Employees Company Car Tax

A guide for company car drivers from ComCar

The emissions–based regime for taxing company cars has been in force since April 2002.

Introduction

The provision of a fully expensed car is still a common employee benefit. Some even suggest that it will become more popular as shortage of finance and soaring insurance costs cause “cash takers” to give up their allowance and move back to the company car. The success of salary sacrifice could also increase the size of the company car park.

Taxation policy is strongly focused on the CO2 emissions of the vehicle, perhaps making this the area where environmental taxation is at its most advanced as well as its highest level in terms of tax per tonne of CO2. There are implications for income tax, VAT, Employers and Employees national insurance, Vehicle Excise Duty and Capital Allowances. This brief review of the rules may highlight areas in which savings can be made or liabilities avoided.

Why provide a company car?

Traditionally this was a very tax–effective form of remuneration. There is a common perception that changes over the years have eroded this advantage by increasing the tax liability, but that only applies to the above average emission vehicles. Lower emission cars are taxed far less than under the pre-2002 regime and this can now apply to some large cars. There is no tax at all on electric cars for another 4 years.

Duty of care legislation has also become stronger over the last decade so that employers need to ensure that business mileage is being undertaken in a well-maintained, suitable, and insured vehicle. It is easier to control this where the employer provides the car.

How is the employee taxed?

The employee is treated as having received a monetary amount equivalent to the provision of the car. This taxable benefit is added to income and taxed accordingly. Usually the recipient’s tax code includes the taxable benefit and the tax is collected monthly. Any additional tax is calculated after the end of the tax year.

How is the taxable benefit calculated?

The taxable amount is calculated as a percentage of the manufacturer’s list price on the day before the car was first registered and includes VAT, standard delivery, and most options, but excludes VED and the £55 First Registration Fee. It is not based on the actual cost, even if the car is purchased second–hand or at a substantial discount. There is no reduction for signpainting.

For cars that are 15 years old or more at the end of the tax year, the benefit is based on the market value of the car, if this exceeds £15,000.

The percentage applied to the list price is graduated according to the level of the car’s carbon dioxide (CO2) emissions and are shown on the tables below for petrol and diesel cars. Fully electric vehicles escape this being 0% . A few  internal combustion engine cars are emerging in the sub 100gm bracket, but the average is more like 140gms. Note how the percentages increase by 1% each year in the middle ranges, but there is an alarming jump for 120gm cars in April 2012 when the old special incentive rules for sub 121gm cars suddenly cease.

Petrol Cars

Diesel Cars

• Cars with "zero emissions" are reduced to 0% for five years from 6th April 2010. 
• Some options can be excluded from calculation of the P11D value.These include the following items.

1. Mobile phone preparation kits since an employer is allowed to provide a mobile phone tax free.
2. Running cost items such as additional warranty, insurance or service packages.
3. Any item which is necessary for work and will only be used for work such as a towbar.
4. Items which are not attached to the car, such as rubber mats.
5. Modifications or additional options to help a disabled employee. This category can also include the full additional cost of automatic transmission.

For example, a company car with a list price of £19,000 and CO₂ emissions of 140g/km gives a benefit of £3,990 in 20011/12, being 21% of the list price.

Discounts are no longer available for hybrid and bi–fuel cars because a technology neutral approach has been adapted to tailpipe emissions. The exception is that diesel cars are still subject to a 3% supplement in recognition of their higher emissions of pollutants that damage local air quality. This supplement cannot take the benefit above the current maximum of 35% of the list price.

Is there a reduction for business use and older cars?

No. Discounts for business mileage and cars over four years old do not feature in the emissions–based regime. Many find it unfair that cars are taxed on full list price but the tax regime is consistent in that it uses the list price (multiplied by the CO₂  relevant percentage) as a measure of comparative running cost, not purely the purchase cost.

What about pool cars?

There is no tax liability for genuine pool cars kept at the business premises for the business use of any employees. There are conditions that HM Revenue and Customs (HMRC) enforces strictly to prevent this concession being abused. For example, any private use must be purely incidental to the business journey.

Is there a taxable benefit for fuel?

Yes, where fuel is provided for private mileage. The car fuel benefit is calculated by applying the same emissions–based percentage as the car benefit to the multiplier, which for 2011/12 is £18,800. The fuel benefit charge could be as much as £6,580 so the employee would need to be doing a lot of private mileage to justify this, even at today’s fuel prices.

If fuel stops being supplied part way through the year, the benefit can be apportioned on a time basis, unless free fuel is resumed later in the same tax year.

If the free fuel taxable benefit is to be avoided, it is necessary to keep accurate records of business mileage in order to fully justify any business fuel reimbursement.

How are details given to HMRC?

Details should be included on the form P11D which must be submitted by 6th July following the tax year. Under self assessment the information must be passed to the employee by the same date. Certain lower–paid employees (broadly those earning under £8,500 pa inclusive of benefits) are excluded from the P11D net and the company car may not be taxable on them.

During the year, when a company car is issued for the first time, this should  be notified to HMRC on form P46(Car) within 28 days of each quarter end.  HMRC is no longer interested in receiving notifications of changes to car details during the year, so it is best if the employee notifies their local tax office and keeps their coding up to date.

Is there a national insurance liability for the company?

Yes, it is called Class 1A and is paid by the employer. It is payable by 19th July following the end of the tax year. The rate of NIC is the rate for the year in which the benefit arises (13.8% for 2011/12), not the rate for the year in which the liability is paid.

What if employees use their own cars for business?

Employees using their own cars for business mileage can be paid a tax-free mileage allowance under the Approved Mileage Allowance Payments (AMAPs). There is no reporting requirement and employees may claim tax relief if the payments are only in respect of business mileage in the employee's own personal vehicle and the mileage paid does not exceed the statutory rates. The rates for 20011/12 are:

Therefore, assuming the mileage is reimbursed within the AMAP rates and there is no profit element, it is not necessary to include this in a dispensation.

Who should I contact?

Your usual accountant should be able to help with detailed advice relevant to your company’s circumstances. For detailed online guidance and comparisons you should look out for a website that contains a full set of up to date data on all UK cars and which provides a 3 year view.  We provide www.comcar.co.uk for exactly this purpose, and contact details are on the website if you need further help.