Company car taxation – what you need to know
Constant changes to company car tax mean that anyone with responsibility for fleets or in possession of a company or salary sacrifice arrangement car needs to keep up to speed with the latest tax rules, warns Nigel Morris, motor sector specialist tax director at MHA MacIntyre Hudson.
Company car tax was reformed in April 2002 to an emissions-based system. Since then the charge is calculated by applying a percentage ﬁgure (the appropriate percentage) to the list price of the car. The fuel type of the car and its CO2 emissions determine the appropriate percentage, with diesel cars attracting a 3% uplift on the beneﬁt in kind (BIK) compared to a petrol car with the same CO2.
Over the years the table of appropriate percentages has been updated to encourage the take-up of lower CO2 emission vehicles. For example, a car with a CO2 rating of 121 g/km (the average new car emitted 120.1g/km CO2 in 2016, according to the SMMT) the BIK was 15% of list price in 2008/9 and will be 25% in 2018/19.
The tables have been expanded to recognise qualifying low emission cars and more recently ultra low emission vehicles, with reduced rates for those emitting below 50 g/km CO2, which attract a BIK charge of 9% of list price (rising to 13% in 2018/19), or those between 51 g/km and 75 g/km CO2 attracting a BIK charge of 13% of list price (rising to 16% in 2018/19).
In 2008, a 10% BIK rate for cars with a CO2 rating of 120 g/km or less was introduced and led to a growth in cars provided using salary sacriﬁce. However, from April 2017 new rules were introduced for salary exchange schemes (known as optional remuneration arrangements (OpRAs)) which negate the income tax and national insurance contribution (NIC) advantages that can exist where some BIKs are subject to tax and NIC on an amount that is less than the salary sacriﬁced or foregone.
From 6 April 2017, where an employee has a choice, the BIK will be valued at the higher of the cash foregone or the current taxable value, for both income tax and employer NICs (and employee NICs where a charge already exists).
Arrangements between an employee and employer, which are binding on both parties and entered into on or before 5 April 2017, are protected until the earlier of:
- variation in the terms of the BIK, or renewal of the contract;
- the employee changes employer;
- 6 April 2018; or
- 6 April 2021 for cars with emissions of more than 75g CO2/km
How does it aﬀect drivers?
The following illustration shows the impact of the changes to the table of appropriate percentages on a ‘typical’ ﬁve-door hatchback diesel:
|2.0 Tdi (150)||£25,375||
Over a three-year term the BIK (and associated tax and employer NIC costs) increases by 32% in this example. For a 100% electric vehicle, the increase is even greater.
It is currently unclear what will happen to electric cars after April 2020 as the Spring Budget proposals in March 2017 did not make it into Finance Bill 2017. A number of clauses were taken out in order to ensure the Finance Bill was passed quickly, with the calling of the general election on 8 June.
The proposals had been to slash the BIK on full electric cars from 16% of BIK in 2019/20 down to 2% in 2020/21 and to introduce new hybrid rates for those emitting less than 50 g/km CO2 based on their full electric range. Also the diesel shown above would have increased by another 3.5%.
The BIK increases therefore aﬀect driver decisions as the increased taxaon impacts the cost beneﬁt assessment as to how ﬁnancially beneﬁcial a car taxed as a company car is.
However, there is sll a ﬁne balance in relation to some of the alternatives, as follows:
- cash – simply taking a cash alternative could be the answer, but that is taxed at the marginal rate. The remaining net pay would then be required to pay for the procurement, insurance and maintenance of a car.
- salary sacriﬁce – the optional remuneration arrangement rules could impact particularly cars with a CO2 in excess of 75g/km. However, when salary sacriﬁce was originally gaining popularity many employers focused on the ‘added value’ beneﬁt of making it easier for employees to have a new car, fully insured and maintained at an aﬀordable cost. This should still be carefully considered as a key feature of these arrangements.
Who do you still need to consider?
While statistics show that there has been a decline in the number of company cars reported on annual beneﬁt form P11D, a drop to 950,000 from 1,16m (-18%) between 2006/7 and 2014/15, the actual tax and NIC liability increased by £40m (2%).
However, the list price of cars has increased over this period too. The example ﬁve-door diesel hatchback shown above may have a £10,000 higher list price today than in 2006.
Company car tax is based on the availability of the vehicle for private use. So the comparison should be against the costs of personally leasing a similar car. It is understood that up to 90% of new cars are procured from dealers via a ﬁnance arrangement and while personal contract purchase (PCP) is very popular, the number of customers that retain the vehicles at the end of the agreement is very low.
Also, with a car owned outright the responsibilies lie solely with the driver, whereas with a company car the employer or leasing company will deal with road fund licence renewals, servicing, MOT, repairs, tyre replacement, etc.
950K - Number of company cars reported on annual beneﬁt form P11D dropped 18% to 950,000 from 1.16 between 2006/07 and 2014/15
Business mileage and fuel also needs to be considered. It is highly likely that however procured the car will be used for some business use and the implications of inaccurate or incorrect mileage records is diﬀerent depending upon the ‘ownership’ of the car.
With a company car the potential implications of inaccurate or incorrect mileage claims could be the imposition of a private fuel scale charge, which is based on a notional ﬁgure (currently £22,600) and the CO2 percentage of the car. This can lead to tax and NIC liabilies on a BIK of several thousand pounds for an error involving just a few pounds worth of fuel.
Inaccurate mileage can lead to tax and NIC liabilies on a BIK of several thousand pounds for an error involving just a few pounds worth of fuel.
With a ‘private’ car the potenal implicaons of inaccurate or incorrect mileage claims would be tax and NIC liabilities linked to the actual costs of mileage that was wrong. In addition, the rates applicable for reimbursement to employees include an automatic proﬁt element that is not liable to tax and NIC as it is intended to contribute towards additional insurance, running costs and wear and tear.
Where mileage rates below the HMRC approved mileage allowance payments (AMAPs) for employees using their own cars on business are paid by the employer, the employee is still entitled to claim tax relief on the diﬀerence at the end of the tax year.
The taxation of company cars has increased greatly since the CO2 based regime was introduced in 2002 and it is sll unclear if previously ‘announced’ reductions for ultra low emission vehicles from April 2020 will be reinstated aer the general election.
For some, company cars are an increasing ﬁnancial burden, for others they still represent good value by reducing hassle and responsibilities, and the costs are worth paying in comparison with the increase in the costs of procuring and running a private car.
There is no one size ﬁts all and the decisions can be further complicated by new legislation, such as the OPRA regulations that will mean that alternative tax calculations will need to be taken to decide what tax is due and needs reporting on P11Ds.
If you would like further information on any of the above please get in touch with Nigel Morris, motor sector specialist and tax director at MHA MacIntyre Hudson.