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Some limited company contractors may decide to purchase a car via the company.
There are some important tax considerations to bear in mind when deciding whether to buy a company car, or claim a mileage allowance for business use of your own car.
Use of Personal Vehicle for business purposes
Most contractors use their own vehicles for business purposes.
For cars and vans, HMRC allows you to claim 40p per mile expenses for the first 10,000 business miles and 25p per mile thereafter.
For motorcycles, there is a flat rate of 24p, and a rate of 20p for normal bicycles.
You might also want to read HMRC's approved mileage rates page.
You can also claim an extra 5p/mile passenger allowance if you are transporting a co-employee somewhere for business purposes!
The calculation is simple, there is no reporting requirement, and you won't be liable to pay benefit in kind charges and increased national insurance rates which apply to company-owned cars.
Company Owned Vehicle
If you decide to purchase a vehicle via your limited company, then the tax implications become more complicated.
Since 6 April 2002, the Benefit in Kind charge for company cars registered from 1 January 1998 is calculated as a percentage of the car's price and linked to the CO2 emissions and the type of fuel it uses.
The value of the company car is determined by the official list price, regardless of any discounts you may have received from a dealer.
Your use of the company car is taxed as a 'benefit in kind' if you are a director or employee of a limited company.
Your accountant will fill in a P46 (Car) form is used to adjust your tax code so that the PAYE system taxes pay at the right level throughout the year.
You can find out full details on CO2 emissions, and calculate the likely cost of company car ownership HMRC CCF Calculator.
Also, refer to the HMRC Help sheet 203 - car benefits and car fuel benefits (PDF).
In Summary
In summary, despite the eroding effects of inflation since first introduced in 2002, most IT contractors will still be better off by using their own cars for business purposes, and reclaiming the 'mileage allowance relief' for each mile of business use (the period of sky-high petrol prices in 2008 perhaps offering a significant exception).
If your car has high maintenance bills, or you have a 'classic' car, there may be a benefit in company ownership. You could contract your accountant before deciding which route to take.
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