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Buying a Vehicle for Business Use

Are you interested in purchasing a vehicle for business use? If you are planning on purchasing a vehicle for your small business or if you are looking for a fleet of vehicles for you and your employees, then there are several options available for you to explore before you make a final decision.

In this article, we will take a look at everything you need to know about buying vehicles for your business, including how to finance a vehicle for business use, the taxes that you need to pay for a business vehicle, the insurance that you will need for your vehicle, and whether you can claim fuel and mileage with a business vehicle.

So if you’re thinking about purchasing a vehicle for your business, read on to find out everything you need to know before going ahead.

How to Finance a Vehicle for Business Use
Do You Need to Pay Tax on a Business Vehicle?
Do You Need to Inform HMRC When Buying a Company Vehicle?
Can You Claim for Fuel and Mileage with a Business Vehicle?
What Insurance is Required for a Company Vehicle?
Conclusion
Sources

How to Finance a Vehicle for Business Use

There are several different ways that you can finance a business vehicle, including buying outright, using a hire-purchase, leasing a vehicle, and taking out a business vehicle loan.

In this section, we will go over these different options to help you determine which may be the best option for you.

Buying a Vehicle Outright For Your Business

Buying a vehicle outright simply means that you pay the vehicle off in an entire lump sum. This is quite possibly the easiest method for getting a new vehicle for your business.

If you choose this option, once you buy the vehicle, it’s yours to keep in the business, and you can do whatever you like with it.

You won’t need to worry about paying interest on the vehicle, so this option is usually cheaper overall.

However, buying the vehicle outright will affect your cash flow, and it’s also unlikely that you will recover the full cost of the vehicle if you come to sell it.

In terms of taxes, the vehicle will be an asset on your balance sheet. However, the price will reduce over the years due to depreciation, and this will also reduce your profits.

For the purpose of taxes, the depreciation of the vehicle will be added back to your profits. However, capital allowances can be claimed. This will reduce the taxable profits and will, therefore, reduce the amount of tax that you need to pay.

Buying a Vehicle Via a Hire-Purchase Lease For Your Business

If you choose to finance your vehicle with a hire purchase agreement, this means that you will pay an initial deposit followed by several monthly payments. Once you have completed the required number of monthly payments, the vehicle is then yours to keep.

Choosing this type of finance option helps you to free up your cash flow and also allows you to have the option of purchasing a more expensive vehicle.

If you do choose to purchase a vehicle using a hire purchase agreement, you can expect the purchase to be subject to interest rates until you have completely paid off the cost of the vehicle.

Also, you can’t sell the vehicle until you have paid it off in full. Some creditors may also charge a purchase fee at the end of your monthly payment term, so this is worth looking into before you agree to this type of finance.

Your accountant will usually class a business vehicle bought through a hire purchase agreement as fully paid; therefore, it will be subject to the usual depreciation allowances.

You will still own the vehicle fully once all of the payments have been made, and you will also have tax relief on any interest that has been incurred.

Vehicle Leasing for Business

When you choose to lease a business vehicle, this involves paying fixed payments each month to hire the car. This option will have much less of an impact on your cash flow as you pay smaller monthly payments rather than making a large lump sum.

This also allows you to budget more effectively as you have a fixed price that you need every month for the vehicle.

A benefit of choosing a business vehicle lease is that leasing companies tend to include vehicle maintenance within the contract. This means that you can have complete peace of mind when it comes to fixing any problems.

When you hire a vehicle, you will never own it. This means that you will spend money every month, but you won’t be able to recoup any of the payments at the end of the contract by selling the vehicle.

Most leasing companies will also have limits on the amount of mileage that the vehicle can do.

The regular payments for the business vehicle would be included in your profit and loss account and would reduce the number of profits that are subject to tax.

If you are VAT registered, you can recover 50% of the VAT that you are charged on the payments.

Purchasing a Vehicle With a Business Vehicle Loan

A business loan can come in a number of different forms. Car manufacturers will usually let you drive a car home right away after you’ve paid a deposit.

Then you can pay off the rest of the car in monthly payments. This type of business vehicle loan is a hire purchase which we have gone over above.

Some banks or other credit providers will lend you money for a vehicle. This is similar to a traditional bank loan. Taking out a business vehicle loan allows you to buy a much more expensive car than you would have been able to afford otherwise.

The amount of money that you can receive from a loan will usually depend on your credit score.

Asset financing is another loan option offered by most large banks. These loans are offered to existing customers with at least two years’ worth of trading history, and the loans can usually be taken out for up to five years.

This will help your regular cash flow and will ensure that you can budget properly. Most banks can offer a bespoke loan that can cater to the needs of your business, and that is appropriate for your finances.

Do You Need to Pay Tax on a Business Vehicle?

If you are thinking about purchasing a business vehicle, you may be wondering whether you will need to pay business vehicle tax. In this section, we will take a look at the taxes that you need to pay for a business vehicle.

If you are an employee, your employer will usually deduct any company car tax that is due to HMRC at the source. If you are self-employed but trade as a limited company, then you will also need to deduct company car tax at the source.

Company cars are taxed at various rates depending on several things. Below is a list of the things that will affect the amount of tax you pay:

The taxable value of the car
The type of engine (electric, diesel, petrol…etc.)
The carbon dioxide emissions
Your income tax bracket

Every vehicle is subject to paying road tax unless the car is over 30 years old.

If you are an employee or you have a limited company, and you use your vehicle for both personal and business use, then the employee is taxed on the car as it is a benefit. The tax amount is a percentage of the car’s list price and will depend on the carbon dioxide emissions and the type of fuel used.

Fuel used for private use is also subject to tax. This fuel can be claimed back under the Approved Mileage Allowance Payments scheme at a set rate per business mile.

The rate depends on the number of business miles and can be made free of National Insurance and tax if the employee is paid no more than the maximum calculated with the appropriate rate.

Employers have to pay Class 1A National Insurance on any taxable values of vehicles and fuel for private use. The rules regarding this are quite complex, so it’s best to consult an accountant or check the position with HMRC.

There are some special rules for VAT on business vehicles as well as the fuel for these cars. You can’t usually claim back any of the tax paid on a new car.

However, VAT registered businesses can reclaim it back if they can prove that the vehicle is used for business 100% of the time.

Do You Need to Inform HMRC When Buying a Company Vehicle?

In this section, we’ll take a look into whether or not you need to inform HMRC when you buy a business vehicle.

You must inform HM Revenue and Customs if the car or the fuel are provided as part of a salary sacrifice arrangement. If the car or fuel is provided in another way, then you may not have to report anything.

There are a few things that will ensure a car is exempt from reporting. If the business car falls into any of the following categories, then it won’t need to be reported to HMRC:

If the car is privately owned
If the car is available for business journeys only
If the car is adapted for an employee with a disability
Any ‘pool’ cars owned by the business

You also won’t need to report any fuel that employees pay for, including private journeys, as long as the employers buy the fuel for their own use or the employee buys it, and it is reimbursed during the tax year.

If the business vehicle does not fall into any of the above categories, then you must report them to HMRC and you may have to pay National Insurance on the value of the benefit.

Can You Claim for Fuel and Mileage with a Business Vehicle?

The question about whether or not you can claim mileage and fuel can be quite confusing. In this section, we will take a look at what you can claim.

If you use your own car for business journeys, then you can claim 45p tax-free as a business mileage allowance. UK mileage rates can differ, but it’s usually set at 45p per mile for the first 10,000 miles and then 25p for every mile after that.

If your company pays you back for mileage but pays you less than the 45p allowance, then you can claim the additional amount as a deduction from your taxable income when you do your tax return.

If you also travel with two or more people from the same business, then you can claim an additional 5p per mile passenger rate for every qualifying passenger.

What Insurance is Required for a Company Vehicle?

An additional cost that you may need to be aware of when purchasing a vehicle for your business is insurance. In this section, we will go over the insurance that is required for a company or business vehicle.

If you use your vehicle for work, then you will need business vehicle insurance. Business insurance is different to a regular insurance policy.

If you are in an accident while using your car for work and you don’t have business insurance, then you won’t be able to make a claim, and you may even be committing an offence.

Business car insurance comes in various classes depending on the type of cover that you need. Below is a list of the different business insurance classes:

Class 1 – This covers your car if you use it to drive between multiple work locations or if you need to visit customers or clients. This is the cheapest type of business insurance.
Class 2 – This gives the same coverage as class 1, but it also allows you to add a co-worker as a named driver who will also be insured to drive that same car.
Class 3 – This covers long-distance business driving. This is the most expensive option, but it may be necessary if you regularly make long business journeys.

Commercial car insurance is different to business car insurance as this covers people who use their car as part of their jobs, such as delivery drivers, taxi drivers, or driving instructors.

If you have a company car, then you usually won’t need business car insurance as it should be insured by the company. However, you should always check with your employer to ensure that you are properly insured for going on journeys.

Conclusion

As you can see, there are several things to consider when purchasing a vehicle for business use. In this article, we have gone over everything you need to know to make the right choice for you when it comes to choosing a vehicle.

We have taken a look at the various ways of financing a business vehicle, the taxes you need to pay, whether you need to report your new vehicle to HMRC, the mileage and fuel costs that you can claim, and what insurance is needed for a business vehicle.