Company Cars. Should Your VAT-Registered Limited Company Have a Company Car?

Company cars sound simple don’t they. The business buys or leases a car and pays the costs.

But once VAT, Corporation Tax and personal tax come into play, the decision isn’t always straightforward.

If you run a VAT-registered limited company, here’s what you need to know before putting a car through the business.

What Counts As a Company Car?

A company car is a vehicle that is:

• Owned or leased by the company, and
• Available for private use by a director or employee

Even occasional personal use (such as the school run, weekend trips, popping to the shops) counts.

The Benefits of having Company Cars

1. The company can claim most running costs

Your limited company can usually claim for things like lease payments or capital allowances, insurance, services and repairs as well as road tax and the MOT. These costs then reduce the company’s Corporation Tax bill.

2. Some VAT can be reclaimed on company cars

Because the company is VAT-registered, there may be VAT savings, but with limits.

For example, If the car is leased usually 50% of the VAT on the lease payments can be reclaimed (due to private use). But 100% of VAT on servicing and repair costs can normally be reclaimed.

If the car is purchased though, VAT can only be reclaimed if the car is used 100% for business. There is no private use allowed at all (and this is very rare for directors).

For most directors, VAT recovery on purchased cars isn’t available.

3. No mileage tracking

With a company car, you don’t need to keep mileage logs and you also do not need to submit mileage claims. This can be appealing if you want simpler admin.

The Disadvantages of Having a Company Car (And Why This Matters)

1. Benefit in Kind (BIK) tax – paid by you personally

If you use the company car privately, HMRC treats it as a personal benefit. This creates a Benefit in Kind (BIK) tax, added to your income. This has to be declared via Self Assessment (or collected through payroll)

Benefit in Kind (BIK) tax is based on the car’s list price and its CO₂ emissions.

🚨 Petrol and diesel cars often come with high BIK tax bills, especially for higher-rate taxpayers.

2. Extra National Insurance for the company

On top of BIK, the company pays Class 1A National Insurance. This is an additional cost that doesn’t apply if you use your own car and claim mileage. It’s deductible for Corporation Tax, but still a cash cost.

3. VAT on fuel can create more tax

If the company pays for fuel used privately, then HMRC may apply a fuel scale charge. This can wipe out any VAT benefit. In many cases, it’s not worth the extra tax.

4. Capital allowance limits on purchased cars

If the company buys the car, then high-emission vehicles get restricted tax relief and the tax benefit is spread over several years. This can be slower and less efficient than leasing.

5. Fixed costs even when profits drop

• Lease payments continue even in quiet periods
• BIK tax still applies, regardless of profits

This can strain cash flow if income fluctuates.

Why Electric Company Cars Are Different ⚡

Electric company cars are a separate story.

They usually offer:

• Very low BIK tax for directors
• Better Corporation Tax efficiency
• No fuel benefit charge on electricity
• More favourable long-term tax treatment

VAT on charging can be complex:

• Home charging needs careful handling
• Public charging VAT can usually be reclaimed by the company

👉 For many VAT-registered limited companies, electric cars are the only company car option that truly makes sense tax-wise.

Company Cars vs Using Your Own Car Comparison

Option	VAT Position	Company Tax	Personal Tax
Company Car (Petrol/Diesel)	Limited VAT recovery	CT relief + Class 1A NIC	High BIK
Company Car (Electric)	Better overall	Very tax-efficient	Very low BIK
Personal Car + Mileage	No VAT recovery	Mileage expense only	No BIK

Final Thoughts On Company Cars and VAT

For VAT-registered limited companies, company cars are rarely tax-efficient unless they’re electric.

Petrol and diesel company cars often mean high personal tax, limited VAT recovery and extra National Insurance for the company.

Before committing, it’s always worth running the numbers properly.

Thinking about a company car?

If you want to know whether a company car actually works for your business, we can:

• Compare company car vs mileage claims
• Calculate your personal BIK tax
• Check VAT recovery and Corporation Tax impact

👉 Send us a message or WhatsApp us for a free consultation. We’ll talk it through in plain English, no jargon.