Do you fully understand the tax implications?
Most business owners will use a vehicle in the course of running their business, at least to some degree. From a tax point of view this is an opportunity to get things very right or very wrong and it is good to understand this BEFORE buying a new vehicle. If you are thinking of changing your vehicle you should ensure that you understand the tax implications first. The type of vehicle you drive, how you choose to finance the purchase of that vehicle and whether you operate as a sole trader or a Limited Company can all have significant tax implications when it comes to using a vehicle for business.
This series of articles are for illustrative purposes only and do not constitute professional advice. To make an appointment to discuss any of the issues raised in these articles and the services we provide please e-mail dave@fhm.ie.
FHM Accountants are an online, pro-active, award-winning firm of Chartered Certified Accountants, Business Mentors & Registered Auditors with physical offices in Wexford, Wicklow and Longford serving clients throughout the Republic of Ireland.
Part 1 of 7 – Tax implications of using a vehicle for business
BIK (Benefit In Kind) on company car – Let’s assume Mr. Jones operates through a Ltd. Co. – he buys a low mileage 2012 Mercedes S-Class for €15k through the Ltd. Co. Mr. Jones recalls hearing about BIK on a company car but thinks – ‘’it only cost €15k – how bad can the BIK be? The accountant can deal with that at the end of the year!’’
Unfortunately BIK can be very harsh as it is based on the Original Market Value of the car – not the amount you pay for it! In this case the S-Class had an OMV of €150k and the BIK is 30% = €45K – this will result in a €22.5k annual tax bill on a car that cost €15k!
Obviously this is an example of how to get it very wrong. Mr. Jones should have spoken to us first! (By the way – in part 6 below we will return to Mr. Jones and show how he could have got his Mercedes S-Class in a much more tax efficient way).
Part 2 of 7 – Tax implications of using a vehicle for business
Mr. Murphy is a sole trader and uses his car 100% for business – his wife’s car is used for all personal travel. Mr. Murphy wants to change his car and contacts us before doing so. We ask Mr. Murphy what type of car he likes and he says that he has always wanted a BMW 5 Series!
We advise Mr. Murphy to go for a post July ’08 2l diesel model as it has low emissions – he buys a low mileage 2012 BMW 5-Series 2l diesel for €10k – as this is a low emission vehicle it has a deemed cost of €24k for Income Tax purposes (regardless of how much he actually pays for it) – this means he will save €12k tax over the next few years – not only does he get the car for free – he will actually make €2k!
This is an example of how to get it very right and shows the benefit for Mr. Murphy of contacting us BEFORE he changed his car. In part 3 below we will tell you how Mr. Murphy could choose to buy a brand new €55K 5-seat luxury Ford Ranger for only €22.5k!
Part 3 of 7 – Tax implications of using a vehicle for business
In part 2 above we saw how Mr. Murphy (a sole trader) could get a BMW 5 Series for free, courtesy of the Tax Man. What if Mr. Murphy would prefer a brand new €55k 5 seat luxury Ford Ranger?
The 5 seat Ford Ranger 4WD pickup is officially classed as a commercial vehicle with road tax of only €333 – as a commercial he can reclaim €10k VAT and write off €45k against tax giving a tax saving of €22.5k over a number of years and a net cost of only €22.5k on a vehicle that retails for €55k!
However – if buying through a Limited Company beware of BIK (see part 1)– although a commercial for VAT, VRT and Road Tax it is a passenger vehicle for BIK (due to the rear seats) – however, in part 4 below we will tell you how to avoid BIK if the vehicle qualifies as a ‘’pooled vehicle’’.
Note: If a vehicle (SUV for example) was originally a passenger model and subsequently converted to a 2-seater it is still regarded as passenger for BIK.
Part 4 of 7 – Tax implications of using a vehicle for business
In part 3 above Mr. Murphy bought a luxury 5 seat Ford Ranger pickup commercial. However, if buying this type of vehicle through a Ltd. Company beware BIK (see part 1 above) – although this is a commercial for VAT, VRT and Road Tax it is a passenger vehicle for BIK purposes (due to the rear seats) and liable to up to 37.5% BIK (depending on emissions). You can avoid BIK if the vehicle qualifies as a ‘’pooled vehicle’’.
So, what is a ‘’pooled vehicle’’?
1. the vehicle is made available to, and is actually used by, more than one employee and is not ordinarily used by one employee to the exclusion of the others, and
2. any private use of the vehicle by the employees is merely incidental to business use, and
3. it is not normally kept overnight at the home of any of the employees unless purely for safe-keeping.
Where all of the criteria above are met no BIK is due. If any of the criteria are not satisfied, BIK applies.
In part 5 below we will look at the tax implications of the 2 most common methods used to finance the purchase of a commercial vehicle – Lease v’s Hire Purchase.
Part 5 of 7 – Tax implications of using a vehicle for business
We will now look at tax implications of common methods of finance for a commercial / van – Lease, Hire Purchase & PCP.
A simple example – a van retails for €36,900 – (€30,000 + €6,900 VAT). With HP you can claim back all the VAT on day 1 whereas with say a 36 month lease you claim back the VAT over the 36 months.
But what about the €30,000? With HP you will write that off over 8 years whereas with the 36 month lease you will write if off over 36 months (plus a nominal secondary amount for a further 5 years).
Summary: While HP offers an initial cash flow advantage on VAT the lease will result in a quicker tax deduction for the full cost.
There is also PCP, although this is more common for cars. If used for a commercial it is more akin to a rental agreement for tax – VAT reclaimed each month and net payments straight to the P&L a/c. If used for a car the amount claimed for tax will be linked to emissions.
In part 6 below we look at claiming tax free mileage payments in a Ltd. Company when you use a personal car for business journeys.
Part 6 of 7 – Tax implications of using a vehicle for business
We now look at claiming tax free mileage payments when you use a personal car for business journeys in a Limited Company.
In part 1 above we met the unfortunate Mr. Jones who bought a lovely 2012 Mercedes S-Class for €15k through his Ltd. Co. and was faced with an annual tax bill of €22.5k BIK on a car that cost €15k!
What if Mr. Jones still wants his 2012 Mercedes S-Class but wants a more tax efficient way of doing things? Well, let’s assume that Mr. Jones does 25,000 business km travel in his car each year. If he buys the car in his personal name rather than through the company he could be claiming €9k p.a. tax free mileage allowance from his company – all he has to do is keep records in the prescribed manner and claim at the civil service mileage rates per km – that would be a far better solution and shows the benefit of contacting us BEFORE buying the car!
In part 7 below we take a look at Electric Cars.
Part 7 of 7 – Tax implications of using a vehicle for business
In the final part of this article we look at Electric Cars. From a tax point of view these are an attractive proposition.
VRT & Motor Tax on Electric cars are the lowest rates possible.
BIK does not currently apply to an electric car (this does not include Hybrid’s) where the Original Market Value was less than €45k. Where the Original Market Value was above €45k BIK is only due on the excess. In addition, BIK on electric cars is at the lowest rate available.
For electric cars, a company may opt for the accelerated allowance scheme for energy efficient equipment. This means that 100% of the cost of the car, up to the specified limit of €24,000 (as well as charging facilities provide at the employer’s business premises) can be claimed as an expense for tax for the year in which the car is first provided and used.
Summary – Tax Implications of using a vehicle for business
We hope you have enjoyed reading all 7 parts of this article outlining the tax implications of using a vehicle for business.
Most business owners will use a vehicle in the course of running their business, at least to some degree. From a tax point of view this is an opportunity to get things very right or very wrong and it is good to understand this BEFORE buying a new vehicle. If you are thinking of changing your vehicle you should understand the tax implications. The type of vehicle you drive, how you choose to finance the purchase of that vehicle and whether you operate as a sole trader or a Limited Company can all have significant tax implications.
(Unfortunately a Rolls Royce Phantom is not very tax efficient unless you want to let the staff have the use of a really nice pooled vehicle!)
FHM Accountants are an online, pro-active, award-winning firm of Chartered Certified Accountants, Business Mentors & Registered Auditors with physical offices in Wexford, Wicklow and Longford serving clients throughout the Republic of Ireland.
The series of articles are for illustrative purposes only and do not constitute professional advice. To make an appointment to discuss any of the issues raised in these articles or the services we provide please e-mail dave@fhm.ie.