Personal and Business Contracts Explained
The two are very similar but with some important distinctions. For both methods, deals are normally calculated over a 2 year or 3 year period these deals would be advertised as 3+23 or 3+35 contracts, this works with 3 payments in advance then 23 payments or 35 payments over the rest of the term.
Mileage allowance is agreed in advance and the minimum is normally 10,000 miles per annum and maximum is normally 40,000 per annum. Mileage over and above the agreed amount is charged at an excess mileage rate. This rate will be billed at the end of the contract. In both cases, you must return the car back to the finance company at the end of the agreed contract. Any damage must be repaired or will be charged in addition to the contract.
The main difference between the two methods is that with BCH, you are able to claim back 50% of the VAT which both contract types are subject to (often called blocked VAT)
So which one should you choose? Some time ago, the business route and the ‘company car’ was a standard component of executive salary packages but it’s become less common as the taxman moved against it by introducing company car and car fuel benefit charges which incur a personal tax liability. However a significant proportion of cars bought today in the UK are still company cars, so the business route is still attractive to many.
When the UK business buys plant and machinery, it can claim ‘capital allowances’ which can be written against profits, thereby decreasing taxes. However cars are a particular case and attract different treatment from other classes of equipment. If the car has some private use, then the car must be treated distinctly from all other assets owned by the company. The private proportion of total usage must be calculated and disallowed from the total. If the car has a value of over £12,000 then the maximum writing-down allowance (WDA) is £3,000 per annum and this is calculated before the private usage adjustment is made. Therefore records have to be kept to show what proportion of the annual mileage was indeed business and what proportion was personal.
There is no VAT tax benefit for a business purchasing a car when there is any personal usage at all. The VAT cannot be claimed back unless the vehicle is demonstrably for business purposes only. If the business leases the vehicle and you drive it for both business and personal purposes, then the company can claim the monthly cost of the lease against profits. The monthly amount claimable is limited to 85% if the vehicle is rated as emitting more than 160 g/km. If the car is rated at less than the key level of 160 g/km, then 100% of the amount is allowable. This is to encourage manufacturers to make cars that create less pollution.
The personal route requires you to keep a record of all business mileage. Your business can then repay you 40p/mile for the first 10,000 miles and 20p/mile thereafter, without you incurring any additional taxes. This does require you to keep a record, but you should be doing so anyway. It’s relatively simple and likely to be the best option if you only use the vehicle relatively infrequently for business purposes.