Best Finance Method for a Company Car

What is the most cost effective way to finance a company car? Well, the most accurate answer is there isn't one! Each method will have different implications depending on the size and style of business involved, and each car will affect the calculations differently. Here, however, we will try to simplify matters to at least put you on the right track.

Assuming you don't pay cash (even cash rich companies will often fund a car as there are usually many other projects which would provide a better financial return) the main options available are Lease Purchase, Finance Lease, Contract Hire.

Lease Purchase, or Hire Purchase, is probably the most straight forward. Basically it is a loan, with the vehicle being the responsibility of the customer, but complicated by comparing the way the deposit is taken, i.e. 3 x the monthly rental instead of the traditional 20%, and the inclusion of a balloon payment. These ideas were stolen from leasing, hence the term ‘Lease Purchase'. It really has nothing to do with car leasing – the asset is treated as being owned and tax relief is taken via a writing down allowance, currently capped at £3000 per annum. As a general rule it is accepted that this is the most tax efficient funding method for more expensive cars along with Contract Purchase.

Finance Lease is similar to Lease Purchase in that the value of the vehicle at the end of the contract is the responsibility of the customer. The difference is in the way that it is offset against tax. Instead of using a writing down allowance, a percentage of the total of all rentals falling into each tax year can be deducted from the company's net profit before tax. This percentage is dependent upon the level of CO2 emissions and the P11D value of the car. At the end of the contract the vehicle should be sold on to a third party with the customer typically retaining around 95% of the proceeds less any balloon payment.

Again, for Contract Hire, it is a percentage of all rentals which can be offset against tax. The difference is that it is the Contract Hire Company's asset and so their responsibility at the end of the contract. The car will be delivered and collected from your door, and, if the vehicle is within standard fair wear and tear guidelines, that will be the end of your responsibility. For larger companies there is also the added benefit of the asset being off balance sheet.

For Sole Traders and Partnerships, financing a car for the owner is relatively straight forward. There is no ‘benefit in kind' as for limited companies, as the proprietor or partner isn't subject to PAYE. The business percentage of these costs along with fuel, insurance and maintenance can be used to reduce the amount of tax paid personally. If the company is VAT registered it is generally accepted that Finance Lease or Contract Hire are the most tax efficient.

For Limited Companies providing a company car to an employee, there are 2 sides to consider. The company can offset the expense as above but will have to pay national insurance on the benefit in kind to the employee. The employee (including directors)receiving the benefit of a company car will pay additional tax on the ‘benefit in kind'. The amount of tax paid on this benefit is calculated by multiplying the ‘P11D' (the manufacturer's VAT inclusive list price including all accessories) by a percentage dependant upon the CO2 emissions of the car. The percentages for tax year 2010-11 range from 15% for 130 grams per kilometre CO2, to 35% for 230g/km, with a cap on the P11D of £80,000. The rates will change for 2011-12 to start at 15% for 125 g/km, increasing as before by 1% for every 5g/km. Also, the cap at £80,000 will be removed. Diesel cars attract an additional 3% over the equivalent petrol CO2, and there is an incentive rate of 10% for cars emitting less than 120g/km reducing to 99g/km in tax year 2012-13. Good luck for your next car leasing deals.