Cost to employee	20% tax payer	40% tax payer
Tax = £3600 x either 20% or 40%	£720	£1440
Class 1a NICs at £3600 x 12.8%	£461	£461
Total tax and NICs	£1181	£1901

So, Joe would pay either £1181 or £1901 benefit in kind charge for the use of his ‘company car’ according to what tax bracket he falls into. He has not incurred a charge for petrol costs as he has personally paid for all personal mileage at a rate of 15p per mile back to the company.

Let’s assume that these are the annual cost for the car being a company car or privately owned:

	Company	Private
Tax and issurance	600	600
Service costs	300	300
Petrol 10,000 + 3,000 miles	1500	1950
Depreciation	3000	3000
FPMS rebate from company		(4000)
Total Cost	5400	1850
Corporation tax payable @21% saved	1134

If the car had been privately owned it would have cost Joe £5850 to run less £4000 in mileage under the FPMS (40p for the first 10,000 then 25p thereafter) therefore a net cost of £1850.

If the car was sold to the company it will have cost Joe only his personal miles of £450 plus the benefit in kind charge; £1631 as a 20% tax payer and £2351 as a 40% tax payer. Not forgetting, he ‘receives’ £15000 tax free, a saving of £3,000 for a 20% tax payer and £6,000 for a 40% tax payer.

Considerations to make:

• The costs of either a company or private car show little difference
• Would Joe be better off having the £15,000 as tax free money in his pocket or DLA?
• The company can claim tax relief on the depreciation, Joe cannot
• Actual mileage will make a difference to the calculation
• Claiming petrol receipts as opposed to HMRC mileage rates will add a significant cost to the benefit in kind charge
• Joe pays the costs from his ‘already’ taxed income
• The company pays the costs from pre-taxed profits
• If the car is owned by the company the insurance needs to be in that name

To summarise, it would appear that every situation has to be calculated on it’s own merit, there is no set answer, but the FPMS which is unchanged for seven years does not provide adequate cover for running costs; and fuel costs continue to rise.

We would recommend that a small amount of time spent may make a worthwhile difference for you and your business.

About the Author

Written by Phil Richards - Blevins Franks Chartered Accountants Ltd
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Posted August 4, 2008