Beware expensive company cars

Various changes to capital allowances for expenditure on company cars were introduced from April 2009, including linking the annual amount of relief to the CO2 emissions of new vehicles, and removing balancing adjustments on their disposal. These changes, along with gradually increasing benefit charges on employees, have made the acquisition of cars by companies' tax inefficient in most cases.

To put this in context, under the old rules it would take 11 years to write-off 95% of the capital value of a car for tax purposes or, if the car was disposed of, relief would be available immediately. For new cars, it takes a staggering 29 years to achieve the same level of relief, unless the car's emissions are less than 160 g/km, in which case it still takes 14 years. From April 2012, the rates of relief will be reduced even further, and as balancing adjustments have been removed, it may be many years after the car has been scrapped before tax relief is finally given.

Removal of £80,000 list price cap

It has also been announced that, from April 2011, the £80,000 list price cap for determining the car benefit charge on the employee/director will be removed. For high emitting cars, where the benefit charge can be 35% of the list price, this could see a significant increase in an annual income tax charge, and employer's Class 1A NIC. What's worse is that the list price is not necessarily what the company paid for the car - so the benefit charge for a second hand Aston Martin will still be based on the cost when it was new.

Consider your options

Companies who have retained expensive cars may therefore want to consider again whether to get rid of them! One option would be to sell the car to the employee/director at market value. There should be no benefit charge on the individual, and (if the car was purchased prior to April 2009) the company may benefit from a balancing adjustment for capital allowance purposes. For the owner-managed businesses, it may be more tax efficient to give the employee/director the car, resulting in an income tax and employer's NIC charge, but a greater corporation tax deduction and less cash "tied up" in the company.

Another option might be to claim that the vehicle is a 'pool car', i.e. that it is available to all employees, kept at the business and any private use is merely incidental to business use.  However, treating an Aston Martin in this way may be subject to challenge by HM Revenue & Customs!

Should you wish to discuss company car tax planning please contact your local office or email your enquiry.