Driving Down Your Tax

If you are thinking about changing a business into a company just to save on tax, you should beware; problems can arise when you try to incorporate a car already used for the business. There are ways to avoid these problems.

Sole trader: For a sole trader, when the business pays all the motor expenses, a proportion of the expenses would be disallowed (quite often 10%) as a reflection of the private use of the vehicle. This usually was OK with the Taxman and the sole trader got tax relief for most of his motoring costs.

Company: If a Company is running the business, it is different. The Company will pick up all the motoring bills, the disallowance trick won’t work any more. The taxman will insist on treating the car as a perk, irrespective of the amount of non-business miles you do.

Why?

If the vehicle if owned by a company, the law states that you must be taxed on the benefit of having the car available for your own use, irrespective of whether you do use it for private mileage. This applies even if the vehicle is used almost 100% for the business.

Example

The car is a black taxi cab that has a list of CO2 emissions of 220gr/km and £30,000.

This person drives a 70,000 business and 1,000 non-business miles a year, i.e. 98.5% Business use! For the 2003/04-tax year the taxable benefit of having this as his company car would be:

Car benefit:	£30,000 * 31%	£9,300
Fuel benefit:	£14,400 * 31%	£4,464
Total taxable benefit:		£13,764
Tax due at 22%:	£13,764 * 22%	£3,028

With costs running of, £22,750 this person would have to pay tax of only 1.5% of this i.e. £341.25 as a sole trader. Now as a company car he now has to pay tax on £13,764.

To avoid it

Keeping the car in your own name is an option to avoid the company car benefit problem. You will have to pay the running costs but you could get 40p for the first 10,000 miles and 25p for the rest from the company.

Running costs:	71,000 * 25p	£17,750
Fixed costs:		£5,000
Total outlay:		£22,750
Less business	10,000 * 40p	£4,000
Mileage reimbursed	60,000 * 25p	£15,000
Net cost of running the car		£3,750

22% taxpayer

Even though the tax bill looks high, as a 22% taxpayer you save £722 per year (£3750-£3028) if you have transferred the car to the company. But if you pay 40% instead of 22% tax, the result will be reversed.

40% taxpayer

With the running costs the same. At 40% rate, your income tax bill for the company car would be £5,506 (13,764 * 40%). So you can save £1,756 (tax bill of £5,506 versus private running costs £3,750) if you could leave the car out of the company.

A car being left outside of business may not be a problem if the company can cover your motoring costs by paying you a rate for every mile you go for every business mile travelled in the car.

Having another car

In reality there is only one way round this and that is to keep a second car available for personal and family use and insure the company car only for business use (not including pleasure motoring). But, only a few insurance companies will write this sort of policy.

The tax bill for your car will now no longer reflect how much you actually use it, this means that your tax will keep on rising. Keep the car outside of business or run a second car for private use to reduce your tax bill if you are a 40% taxpayer.