Tax relief on cars for medical professionals
We’re often asked by our medical clients how they should purchase any cars they use for business in order to get optimum tax relief. You can only claim for the car’s business use, which should be determined by a mileage log, demonstrating your business mileage as a proportion of your total mileage. HMRC would expect to see this in the event of an enquiry.
There are limited claims that can be made for business trips if you’re an employee i.e. a salaried GP, and this would be based on your business mileage at HMRC-approved mileage rates.
However, salaried GPs who are undertaking visits should keep a record of those business miles and make the appropriate claims for tax, either on form P87 or their tax return.
If you’re a GP partner, then you can claim the approved mileage rate, as set out by HMRC, for your business miles. These rates are deemed to cover the car’s running costs and wear and tear.
Alternatively, you can claim on an actual basis, based on your actual costs. You can claim a business proportion of your total car running costs and can include capital allowances on the car’s value. You can't pick and choose the route every year; once a method of claiming has been picked, you must continue with that method.
If you have a limited company, as an employee of that company, it could purchase you a car for business and personal use. The company would claim Corporation Tax Relief on the cost of the car, but as you would be using it for personal and business use, there would be a taxable benefit-in-kind charge back on you. This can be attractive if the company has purchased you a new electric car, as the benefit-in-kind tax rates are currently very low.
If you lease or rent a car, then you claim tax relief on the rental payments subject to business use. For example, if you pay £300 a month and use the car 25% of the time for business use, then the claim to reduce your taxable income is £900 (£300 x 12 months x 25% business use). A claim can be made every year that you’re paying some or all of the lease or renting costs.
There can be a further reduction to the claim of 15% depending on the car’s CO2 emissions. From 6 April 2021, the deduction applies to cars with CO2 emissions of 50g/km or more. Previously, the deduction applied to cars with CO2 emissions of greater than 110g/km.
Again, subject to business use, you can claim additional tax relief on any running costs including insurance, petrol, repairs and servicing.
Buying a car
If you buy a car and have chosen not to use the mileage rate, then the claim for the purchase of the car is based on a depreciation/capital allowance rate set by HMRC. The capital allowance claims set by HMRC change and currently range from 6% to 100% depending on the CO2 emissions and whether the car is new or used.
The 100% claim only relates to new and unused cars with CO2 emissions of 0g/km. This means if you buy an electric car for £50,000 and use it 25% of the time for business, then you can reduce your taxable income by £12,500 in the first year of ownership (£50,000 x 25%). There’s nothing to claim in the following years, as you’ve claimed capital allowances in full on the purchase price.
When you sell the car, you’ll pay back a proportion of the tax relief based on the disposal proceeds and the proportion you have used it for business purposes. So, over the period that you own a car, you’ll be claiming the cost of that car to you, subject to business use. For example, if you continued to use the car 25% of the time for business use and sold it three years later for £20,000, then it has cost you £30,000. The amount you should have reduced your taxable income for is £7,500, but in year one, you reduced your taxable income by £12,500, so you’ll be taxed on £5,000 in the year of disposal.
This applies to any vehicle you buy, although the amount you claim each year under the capital allowance regime will depend on the CO2 emissions. The lower the CO2 emissions, the more tax relief you’re claiming upfront. In essence, it’s a cashflow advantage, since you’ll always claim the business usage percentage on the value that the car has cost you over your ownership.
Cars purchased on Personal Contact Purchase (PCP) arrangements are more likely to be lease rentals rather than a purchase of the car. This means you’ll probably claim tax relief on the PCP payments, like the lease or rental option, and not for the depreciation/capital allowances.
Cars purchased under hire purchase arrangements are treated as if you’ve purchased the car and therefore capital allowances are available. However, there are very few cars that are bought on finance that will be a true hire purchase, so unless the car is bought outright or with a separate bank loan, no capital allowances will be available.
Any interest on loans used to buy cars can also be claimed for tax relief, again, subject to business use.
Overall, the tax relief will follow the expenditure, so purchase a car in the most economical way that makes sense for you and the car you’re considering.
If you have any queries about tax relief on cars, please ask your usual Larking Gowen contact. You can find our contact details in the Our People section on our website. Alternatively, call 0330 024 0888 or email email@example.com.
Sign up to receive the latest news from Larking Gowen