We are sharing this update from ACCA, our professional body, for the interest of clients and contacts. The content is (c) ACCA

Company cars and tax

 

Company cars remain a popular employee benefit. Some company car drivers also receive free fuel for private use.

Both employers and employees need to consider the tax implications of company cars before making decisions. Employers will pay class 1A national insurance contributions (NIC) on the benefit. Employees pay income tax on the benefit but do not pay NIC. A car’s CO₂ emission levels can have a significant impact, as can the decision whether to buy, lease or use your own car.

 

Employee car tax

 

Company cars are taxed as a benefit in kind for most employees and income tax is payable

• There are some special cases.
• Pool cars used by more than one employee for their work are not taxed. A pool car must not normally be kept overnight at an employee’s home.
• Employees pay tax at their top rate

The income tax charge is based on an assumed benefit

• This is calculated as a percentage of the car’s list price. The percentage depends on the car’s CO₂ emissions. The higher the emissions, the higher the assumed benefit is.
• For 2019/20, the percentage for petrol cars ranges from 16% up to 37%. Diesel cars that do not meet the RDE2 standards for cleaner emissions pay an extra 4%.
• For 2020/21, the rates range from 0% (for cars with zero emissions) up to 37%, with more polluting diesel cars paying an extra 2%. The rates for different emissions depend on whether the car was registered before or after 6 April 2020 (when emissions testing rules changed).
• There are substantial advantages for zero-emission electric cars. While the rate for 2019/20 was 16%, this falls to 0% for 2020/21 before slowly rising in future years.
• For low-emission hybrid cars (below 50gm of CO₂ per kilometre), the rate depends on the electric range. 2020/21 rates range from 0% (for an electric range over 130 miles) to 12% (range below 30 miles).
• The tax cost to the employee depends on their tax rate. For example, for a car with a list price of £20,000 and a rate of 30% (based on emissions), the benefit in kind would be £6,000 (30% of £20,000). The income tax charge would be £1,200 for a basic rate taxpayer (20% of £6,000) or £2,400 for a higher rate taxpayer (40% of £6,000).
• The rates applied to each CO₂ band have increased every tax year. It is currently the government’s intention to continue that trend to persuade businesses to buy more fuel-efficient cars.
• Higher business mileage now has no effect on the tax charge. Nor has the age of the car, except that a special scale charge applies to cars registered before 1998.

The list price is based on the price published by the manufacturer, importer or distributor

• Delivery charges, tax and VAT are included, but not vehicle excise duty.
• The list price of any accessories (plus fitting and VAT) is also included.
• Accessories worth up to £100, fitted after the car has been delivered to the employee, are excluded. So are mobile phones, equipment necessary to a disabled driver, and equipment necessary to the driver to perform their duties.
• The cost of enabling the car to run on compressed natural gas (CNG) or liquid petroleum gas (LPG) is also excluded.

Employees provided with a van pay tax if there is any significant private use

• Employees are taxed on a benefit of £3,490 for 2020/21 (£3,430 for 2019/20) for all levels of non-zero CO₂ emissions.
• For zero-emission vans, the charge is reduced to £2,744 for 2020/21 (£2,058 for 2019/20).
• If the only private use is travelling between home and work, employees pay nothing.
• If several employees share the same van, the value of the benefit for each employee is reduced on a just and reasonable basis.

Tax on fuel

If any free or subsidised fuel is provided for private use in a company car or van, the employee pays income tax on this benefit. The value of the benefit depends on the fuel efficiency of the engine, not on how much fuel is provided.

The percentage charge for each car is normally the same as that car’s charge for car benefit

• Cars with higher CO₂ emissions have a higher percentage charge.
• Discounts and exemptions apply for electric cars and vans.

The percentage charge is applied to an annual figure to determine the taxable benefit

• This fixed figure or ‘fuel charge multiplier’ is the same for all cars and is not linked to list price.
• The benefit charge multiplier is £24,500 in 2020/21 (£24,100 in 2019/20). So, for a car with a percentage charge of 30%, the taxable benefit would be £7,350 for 2020/21 (30% of £24,500).
• The income tax payable for a basic rate tax payer of 20% on £7,350 would be £1,470.
• For a higher rate tax payer, the tax charge at 40% on £7,350 would be £2,940.

Van drivers are exempted from the fuel benefit charge if the van is used solely for business purposes

• If there is any significant private use of the van, drivers are taxed on a benefit of £666 in 2020/21 (£655 in 2019/20).

The tax-free benefits

Though the use of a car and the value of the fuel are taxed, company car drivers do not pay extra tax on some other benefits. The cash value of these benefits often outweighs the cost of any car tax paid. Depending on the vehicle and its reliability, the value to the employee will be at least £600 a year, and could be much higher.

Knowing there will be no surprises in the shape of repair bills or insurance increases also allows employees to take motoring costs out of the family budget.

The benefits that escape extra tax are:

• maintenance and servicing
• repairs
• insurance
• road tax
• membership of a motoring organisation

 

Reducing tax costs

Employees and directors can reduce the tax paid on company vehicles in several ways.

Contribute up to £5,000 towards the cost of buying the car

• This reduces the taxable value (list price) of the car by the amount contributed.
• You will need to keep the car for several years before you save money. How long depends on the car’s size and age, your tax rate and the amount contributed.
• In practice, this approach is not particularly tax-efficient. It is of most use to directors or owner-managers who want more expensive cars or who want to reduce the amount of capital the business has tied up in cars.

If you pay the full cost of fuel for private travel, you do not have to pay private fuel tax

• This includes paying for fuel for journeys to and from work. Paying for only part of the fuel does not reduce the tax paid.
• Depending on the individual’s circumstances, it may be worth accepting fuel for private use, bearing in mind increasing fuel costs.
• For example, for a car emitting 130gm/km, and so subject to a 30% charge, a basic rate taxpayer would pay £1,470 in fuel benefit tax for 2020/21. If the private fuel they use costs £122 a month or less, they would be better off paying for their petrol.
• A 40% taxpayer driving a car with emissions of 215gm/km giving rise to a 37% scale rate would have a tax bill of £3,626 for 2020/21. They would have to be using petrol worth £302 a month to make it worthwhile accepting fuel for private use from the employer.

Second cars are taxed on the same basis as first cars

Sharing a car reduces the benefit each employee pays tax on

• The value of the benefit for each employee is reduced on a just and reasonable basis. For example, if two employees share a company car equally, normally each of them would be taxed on half the usual benefit.
• If the employees are also taxed on fuel provided for private use, the value of this benefit is reduced in the same way.

You are only taxed on the proportion of the year you use the car

• Tax due on fuel can also be worked out proportionately if you give up the ‘free’ fuel and so long as the fuel is not reinstated later.

 

No car or your own car?

Some staff will be better off without a company car; it depends on what the company offers.

Some companies offer employees extra salary instead of a company car

• This is worth considering if the company car has high emissions. The number of miles you drive on company business no longer reduces the tax charge – but it will affect your running costs.

Some companies provide benefits for employees who use their own cars for business

• These are normally paid as mileage allowances. The size of the allowance will be decided by the company.
• Companies may decide to pay the optional passenger rate of up to 5p a mile for each passenger. The passenger must be an employee who also needs to travel on business.

Employees who use their own cars usually receive a mileage allowance

• If mileage allowances are paid in line with the HMRC Approved Mileage Allowance Payments (AMAP), there is no tax or NIC liability.
• AMAP for all cars (and vans) are 45p a mile for the first 10,000 miles and 25p a mile thereafter, unchanged since April 2011.
• The rate for employees who use their own motorcycles for business is 24p a mile.

Employees who do not receive full mileage allowances may claim relief on their tax return

• The relief is given on the difference between the AMAP and the amount paid by their employer.

Other employer contributions to the running costs of employees’ cars are taxable

• But employees can claim a tax deduction, using AMAP.

 

Tax for employers

Employers must pay class 1A NIC on the benefits

• Contributions are based on the taxable value of cars and fuel given to employees.
• The rate of contributions is 13.8%.
• Employers must use the car benefit and fuel scale charges when calculating these.

The tax due on company cars and private fuel is collected through PAYE

• You can include car benefits in payroll by registering with HMRC before the start of the tax year. If so, you do not need to use form P46.
• If you are not payrolling car benefits, you must notify HMRC of any changes in company car use every quarter on form P46 (Car), due on the fifth day of February, May, August and November. There are penalties if you miss the deadlines.

There are additional rules regarding VAT

• Employers can recover VAT on fuel used for business purposes only. This applies even if an employee pays for the fuel and then claims the cost on expenses.
• Employers who provide fuel for private use at or below cost can recover VAT on the fuel purchase, but must then pay VAT following the set fuel scale charges. These are based on the car’s CO2 emissions.
• Employers do not have to apply the scale charges if they do not recover VAT on the purchase of private fuel.
• Employers do not account for VAT if they charge employees for the use of cars.

 

Buying company cars

Businesses can claim the cost of purchase through capital allowances

• This reduces taxable profits, or increases taxable losses, over several years.
• The capital allowance you can claim is based on the car’s CO₂emissions. For 2020/21, new cars with emissions between 50g/km and 110g/km go into the main rate pool of 18%, while new cars with emissions greater than 110g/km go into the special rate pool of 6%.
• Businesses can claim 100% first-year allowances on low-emission cars (less than 50g/km) and new zero-emission goods vehicles purchased for business use.
• Second-hand and electric cars with emissions below 110g/km can claim 18%.
• From April 2021, the emission thresholds are expected to fall to 0g/km (for the 100% allowance) and to 50g/km (18% pool).
• Sole traders who buy cars for business and private use can only claim the business portion of the writing-down allowance.

Some costs attract full tax relief

• Maintenance and other running costs.
• Interest paid on a loan to buy the car.

A business cannot normally recover VAT on the purchase of a new car

• To recover VAT, you must be able to prove that the car is for business use only.
• Typically, car dealers and leasing firms are the only businesses able to recover VAT.

 

Leasing company cars

Tax deductions depend on the CO₂ emissions of the car

• All the costs of leasing can be deducted from taxable profits as expenses for leased cars with CO₂ emissions below 110g/km from April 2018.
• There is a flat-rate disallowance of 15% of relevant payments for leased cars with CO₂ emissions above 110g/km.

Only 50% of the VAT charged on rentals can normally be claimed

• You may be able to reclaim 100% if the car is used wholly for business purposes.

Capital allowances can only be claimed if there is an option to purchase the car

 

Signpost

Find guidance on:

• taxable benefits for company cars and company vans
• reclaiming VAT on business vehicles
• capital allowances for business vehicles