Employees Company Car Tax

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 very common employee benefit that has income tax, VAT and national insurance consequences. This brief review of the rules may highlight areas in which savings can be made or liabilities avoided.

‘Company car’ in this factsheet refers to a car provided for an employee's private use. It includes cars provided to employees, but not proprietors, of unincorporated businesses.

Why provide a company car?

Traditionally this was a very tax–effective form of remuneration, although changes over the years have eroded this advantage by increasing the tax liability.

In some cases providing a salary alternative can be beneficial to both employer and employee. It is often a marginal decision depending on the facts of each case and intangible factors, eg peace of mind, may swing the decision in favour of 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 the list price of any accessories or options. It is not based on the actual cost, even if the car is purchased second–hand. Any excess over £80,000 is ignored.

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. Again, there is a cap of £80,000.

The percentage applied to the list price is graduated according to the level of the car’s carbon dioxide (CO₂) emissions. The charge builds up from 15% of the car’s list price, at CO₂ emissions of 135g/km, the ‘lower threshold’, in 1% steps for every additional 5g/km over 135g/km. From 6 April 2008 a 10% rate applies to petrol cars with CO₂ emissions of 120g/km or less (13% for diesels). These are known as ‘qualifying low emissions cars’ or QUALECs.

Cars rated above 120g/km but below the lower threshold have a 15% charge. For cars with CO₂ emissions over the lower threshold the exact CO₂ figure is rounded down to the nearest 5g/km to find the relevant percentage. The maximum benefit is 35% of the list price. The lower threshold will be reduced to 130g/km in 2010/11.

For example, a company car with a list price of £15,000 and CO₂ emissions of 205g/km gives a benefit of £4,350 in 2008/09, being 29% of the list price.

Discounts are available for environmentally friendly cars, including electric, hybrid and bi–fuel cars and cars capable of running on bioethanol, or on a mixture of at least 85% bioethanol and unleaded petrol (commonly known as E85 fuel). Diesel cars are 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.

All cars registered before 1 January 1998, and cars registered from 1^st January 1998 that do not have an approved CO₂ figure, have their tax charge based on the engine size. Details are as follows:

For diesel cars registered on or after 1^st January 1998, the 3% supplement applies to the figures in the right hand column of the table above, subject to the 35% maximum. There is no supplement for diesel cars registered before 1^st January 1998.

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.

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 2008/09 is £16,900. The Chancellor has said the multiplier will increase for 2009/10 and 2010/11 at least in line with the Retail Prices Index. For 2008/09 the fuel benefit charge could be as much as £5,915 and it may be beneficial for the employee to buy their own fuel.

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

It can be difficult to prove that fuel has only been used for a business journey. In order to avoid a taxable fuel benefit, reimbursement for business miles at an appropriate rate is recommended. HMRC publish advisory rates from time to time.

How are details given to HMRC?

Details should be included on the form P11D which must be submitted by 6^th July following the tax year. Under selfassessment 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, details of changes to company cars must be notified to HMRC on form P46(Car) within 28 days of each quarter end.

What about VAT?

Where employers have reclaimed input VAT on fuel provided free to employees for private use, output VAT should be accounted for on scale rates. The fuel scale charge is based on the CO₂ emissions rating of the vehicle, much in the same way as car and fuel benefits are. The scale charges announced in the 2008 Budget must be used for accounting periods beginning on or after 1 May 2008. For cars with no CO₂ emissions rating, the scale charge is based on the engine capacity.

Where an employer purchases a car to be used as a company car the input VAT is not reclaimable. If it is leased, then 50% of the VAT charged on the rental payments can be reclaimed.

Is there a national insurance liability?

Yes, it is called Class 1A and is paid by the employer. It is payable by 19^th July following the end of the tax year. The rate of NIC is the rate for the year in which the benefit arises (12.8% for 2008/09), not the rate for the year in which the liability is paid.

What if a van is provided?

There is a scale charge of £3,000 where a van, as defined, is provided for private use. There is also a fuel benefit of £500 where private fuel is provided.

There are complex rules for shared vans where several employees have private use. If private use of the van is 'insignificant' then there is no van benefit charge. An example of insignificant use would be an employee who takes their van home overnight but is not allowed any other private use.

What if employees use their own cars for business?

Employees using their own cars for business mileage can be paid a tax– and national insurance–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 2008/09 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?

If you would like advice on any of the points covered by this fact sheet please contact the person at Grant Thornton who normally advises you, or the local office shown below.