| Company Cars |
The rules for taxing company cars will change
significantly next April.
Read on to find out how the changes will affect you.
Will the company car still be tax efficient?
If not what are the alternatives?
Reviewing the options available and deciding on which is the best option for you can be a daunting task. We hope the following will help you understand the new regime in more detail.
If you need to discuss anything further, or would like any clarification or help in deciding,
please contact us.
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The current rules
The tax charge for an employee provided with a company car is currently based on a percentage of the list price of the car. The percentage is dependent upon the level of business mileage and the age of the car. The lowest percentage charge arises for someone doing high business mileage in an older car. The highest percentage charge applies to someone driving very few business miles in a newer car, the so called ‘perk’ car.
The complete list of charges for the current tax year (2001/02) is set out below.
| Charge based on percentage of list price |
| Business miles |
Vehicles under 4 years old |
Vehicles at least 4 years old
|
| 0 - 2,499 |
35% |
26.25% |
| 2,500 - 17,999 |
25% |
18.75% |
| 18,000 and over |
15% |
11.25% |
The new regime
The Government originally announced their intention to reform the taxation of company cars in 1999. The reforms are designed to help protect the environment by tackling global warming and improving local air quality.
The new regime will continue to tax company cars by reference to the list price of the car, but graduated according to the level of its carbon dioxide (CO2) emissions. The new regime is intended:
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- to encourage manufacturers to produce cars which are more environmentally friendly; and
- to give company car drivers and their employers a tax incentive to choose more fuel-efficient vehicles.
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The existing business mileage and age related discounts will be abolished. This is at least in part because the Government believes that up to 300 million business miles may be driven unnecessarily each year in order to reach the mileage discount thresholds. Quite where that belief stems from, no-one seems too sure!
As under the current regime, the percentage charge for the majority of cars will be between 15% and 35%. The new emissions table is set out below.
| CO2 emissions in grams per kilometre |
Percentage
of car’s
price taxed
|
| 2002/03 |
2003/04 |
2004/05 |
| 165 |
155 |
145 |
15 |
| 170 |
160 |
150 |
16 |
| 175 |
165 |
155 |
17 |
| 180 |
170 |
160 |
18 |
| 185 |
175 |
165 |
19 |
| 190 |
180 |
170 |
20 |
| 195 |
185 |
175 |
21 |
| 200 |
190 |
180 |
22 |
| 205 |
195 |
185 |
23 |
| 210 |
200 |
190 |
24 |
| 215 |
205 |
195 |
25 |
| 220 |
210 |
200 |
26 |
| 225 |
215 |
205 |
27 |
| 230 |
220 |
210 |
28 |
| 235 |
225 |
215 |
29 |
| 240 |
230 |
220 |
30 |
| 245 |
235 |
225 |
31 |
| 250 |
240 |
230 |
32 |
| 255 |
245 |
235 |
33 |
| 260 |
250 |
240 |
34 |
265
|
255
|
245
|
35
|
- For diesel cars, add a 3% supplement but not so as to exceed the maximum charge of 35%.
- If the CO2 figure doesn’t end in a 5 or 0 round down to the nearest 5 grams per kilometre.
- Discounts will apply to certain environmentally extra friendly cars, eg electric cars and those running on LPG.
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Obtaining emissions data
The Vehicle Certification Agency produces a free guide to the fuel consumption and emissions figures of all new cars. It is available on the internet at www.vcacarfueldata.org.uk For all cars first registered from 1 March 2001 onwards, the definitive CO2 emissions figure is recorded on the Vehicle Registration Document (V5). Under an agreement with the Inland Revenue, the Society of Motor Manufacturers and Traders (SMMT) is providing, for a limited period, a CO2 emissions enquiry service at www.smmt.co.uk/co2/co2.asp for cars first registered between 1 January 1998 and 28 February 2001.
The winners and losers - death of a salesman and rebirth of the perk car
The winners under the new regime will be those with relatively modest cars doing few business miles - ie the ‘perk’ car drivers. The losers will be those driving at least 18,000 business miles a year in high specification models - often sales people. Further examples of the effect of the new regime on certain specific makes and models are detailed on the back cover.
As a general word of warning remember to be specific in any discussions. For example, if a new VW Passat is planned as a company car, the emissions, depending on the precise model, can vary from 154 to 262 and therefore the tax charge could be as low as 18% or as high as 34%!
The way forward - what are the alternatives?
It may pay to consider alternatives to the company car, particularly where the increase in taxable benefit will be substantial next April.
The example below shows the level of saving that could be made if the car was to be owned privately by the employee with the employer paying a mileage allowance equal to the statutory rate. See below for further details on mileage rates.
Authorised mileage rates
Employees using their own cars for business travel can claim tax relief for that mileage based on rates set by the Inland Revenue.
From next April the rates will be: |
- 40p per mile for the first 10,000 miles in the tax year; and
- 25p per mile thereafter.
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NOTES
The tax relief can be claimed whether or not the employee receives a mileage allowance from the employer.
If an employee receives a rate below the statutory level he can claim tax relief on the difference.
If an employee receives a rate above the statutory level the excess is taxable.
Employees will not be able to claim tax relief on actual business motoring costs instead if they are higher than the statutory rate. This represents an important change from the current regime. |
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Example
Mark drives a company car, the list price of which is £20,000. He drives 22,000 business miles and 10,000 private miles each year.
The provision and running costs of the car are met by the company, except fuel. The relevant information is as follows:
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- the company pays corporation tax at 20%;
- the car is a 1997cc and the emissions figure for the vehicle is 220g/km. Fuel consumption is 30 miles/gallon. Petrol costs £3.70 a gallon;
- the company pays for business mileage at 14p/mile under a dispensation;
- if the employee was to use his own car, the company would reimburse at authorised mileage rates; and
- car costs:
service and repairs - £600
insurance and tax disc - £500
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|
|
| Year on year comparative position for running a company and private car |
2001/02 - If company car
|
| Company |
£ |
|
Employee |
£ |
| Repairs |
600 |
|
Taxable benefit |
3,000 |
| Insurance |
500 |
|
(£20,000 x 15%) |
|
| Business fuel |
3,080 |
|
|
|
| (22,000 x 14p) |
|
|
|
|
|
|
|
Tax @ 40% |
1,200 |
| Class 1A NIC |
|
|
|
|
| (£3,000 x 11.9%) |
357 |
|
|
|
| Finance costs |
2,000 |
|
|
|
|
|
|
|
|
| Depreciation/Capital allowance |
3,000 |
|
|
|
|
9,537 |
|
|
|
|
|
|
|
|
Less: Tax relief
(@ 20%) |
(1,907) |
|
|
|
| Net costs |
7,630 |
|
|
|
|
|
|
|
|
| 2001/02 - If privately owned |
| Company |
£ |
|
Employee |
£ |
Fuel at authorised rates (4,000 x 45p
+ 18,000 x 25p) |
6,300 |
|
Mileage allowance |
6,300 |
|
|
|
Less: |
|
Less: Tax relief
(@ 20%) |
(1,260) |
|
Repairs |
(600) |
| Net costs |
5,040 |
|
Insurance |
(500) |
|
|
|
Fuel |
(2,713) |
|
|
|
Finance costs |
(2,000) |
|
|
|
Depreciation |
(3,000) |
|
|
|
Net costs |
(2,513) |
|
|
|
|
|
| ie Company saving: |
2,590 |
|
|
|
|
|
|
|
|
| Employee additional costs: |
1,313 |
|
|
|
|
2002/03 - If company car
|
| Company |
£ |
|
Employee |
£ |
| Repairs |
600 |
|
Taxable benefit |
5,200 |
| Insurance |
500 |
|
(£20,000 x 26%) |
|
| Business fuel |
3,080 |
|
|
|
|
|
|
|
|
|
|
|
Tax @ 40% |
2,080 |
| Class 1A NIC |
|
|
|
|
| (£5,200 x 11.9%) |
619 |
|
|
|
| Finance costs |
2,000 |
|
|
|
|
|
|
|
|
| Depreciation/Capital allowance |
3,000 |
|
|
|
|
9,799 |
|
|
|
|
|
|
|
|
Less: Tax relief
(@ 20%) |
(1,960) |
|
|
|
| Net costs |
7,839 |
|
|
|
|
|
|
|
|
| 2002/03 - If privately owned |
| Company |
£ |
|
Employee |
£ |
Fuel at authorised rates (10,000 x 40p
+ 12,000 x 25p) |
7,000 |
|
Mileage allowance |
7,000 |
|
|
|
Less: |
|
Less: Tax relief
(@ 20%) |
(1,400) |
|
Repairs |
(600) |
| Net costs |
5,600 |
|
Insurance |
(500) |
|
|
|
Fuel |
(2,713) |
|
|
|
Finance costs |
(2,000) |
|
|
|
Depreciation |
(3,000) |
|
|
|
Net costs |
(1,813) |
|
|
|
|
|
| ie Company saving: |
2,239 |
|
|
|
|
|
|
|
|
| Employee additional costs: |
267 |
|
|
|
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NOTES
The loss of capital or depreciation charge is assumed to be equal to the capital allowances available.
Business fuel costs: (22,000 miles/30 mpg) x £3.70/gallon = £2,713.
Finance costs: Assumed to be 10% of the capital cost of the car.
VAT has been ignored. However, the effect would be to reduce the costs for the company due to the recoverability of VAT. |
Conclusions
As our example demonstrates, there may be savings to be made by abandoning the company car in favour of private ownership under the new regime. However, the employee savings are modest compared with the savings
available to the company. Other issues therefore need to be considered.
The employee might expect some salary compensation or an interest free loan as recompense, at least in part, for the fact that the employee now has to bear the unpredictable running costs of the car. These considerations have not been factored into the calculations in our example.
Furthermore, don’t underestimate the ‘comfort factor’ of the company car. The employee knows that whatever happens the employer will take care of it. |
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| Yet more information you need to know! |
Factors that won’t change
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- the list price of a car will still be the price when it was first registered including delivery, VAT and any accessories provided with the car or subsequently made available (unless they have a list price of less than £100);
- the list price will continue to be restricted to an upper limit of £80,000;
- employee capital contributions up to £5,000 reduce the list price; and
- the benefit will continue to be proportionately reduced if the car is unavailable for part of the year.
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The exceptions
As with all changes to tax rules there are exceptions to the general rule. In this case the exceptions are as follows:
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Cars first registered before
1 January 1998 |
|
Imports |
There is no reliable source of CO2 emissions data for cars registered before 1 January 1998. Such cars will be taxed from 6 April 2002 according to their engine size as follows:
|
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Some cars registered after 1 January 1998 may have no approved CO2 emissions figure, perhaps if they were imported from outside the EU. They too will be taxed according to engine size as follows:
|
| Engine Size (cc) |
% of list price charged to tax |
|
Engine Size (cc) |
% of list price charged to tax |
| 0 - 1400 |
15 |
|
0 - 1400 |
15 |
| 1401 - 2000 |
22 |
|
1401 - 2000 |
25 |
| over 2000 |
32 |
|
over 2000 |
35 |
|
The effect of the new regime on specific models and makes
| Vehicle |
Benefit
now
% |
Benefit in 2002/03
% |
| Honda Civic 1.6 SE |
15 |
15 |
| Ford Puma |
15 |
17 |
| Peugeot 406 2.0 GLX |
15 |
22 |
| Volvo V70 (2.4 T S) |
15 |
26 |
| BMW 525i |
15 |
27 |
| Mercedes E280 |
15 |
30 |
| Jaguar XJ8 4.0 |
15 |
35 |
Assume that in each case the annual business mileage exceeds 18,000.
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Disclaimer - for information of users
This bulletin is published for the information of clients. It provides only an overview of the regulations in force at the date of publication, and no action should be taken without consulting the detailed legislation or seeking professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material contained in this bulletin can be accepted by the authors or the firm.
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