For many dentists, the amount of tax relief that can be claimed is quite low as there is limited business travel, so first work out which option is the best deal financially. This may not necessarily be the option attracting the most tax relief.
For the cash purchase of a car, tax relief on the cost of the car is given as a capital allowance, which is normally spread over the period of ownership. However, for sole traders and partners, claims are restricted to the business use of the car and an adjustment is made in the business tax computations based on the proportion of personal mileage relative to total mileage.
If a loan is taken out to buy the car, tax relief will be given on the loan interest in addition to capital allowances on the cost of the car. As with the capital allowances, the deduction for the loan interest is restricted to the business use proportion for sole traders and partners.
Acquiring a car on hire purchase is similar to acquiring a car using a loan, with capital allowances for the cost of the car and a deduction for interest, both of which are restricted for business use.
The tax rules for leasing a car are different, because the lessor retains ownership of the vehicle during the term of the lease. Capital allowances are not available because the lessor owns the vehicle but tax relief may be claimed on the rental payments. Again, this will be subject to a private use adjustment for sole traders and partners.
Cars with a CO2 emissions figure exceeding 110g/km are subject to a further 15% restriction. For example, for a lease rental of £1,000 per month with 20% business use and CO2 emissions of 140g/km, the tax deductible amount is £170 per month (£1,000 x 20% x 85%).
If there is an option to buy the vehicle with a single payment at the end of the lease, tax relief is available on the rental payments during the lease term and capital allowances may be claimed on the final purchase payment, subject to a private use adjustment.
Where a limited company buys or leases a car there is no restriction for business use proportions in the corporation tax computations. However, a benefit in kind (BIK) is chargeable on the employee/director and Class 1A National Insurance is payable by the company. The BIK is based on the car’s list price and its CO2 emissions.
For sole traders and partners, whichever option is chosen to acquire the car, tax relief on the running expenses is the same. All costs can be paid by the business and a private use adjustment is made in the business tax computations. There is no private use adjustment for running costs for companies.
However, where a company pays for private fuel, an additional BIK arises. This is based on a set annual rate, linked to the CO2 emissions of the vehicle. Very often this is not found to be worthwhile, as the amount of private mileage needs to be substantial to cover the additional tax cost.
An alternative option is for the car to be purchased personally. A mileage allowance can be claimed for business miles travelled, which includes a contribution towards all running costs. Currently, payments of 45p for the first 10,000 miles per tax year and 25p thereafter can be made without any BIK arising.
Cars can be a bit of a minefield when it comes to lease or buy decisions, so please get in touch if you have any questions.