Purchasing a car through your limited company can be complicated, as there are many inherent risks and hidden costs. Many entrepreneurs and small business owners have been wondering whether they should actually buy a car through their limited company, and if it is worth it.
Before we answer this question, let’s understand the basics of purchasing a car through a limited company. Companies that wish to buy a car to be used for business purposes must use a hire purchase agreement. This entails a process in which the full purchase price of the car is divided into monthly payments that can be spread over a period of years. When these payments are made in full, you own the car. Some companies may also choose to lease the car instead of purchasing it outright.
The main benefit to buying a car through a limited company is that it can provide better value in terms of taxes. The cost of the car and the interest payments of the hire purchase agreement can be claimed as tax relief, which can be a considerable sum. In addition, the company can claim capital allowances which effectively means that the company gets tax relief for expenses, such as the depreciation of the car.
Another advantage to consider is that the car can be used to generate income. As it is owned by the company, it can be hired out, and you can receive an additional income which goes back into the business. This is a great way to offset the cost of the car in the long-term.
However, it is important to note that there are also some risks to consider when purchasing a car through a limited company. For example, if the company gets into financial difficulty, bankruptcy proceedings could be initiated, and then the car may have to be sold off in order to pay the creditors. This could be a significant financial loss for the company. Also, it may be difficult to secure a loan from a bank if your credit history is not strong.
The question remains: should you buy a car through your limited company? The answer depends on your individual circumstances. If you are confident that you can pay off the loan on time and that you can handle any risks, then it may be worth considering. But if you are unsure, then it is best to consult a financial adviser for advice.
Other Aspects to Consider
In addition to determining whether buying a car through a limited company is worth it from a financial perspective, there are many other aspects to consider. For example, if you decide to purchase a car through a limited company, you will need to be aware of the relevant laws and regulations. Companies that purchase cars must abide by certain rules, such as the Road Traffic Act, and will need to ensure that appropriate insurance is in place.
Another factor to consider is the choice of car. Many companies opt for second-hand cars in order to reduce the cost of the purchase, but this can come with risks, such as mechanical issues and unexpected costs. However, if buying a second-hand car is your only option, then there are ways to reduce these risks, such as purchasing a car that has been inspected and has a good service history.
Finally, it is important to make sure that you have the right paperwork in place. This includes a hire purchase agreement, insurance documents and a valid tax certificate, which you must keep updated. This paperwork needs to be kept up-to-date and stored securely.
Additional Costs
One of the important things to remember when purchasing a car through a limited company is that there are additional costs that need to be considered. These include fuel and service costs, insurance payments and road tax. The car will also need to be regularly serviced and maintained in order to keep it in good condition and to ensure that it remains safe to drive.
In addition to these costs, there may also be additional costs associated with the hire purchase agreement. For example, if you decide to pay off the loan early then you may have to pay a penalty fee. It is therefore important to carefully read through the hire purchase agreement in order to understand any additional costs. This will ensure that you know exactly what you are getting into before you go ahead and buy a car through your limited company.
The Legal Side
Buying a car through a limited company is not as straightforward as it may seem. There are various legal aspects that you need to consider when purchasing a car, such as the hire purchase agreement and the insurance documents. Furthermore, if you are leasing the car instead of purchasing it outright, then you will need to ensure that you understand the terms of the lease and that you abide by them.
It is also important to remember that if you are going to use the car for business purposes, then you will need to register it as a business vehicle with the DVLA. This will enable you to get tax relief for the costs associated with the car, and it will also enable you to claim any additional expenses associated with the use of the car.
In addition, you will need to make sure that you have the right legal documents in place when purchasing a car through a limited company. This includes a hire purchase agreement, an insurance certificate and a vehicle registration document. It is important to ensure that these documents are up-to-date and are stored securely.
Maintenance
If you decide to buy a car through your limited company, then you will need to ensure that it is regularly serviced and maintained. The car will need to be checked on a regular basis in order to ensure that it remains in good condition and is safe to drive. It is important to keep records of the service history of the car so that you can keep track of when the car was serviced and what was done.
In addition, it is important to make sure that the car is covered by appropriate insurance. There are various types of insurance policies available and it is important to ensure that you have the right type of cover in place in order to protect the car. This will ensure that the car is covered in the event of any accidents or damage.
Extra Tips
When purchasing a car through a limited company, it is important to factor in additional costs such as fuel and maintenance. These costs can add up significantly over time and can make a difference when it comes to determining whether buying a car through a limited company is financially viable. It is therefore important to consider these costs when making the decision.
Furthermore, it is important to remember that if you buy a car through a limited company, you will need to pay additional taxes. This includes a road tax and a general VAT (Value Added Tax) of 20%. It is therefore important to factor in these costs when deciding whether or not to buy a car through a limited company.
Finally, it is also important to ensure that you have the correct legal documents in place before you make the purchase. This includes a hire purchase agreement, an insurance certificate and a valid road tax certificate. It is important to ensure that these are up-to-date and stored securely.
