How to buy a vehicle through a limited company

Buying a vehicle through a limited company works similarly to how you may have purchased a vehicle in your personal life. However, managing the expense on your company’s accounts takes some consideration in order to file them correctly and manage the financial commitment to your business. 

Learn the options available to your company as you buy a vehicle in this article, including:

• Three ways you can buy a vehicle through a limited company
• Can you reclaim the VAT?
• How to declare the vehicle as an employee benefit
• How to expense the running costs
• How to simplify your company expenses and accounting

1. Purchasing the vehicle outright

Like acquiring any other asset for your company, you can purchase a vehicle by paying the purchase price in full. This can help simplify your accounting if you’re just starting out as you won’t have to calculate and expense the interest you would otherwise pay through a loan. You may also be able to access deals with better value since the seller will receive a lump sum of thousands of pounds from your purchase versus smaller finance amounts over time. Similarly, you won’t face mileage limitations from the leasing company as the vehicle is entirely yours to do with, as you please.

However, vehicles are notoriously assets that depreciate (or lose their value) very quickly – especially if you are considering buying new. Therefore, this may not be the best business decision for your company’s balance sheet. Finally, paying such a large lump sum, while good for your monthly cash flow, can otherwise restrict your ability to invest in your business elsewhere while you save.

2. Hire purchase agreement

Like purchasing your new company vehicle outright, you could consider a hire purchase agreement instead. Like before, this purchase method allows you to own the asset (the vehicle) in full. However, you pay off the loan used to purchase it over time. You can still put modifications or upgrades on the vehicle, using it as much as you want all while paying a smaller, more manageable amount over time.

However, because interest is applied to the loan, you will pay more for the car versus having paid for it in full. Therefore, even if you can access favourable interest rates, you may depreciate the vehicle considerably from driving it. In this situation, you may be faced with selling the vehicle at a later date and cannot charge enough to settle the loan in full. In addition to this, the loan amount functions as a mandatory ongoing commitment to your business, restricting your cash flow over time. Therefore, there is an element of long-term risk involved that you should consider. 

3. Leasing a vehicle

Finally, you could also consider leasing a vehicle. In this example, you don’t own the asset. Instead, you have the ability to use it. This method can be very low-risk as you’re able to walk away after your lease term has finished and/or upgrade to a new vehicle. Similar to before, the ongoing lease agreement can be cheaper in the short term with smaller payments throughout.

However, there are mileage restrictions placed on your business usage in order to limit the depreciation of the vehicle while you use it. This is because sellers will try to re-sell the vehicle or re-lease it after you’re done. While you will also have mileage limits placed on your usage by your insurance company, you can adjust these at a later date. Therefore, the mileage restrictions on lease agreements can be very limiting if you need to drive more as your business grows. While they can sometimes be adjusted, pricing for higher mileage is expensive, and some agreements may prohibit changes after the lease has begun.

Once you’ve found a car through a local dealership or retailer that you like, you use one of the above methods to buy a vehicle for your company.

Limited companies can reclaim the VAT on vehicle purchases as long as VAT has been applied to the car and your company is VAT registered. When filing your VAT return, the VAT rate differs depending on whether you’ve bought a new car or have a lease agreement.

You can reclaim the full VAT amount on new car purchases as long as you only use the car for business purposes. Note that HMRC doesn’t allow any personal usage if you reclaim the VAT. Proving this can be difficult, therefore, you may wish to write a term into your employment contract as the company director regarding the company car.

Fortunately, HMRC recognises used cars as ‘new’ to the company and so you can claim VAT on second hand or used cars. Some second-hand car dealers use the VAT margin scheme. In which case, you should remain the VAT amount listed on your purchase invoice rather than the typical 20%.

If you lease a car, you can usually claim 50% of the VAT. However, as before, you may be able to reclaim the VAT in full if the car is used only for business purposes.

If you’d like to drive the company car for personal usage, you’ll need to list it as a benefit on your taxes and have the company pay additional income tax and national insurance.

Expenses for vehicles vary depending on whether the vehicle benefit is a car or a van. Therefore, follow the steps listed in each of the links provided according to which vehicle you’ve bought. Unfortunately, this will prohibit you from claiming the VAT back on the purchase.

HMRC offers two ways to claim vehicle expenses: the Flat Rate Scheme and Capital allowances and you need to use each method consistently when expensing. 

When claiming travel expenses, journeys need to be for your work, and not part of your regular commute. For example, if you have a main office location, you cannot claim travel expenses to and from home and this location. However, you can claim on trips to client homes or offices, trade shows and other work journeys because they are not part of your regular work travel.

Managing your business expenses shouldn’t take time away from running your business. Use the Countingup app to save time and stress from your accounting and stay focused on growing your business instead.

The Countingup business account makes it easy to keep on top of your business finances. The app comes with free built-in accounting software that automates the time-consuming aspects of bookkeeping. You can use the automated expense categorisation tools to make your records accurate and organised.

Get started with a three month trial