Buying a Vehicle for Business Use

Are you interested in purchasing a vehicle for business use?

If you are planning on purchasing a vehicle for your small business or if you are looking for a fleet of vehicles for you and your employees, then there are several options available for you to explore before you make a final decision.

In this article, we will take a look at everything you need to know about buying vehicles for your business, including how to finance a vehicle for business use, the taxes that you need to pay for a business vehicle, the insurance that you will need for your vehicle, and whether you can claim fuel and mileage with a business vehicle.

So if you’re thinking about purchasing a vehicle for your business, read on to find out everything you need to know before going ahead.

Buying a Vehicle Through a Business

There are several different ways that you can finance a business vehicle, including buying outright, using a hire-purchase, leasing a vehicle, and taking out a business vehicle loan.

In this section, we will go over these different ways of buying a car for business to help you determine which may be the best option for you.

Buying a Vehicle Outright For Your Business

Buying a vehicle outright simply means that you pay the vehicle off in one lump sum. This is quite possibly the easiest method for getting a new vehicle for your business.

If you choose this option, once you buy the vehicle, it’s yours to keep in the business, and you can do whatever you like with it.

Pros

• ✔ Vehicle is immediately owned by your business.
• ✔ Usually cheaper over the long-term compared to paying interest, etc.
• ✔ Full capital allowance can be claimed if it's brand new and fully electric.
• ✔ No mileage conditions or other conditions of use.
• ✔ Vehicle can be sold and proceeds kept.

Cons

• ✖ Requires a large upfront outlay.
• ✖ Value of vehicles can depreciate quickly.
• ✖ Regular upgrades will require further significant outlays.
• ✖ All maintenance and associated risks are yours.

Buying a Vehicle Via a Hire-Purchase Lease For Your Business

If you choose to finance your vehicle with a hire purchase agreement, this means that you will pay an initial deposit followed by several monthly payments. Once you have completed the required number of monthly payments, the vehicle is then yours to keep.

Pros

• ✔ Spreads the cost over time and improves cash flow.
• ✔ Once the payments have been completed, the vehicle is yours.
• ✔ Interest charges on hire-purchase agreements may be tax-deductible.
• ✔ Full capital allowance can be claimed if it's brand new and fully electric.

Cons

• ✖ Total vehicle costs are increased by interest and other fees.
• ✖ Any deposit required may still affect your cash flow.
• ✖ The vehicle does not belong to you until all payments have been made.
• ✖ Some hire-purchase agreements will require a lump sum at the end of the agreement.
• ✖ Your lender can repossess the vehicle if you fail to make your payments.

Vehicle Leasing For Your Business

When you choose to lease a business vehicle, this involves paying fixed payments each month to hire the car. This option will have much less of an impact on your cash flow as you pay smaller monthly payments rather than making a large lump sum.

Pros

• ✔ Initial outlay is lower compared to buying a vehicle.
• ✔ Straightforward to budget with monthly payments.
• ✔ Many leasing agreements include maintenance packages.
• ✔ You can easily upgrade to another vehicle.
• ✔ Payments for a business vehicle under a vehicle lease are fully deductible if its emissions are less than 50g/km CO₂.
• ✔ If you are VAT registered, you can recover 50% of the VAT that you are charged on the payments.

Cons

• ✖ You do not own the car and it must be returned at the end of the agreement.
• ✖ Agreements will include mileage limits, with excess charges on the expensive side.
• ✖ You may be liable for damages if the vehicle isn't returned with only fair wear and tear.
• ✖ Often more expensive than ownership over the long term.

Purchasing a Vehicle With a Business Vehicle Loan

A business loan can come in a number of different forms.

Some banks or other credit providers will lend you money for a vehicle. This is similar to a traditional bank loan. Taking out a business vehicle loan allows you to buy a much more expensive car than you would have been able to afford otherwise.

The amount of money that you can receive from a loan will usually depend on your credit score.

Asset financing is another loan option offered by most large banks. These loans are offered to existing customers with at least two years’ worth of trading history, and the loans can usually be taken out for up to five years.

This will help your regular cash flow and will ensure that you can budget properly. Most banks can offer a bespoke loan that can cater to the needs of your business, and that is appropriate for your finances.

Pros

• ✔ Allows you to spread the cost of a business vehicle while owning it from day one.
• ✔ You have more flexibility in choosing a lender than a hire-purchase agreement.
• ✔ Interest paid on the business loan is often tax-deductible.
• ✔ Capital allowances can be claimed for depreciation.

Cons

• ✖ Overall cost of the vehicle is increased by interest charges.
• ✖ Your business remains liable for the debt until it is paid in full.
• ✖ Loan approval is dependent on a good credit history.
• ✖ Vehicle depreciation risks are yours.

Do You Need to Pay Tax on a Business Vehicle?

If you are thinking about purchasing a business vehicle, you may be wondering whether you will need to pay business vehicle tax. In this section, we will take a look at the taxes that you need to pay for a business vehicle.

If you are an employee, your employer will usually deduct any company car tax that is due to HMRC at the source.

If you are self-employed but trade as a limited company, then you will also need to deduct company car tax at the source.

Bear in mind that hiring an accountant can help you understand your tax liabilities and make sure you're deducting as much as possible for your business vehicle.

Company cars are taxed at various rates depending on several things. Below is a list of the things that will affect the amount of tax you pay:

• The taxable value of the car
• The type of engine (electric, diesel, petrol…etc.)
• The carbon dioxide emissions
• Your income tax bracket

Most vehicles will need to pay road tax. From 1st April 2025, electric vehicles also need to pay road tax.

Personal and Business Use

If you are an employee or you have a limited company, and you use your vehicle for both personal and business use, then you, as an employee, are taxed on the car as it is a benefit.

The tax amount is a percentage of the car’s list price and will depend on the carbon dioxide emissions and the type of fuel used.

Fuel Use for Private Use

Fuel used for private use is also subject to tax. This fuel can be claimed back under the Approved Mileage Allowance Payments scheme at a set rate per business mile.

The rate depends on the number of business miles and can be made free of National Insurance and tax if the employee is paid no more than the maximum calculated with the appropriate rate.

Employers have to pay Class 1A National Insurance on any taxable values of vehicles and fuel for private use. The rules regarding this are quite complex, so it’s best to consult an accountant or check the position with HMRC.

VAT on Business Vehicles

There are some special rules for VAT on business vehicles as well as the fuel for these cars. You can’t usually claim back any of the tax paid on a new car.

However, VAT-registered businesses can reclaim it if they can prove that the vehicle is used for business 100% of the time.

Do You Need to Inform HMRC When Buying a Company Vehicle?

In this section, we’ll take a look at whether or not you need to inform HMRC when you buy a business vehicle.

You must inform HM Revenue and Customs if the car or the fuel is provided as part of a salary sacrifice arrangement. If the car or fuel is provided in another way, then you may not have to report anything.

There are a few things that will ensure a car is exempt from reporting. If the business car falls into any of the following categories, then it won’t need to be reported to HMRC:

• If the car is privately owned
• If the car is available for business journeys only
• If the car is adapted for an employee with a disability
• Any ‘pool’ cars owned by the business

You also won’t need to report any fuel that employees pay for, including private journeys, as long as the employers buy the fuel for their own use or the employee buys it, and it is reimbursed during the tax year.

If the business vehicle does not fall into any of the above categories, then you must report it to HMRC, and you may have to pay National Insurance on the value of the benefit.

Can You Claim for Fuel and Mileage with a Business Vehicle?

The question about whether or not you can claim mileage and fuel can be quite confusing. In this section, we will take a look at what you can claim.

If you use your own car for business journeys, then you can claim 45p tax-free as a business mileage allowance. UK mileage rates can differ, but it’s usually set at 45p per mile for the first 10,000 miles and then 25p for every mile after that.

If your company pays you back for mileage but pays you less than the 45p allowance, then you can claim the additional amount as a deduction from your taxable income when you do your tax return.

If you also travel with two or more people from the same business, then you can claim an additional 5p per mile passenger rate for every qualifying passenger.

What Insurance is Required for a Company Vehicle?

An additional cost that you may need to be aware of when purchasing a vehicle for your business is insurance. In this section, we will go over the insurance that is required for a company or business vehicle.

If you use your vehicle for work, then you will need business vehicle insurance. Business insurance is different to a regular insurance policy.

If you are in an accident while using your car for work and you don’t have business insurance, then you won’t be able to make a claim, and you may even be committing an offence.

Business car insurance comes in various classes depending on the type of cover that you need. Below is a list of the different business insurance classes:

• Class 1 – This covers your car if you use it to drive between multiple work locations or if you need to visit customers or clients. This is the cheapest type of business insurance.
• Class 2 – This gives the same coverage as class 1, but it also allows you to add a co-worker as a named driver who will also be insured to drive that same car.
• Class 3 – This covers long-distance business driving. This is the most expensive option, but it may be necessary if you regularly make long business journeys.

Commercial car insurance is different to business car insurance as this covers people who use their car as part of their jobs, such as delivery drivers, taxi drivers, or driving instructors.

If you have a company car, then you usually won’t need business car insurance as it should be insured by the company. However, you should always check with your employer to ensure that you are properly insured for going on journeys.

If you're keeping tools in this vehicle, then you may also want to check that they're adequately covered in case there's an accident or they're stolen. Tool theft is a growing problem across the UK, so it's something to be prepared for.

Conclusion

Purchasing a vehicle for business use can be done in various ways, and the ideal method for you will depend on your business's circumstances.

Explore questions like these as you consider your options when buying a company car or van:

• Do you have a large amount of money to spend upfront on a deposit?
• Is your business in a position to commit to monthly repayments?
• Will the vehicle be used for personal use as well as business use?
• Do you want to own the vehicle or are you happy leasing it?
• Are you confident navigating the tax issues around business vehicles, or do you need support?

These are just a few questions to get you started. As every business is different, you should take a close look at your finances before buying a car for business.