Company car tax

Company Car – For the Business

Why do companies lease vehicles? Contract hire and leasing is a tax efficient way in which they can operate a fleet. For a vehicle that emits less than110g/km of CO2, 100% of the monthly rentals are allowable against corporation tax. For more “polluting vehicles”, only 85% of the rentals are allowable against tax. In contrast, those companies who purchase vehicles must use capital allowances which is a different taxation approach. This needs to be separated from the Annual Investment Allowance, which allows 100% write down in year one for commercial vehicles (not cars).

As an electric vehicle emits zero tailpipe emissions, i.e. 0g/km, 100% of the rentals are allowable against tax. EVs also present a better position for employer National Insurance (NI), which is payable on company cars. Electric cars are more tax efficient than combustion alternatives in most cases.

How about VAT? For any Vat registered business, up to 50% of the Vat on the finance rentals and 100% of the VAT on the maintenance rentals can be reclaimed. If you opt for a funder-maintained quotation this a service whereby the finance company will include the cost of all servicing, maintenance, tyres and in some cases, breakdown recovery. While maintenance obligations on an EV is lower than a petrol/diesel option, many fleets minimise risk by including this as part of the arrangement.

While IFRS 16 now means that contract hire is an “on-balance sheet” product, it is still a tax effective way for vehicles to be operated. You also have to consider that zero initial rental (no deposit) offers are available, making this a cash-flow efficient tool too compared to outright purchase.

Another point to highlight is that in moving towards electric cars (and vans), it presents a great opportunity to enhance corporate image. With the right charging infrastructure in place it can also minimise spending on petrol and diesel within the fleet. Reducing carbon footprint, emissions and moving towards alternative fuel is now key part of the legal and political agenda. Companies do need to consider making a swift and clear transition (if they have not already done so).

Company Car – Should an employee get one?

Company car or personal car allowance? This is a question which has consistently been raised by many drivers, as they try to work out which is the best way to lease a new vehicle.

A company car is not free; when you lease a car via your employer HMRC will be made aware of this and will charge you the appropriate level of tax for enjoying this benefit. This is where drivers do need to be careful as this will affect their tax/pension moving forwards. Your employer will have to use the relevant forms at HMRC to accurately calculate your tax exposure (https://www.gov.uk/paye-forms-p45-p60-p11d/p11d).

Company car tax/benefit in kind is based on the P11d of a vehicle (its recommended retail price plus any options), the emissions of the vehicle (shown as CO2 per Kilometre) and your income tax bracket (20 or 40% etc). Some potential company car drivers will use Comcar (https://comcar.co.uk/) to help calculate their tax exposure on the vehicle and on any fuel benefit. In short, the more expensive and more polluting the vehicle, the higher the level of tax you pay. The reality is that a company car has become less of a perk over the years due to the increasing costs of company car tax under our emissions-based regime in the UK.

So what’s the benefit to the individual driver then? Notwithstanding the tax exposure noted above, you cannot deviate from the fact that the employs is receiving a brand-new car for 2, 3 or 4 years. In many cases the driver will have maintenance included (servicing, parts and tyres) plus the insurance can be covered too. You would have to consider whether or not the driver would be able to afford a brand-new vehicle with all of the above? For some company car drivers, they just wouldn’t be able to afford the same proposition and many Audi/BMW/Mercedes company car drivers would indeed be looking at more budget brands if not for their company car scheme.

Company Car – How is tax changing?

For the end-user company car tax is a conundrum when operating a combustion engine. Even efficient/eco cars which emit 100g of CO2/km will bring about a BiK rate of 23% from tax year 2020/21. Add to that a 4% diesel supplement for those cars which exceed RDE2 standards and you have an incredibly expensive proposition for the end-user. In some cases, the tax a driver pays is similar or more than the rental the employer is paying for the car itself. This is forcing many drivers to opt-out the company car scheme and pursue a company car allowance instead.

To assist in the growth of electric (and PHEV) options, HMRC have changed their approach to company car tax as set out below:

The key points to note from the new taxation regime is that a purely electric vehicle will have 0% Bik for 2020-21 / 1% 2021-2022 / 2% 2022-23. For many modern PHEVs there will be a 10-14% BiK banding, so long as the vehicle can travel between 30-40 miles on pure electric. As a consequence, many company car drivers may start pushing their directors and fleet management to consider these electrified solutions

Company Car – What’s the future

Until the recent taxation changes, the difficult of making an electric car transition was that there were not as many taxation or financial benefits. While the Government is continuing the plug-in grant (https://www.gov.uk/plug-in-car-van-grants) which offers up to £3500 towards a new vehicle plus the grant scheme for charging infostructure (https://www.gov.uk/government/collections/government-grants-for-low-emission-vehicles), the reality is that the UK needed more. From April 2020, there will be much more focus on electric cars within company car schemes and fleets.

All of this will present an interesting conversation for suppliers, employers and driver alike. The reality is that electric cars are generally more expensive on the surface and do need a Whole of Life cost analysis to understand their potential – by this we mean employers will need to look more carefully at what the vehicle is costing them per mile in fuel, maintenance, tyres and insurance (not to mention national insurance). Electric vehicles cost significantly less to fuel per mile and are cheaper to maintain. However, there is an initial investment in charging infrastructure at the home and workplace.

Employees will be considering the tax implication of the pure electric car too – it seems we are in an age where a genuinely free company car is becoming possible. However, do you have a home charging solution? Does your mileage and driving style suit the vehicle you intend to lease? Will your employer provide you with an adequate budget? Modern vehicles do provide a much better range, some are now achieving 250 miles and beyond on a full charge. Public infrastructure continues to increase for charge points; “range-anxiety” is becoming a nation of the past