It is a question we are often asked, mainly from a tax point of view of course, and you will probably not be surprised if I say the answer is generally ‘it depends’! writes Pearson May partner Nick Oliver FCA FIoD
Changes in recent years increasing the taxable benefit rates across the board has meant that the amounts on which company directors and staff are taxed has increased significantly.
Generally speaking, if a company provides a car to an employee (including directors) then the fact that the car is available for private use as well as for business purposes is enough for a Benefit in Kind (BIK) income tax charge to arise on the employee.
The tax charge is calculated by reference to the list price of the car when new (plus the list price of any optional extras) and then applying a percentage to that amount, based on the car’s CO2 emissions. The higher the emissions, the greater the taxable benefit will be. For example, for a diesel car with CO2 emissions of 140 g/km, the current taxable BIK arising would be equivalent to 33% of the car’s list price (the percentage is 4% lower if the car is certified to the ‘RDE2’ standard) and this increases to 36% in 2019/20. The employee would then pay tax on that figure at their marginal income tax rate. The benefit is reported on a form P11D for each tax year for which the car is provided and the company also pays Class 1A National Insurance (currently at a rate of 13.8%) on the value of the taxable benefit.
The level of this taxable benefit in itself may not be too significant but the potentially much more significant tax charges arise if the company provides fuel for both private and business journeys. If that is the case then a flat rate sum of £23,400 (for 2018/19) is multiplied by the applicable taxable percentage (as mentioned above), or a proportion thereof if the car is not provided for the whole year. This flat rate generally increases each tax year.
Are there any ways to avoid these taxable benefits?
It can be very difficult to convince the Revenue that no taxable benefit arises on cars available for use by employees, but in theory there is an exemption if the company prohibits private use of the car and there is, as a matter of fact, no actual private use. In practical terms, a clear agreement should be drawn up (which might be able to be included in the individual’s contract of employment) which states that private use is prohibited as part of the terms on which the vehicle is provided to the employee. For these purposes, ordinary commuting i.e. travel between the employee’s home and place of work is usually classed as a private journey.
There is also an exemption for company pool cars but, again, there are numerous conditions to be met. For a car to qualify as a pool car it should not normally be kept at or near an employee’s home and the Revenue would generally expect it to be kept on the business premises when not in use. It should be used by more than one employee and should not ordinarily be used by one employee to the exclusion of others and there must not usually be any private use of the pool car except for any private use which might be incidental to business use, for example an employee taking the car home in the evening before an early start for a business journey the next day.
In practice, the Revenue would expect to see very detailed records in support of a car being classed as a pool car which would probably need to include a log of every journey undertaken in the pool car detailing the purpose of the journey and who used the car with a note of how many miles were undertaken and a running total of the miles which should be reconciled to the odometer readings from the car.
Are there any circumstances in which a company car is beneficial from a tax point of view?
If low emission cars are provided to employees then the taxable benefit can equally be relatively low, although BIK rates have increased fairly significantly across the board over recent years and these increases have also applied to very low emission and wholly electric cars. Four years ago, electric cars had a 0% BIK charge but the current rate (for 2018/19) is 13%, increasing to 16% next year. Similarly, a car with CO2 emissions of up to 50 g/km was taxed at 5% four years ago, but the rate for such cars now is also 13%. However, HMRC have announced that the BIK rates applicable to so-called ‘Ultra Low Emission Vehicles’ will be significantly reduced from 2020/21 which will mean wholly electric cars (and in some cases, those with CO2 emissions of up to 50 g/km) will only have a BIK rate of 2%.
As an aside, from a Capital Allowances point of view, if the car has CO2 emissions of 50 g/km or less then the company should be able to claim 100% Corporation Tax relief on the cost of the car, but only if it is acquired brand new from the forecourt.
What about the fuel benefit?
It is relatively rare that the provision of fuel for private motoring in a company car is tax efficient but this can arise in a situation where an employee’s private mileage is very high. In most other cases it is generally advisable to ask the employee to meet all the fuel costs and for the company to then reimburse them for business journeys (using HMRC’s advisory fuel rates). HMRC publish these advisory fuel rates quarterly via their website. Again, to avoid a taxable benefit arising, detailed mileage logs should be maintained to record any business or private journeys as appropriate, to evidence that only the cost of business journeys has been reimbursed to the employees.
However, to incentivise companies to become ‘greener’ generally, HMRC has introduced more favourable tax breaks for the provision by employers of electricity and electric charging points, either at the employer’s premises or at the employee’s home. Electricity is not classed as ‘fuel’ for these purposes, so the flat rate fuel benefit referred to above (£23,400) does not apply to the provision of electricity. As long as the employer contracts directly to install electric charging points and/or provide electricity for charging company cars, a taxable benefit on these costs can often be avoided completely.
The above is for general guidance only and no action should be taken without obtaining specific advice.
