THE TAXATION OF COMPANY CARS. Calculating the cash equivalent

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1 THE TAXATION OF COMPANY CARS Company cars remain a popular employment-related benefit despite the fact that income tax charges on them are generally high. The benefit of having a company car available for private use is taxed by reference to a notional amount of taxable extra income, known as its cash equivalent value. The employee pays tax on the cash equivalent at his or her marginal rate. The employer is liable to Class 1A national insurance contributions (NICs) of 13.8%, but there is no liability to employee NICs. Calculating the cash equivalent There are four steps to calculating the cash equivalent of a company car. Establish the price of the car for tax purposes. This is essentially the list price of the car, plus the list price of any optional accessories, less any capital contributions made by the employee (up to a maximum of 5,000). Multiply the price established for tax purposes by the appropriate percentage to produce the car s cash equivalent. This percentage is determined by the car s CO 2 emissions. If necessary, reduce the cash equivalent for periods when the car was not available to the employee. Make an adjustment for any contribution made by the employee for the private use of the car. List price The relevant list price is the one published by the manufacturer for the vehicle on the day before its first registration, regardless of the age of the car, or whether it was bought new or second-hand. It includes delivery charges, value added tax (VAT) and any customs or excise duty, whatever the VAT status of the employer. The cost of mobile telephones is not included. Appropriate percentage The appropriate percentage is normally determined by the level of the car s CO 2 emissions. CO 2 figures are available at the Society of Motor Manufacturers and Traders Ltd website (www.smmt.co.uk/members-lounge/member-services/ market-intelligence/vehicle-data/co2-emissionsdata/) and are usually shown on vehicle registration documents. If the car s CO 2 emissions (rounded down to the nearest 5g/km) equal the relevant threshold, the appropriate percentage is 12% for petrol cars for 2014/15. The relevant threshold is set at 95g/km for 2014/15. Where CO 2 emissions exceed the relevant threshold the appropriate percentage is increased by 1% to a maximum of 35% for each 5g/km increase in CO 2 emissions. There are special rules for cars with CO 2 emissions below the relevant threshold. Diesel cars are subject to a supplement of 3% (maximum 35%) until 6 April The following table gives the taxable percentage of list price by emissions level: All Rights Reserved Page 1 of 5

2 2014/ / /17 Zero emissions 0% 13% 15% CO 2 emissions Petrol Diesel Petrol Diesel All fuel g/km % % % % % & over All Rights Reserved Page 2 of 5

3 Other adjustments If the car is available to the employee for part of the year only, the car benefit charge is reduced pro rata. Contributions that employees make for the private use of their vehicles are deducted from the taxable cash equivalent after all other reductions. Payments for supplies or services, such as petrol or insurance, do not count. Tax planning The car benefit rules do not take into account the extent of business use of a company car. The sales person who drives long distances on business every day is taxed in exactly the same way as the employee who goes to work by train and is given a car as a perk. Consequently, whether the tax cost to the employee of a company car is worth the benefit depends mainly on the amount of private use. Providing modest cars to staff with high private mileage can be very attractive. Reducing the tax charge There are several options for employees faced with a high tax liability. An electric car can be provided as a tax-free benefit until April A lower emission car and/or a cheaper model will reduce the cash equivalent. A switch from the petrol to the diesel model of the same vehicle will often result in a substantially reduced tax charge due to lower CO 2 emissions. The employer could agree to pay the employee enough extra salary to compensate for the high tax on the car. The employer could establish a clear rule that the car is only available for the employee s business use. The car could then not be used for home to work travel because this is automatically classed as private mileage. The employer could stop providing a company car and pay additional salary instead. Capital allowances Capital allowances (the tax equivalent to depreciation) allow businesses to write off the cost of capital assets against their taxable profits. The rate of capital allowances given depends on the level of the car s CO 2 emissions. Expenditure on cars is allocated to one of two pools. Those cars with CO 2 emissions of 130g/km or less are allocated to the main pool and have a writing down allowance of 18% a year. Cars with CO 2 emissions of more than 130g/km are allocated to a special rate pool and have a writing down allowance of 8% a year. Capital allowances are based on the actual price of the car and not the list price. From April 2013 until 31 March 2015, a first year allowance of 100% is available to cars with CO 2 emissions of 95g/km or less. Employee-owned cars For many employees it is more attractive to own their car privately and charge their employer for any business mileage they drive. The only way an employer can reimburse an employee tax-free for business mileage is at a fixed rate of up to 45p a mile (2014/15) for the first 10,000 business miles in the tax year and 25p a mile thereafter, irrespective of the size of the car. Cash or car? Choosing between a company car and a privately owned car involves consideration of many issues, including: All Rights Reserved Page 3 of 5

4 Cash flow for both employer and employee. Corporation tax, income tax, VAT and national insurance considerations. Administration costs of running a car fleet. Buying power, discounts, group insurance policies, etc. Employer control over the types of cars driven by employees. The fact that an employee who has been covered by an employer s car insurance might not qualify for any no claims bonus on a new private policy. The need for accurate records of business mileage driven in private cars but not in company cars (unless business fuel, but not private fuel, is reimbursed). Making the transition Making the switch from company car to personal ownership can cause difficulties. One approach is simply to transfer the car from the employer into the personal ownership of the employee. The employee will then be taxed on the market value of the vehicle at the time of transfer, unless the employee pays for the car. The employer could make a loan to the employee to help finance the purchase. There will be no tax charge as long as the total of all loans from the employer to the employee does not exceed 10,000 at any time in the tax year. Fuel for company cars Private fuel for company cars The tax charge on a company car does not cover fuel for private motoring provided or reimbursed by the employer. To calculate the cash equivalent of private fuel, the appropriate percentage figure used to calculate the cash equivalent of the car itself is multiplied by a set figure, which is 21,700 for 2014/15. There is no reduction if the employer only pays for some, but not all, fuel for private use in a period. Reimbursing business fuel Where a company car is used for business mileage and fuel is not provided, the employer may pay mileage rates for business travel. The employee must keep records of business mileage in order to claim reimbursement for business fuel. HMRC publishes quarterly advisory fuel rates for company car drivers. The rates from 1 March 2014 are: Petrol Diesel LPG Up to 1,400cc 14p 12p 9p 1,401 to 1,600 16p 12p 11p 1,601 to 2,000cc 16p 14p 11p Over 2,000cc 24p 17p 17p All Rights Reserved Page 4 of 5

5 Tax planning key points `Executive company cars have generally not been a tax-efficient perk for many years. However, very low or zero emission cars can be very tax efficient until April If an employee needs a car for business travel, the question of whether a company car should be provided will depend on the individual facts in each case. Some employees will prefer to suffer the tax charge in order to benefit from the convenience provided by a company car. The income tax rules now favour smaller fuel-efficient cars. In many cases, the provision of fuel for private motoring in a company car will not be tax efficient unless the employee does very high levels of private mileage. This guide is for general information only and is not intended to be advice to any speci erson. You are recommended to seek competent professional advice before taking or refraining from taking action on the basis of the contents of this publication. The guide represents our understanding of the law and HM Revenue & Customs practice as at April 2014, which are subject to change. All Rights Reserved Page 5 of 5

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