Are Company Cars Ever A Good Idea?

It is a question which is often put to us, mainly from a tax point of view of course, and you will probably not be surprised if I say ‘it depends’! Changes in recent years increasing the taxable benefit rates on lower emission cars has meant that the amounts on which company directors and staff are taxed could have increased significantly. 

Generally speaking, if a company provides a car to an employee (including directors) then the fact that the car is available for private use as well as for business purposes is enough for a benefit in kind income tax charge to arise on the employee.  The tax charge is calculated by reference to the list price of the car when new (plus the list price of any optional extras) and then applying a percentage to that amount, based on the car’s CO2 emissions.  The higher the car’s CO2 emissions, the greater the taxable benefit will be.  For example, for a diesel car with CO2 emissions of 160 gms/km, the taxable benefit in kind arising would be equivalent to 28% of the car’s list price.  The employee would then pay tax on that figure at their marginal income tax rate.  The benefit is reported on a form P11D for each tax year for which the car is provided and the company also pays Class 1A National Insurance (currently at a rate of 13.8%) on the value of the taxable benefit.

The level of this taxable benefit in itself may not be too significant but the potentially much more significant tax charges arise if the company provides fuel for both private and business journeys.  If that is the case then a flat rate sum of £21,700 (for 2014/15) is multiplied by the applicable taxable percentage (as mentioned above), or a proportion thereof if the car is not provided for the whole year.

Are there any ways to avoid these taxable benefits?

It can be very difficult to convince the Revenue that no taxable benefit arises on cars provided to employees but in theory there is an exemption if the company prohibits private use of the car and there is, as a matter of fact, no actual private use.  In practical terms, a clear agreement should be drawn up (which might be able to be included in the individual’s contract of employment) which states that private use is prohibited as part of the terms on which the vehicle is provided to the employee.  For these purposes, ordinary commuting i.e. travel between the employee’s home and place of work is usually classed as a private journey.

There is also an exemption for company pool cars but, again, there are numerous conditions to be met.  For a car to qualify as a pool car it should not normally be kept at or near an employee’s home and normally be kept on the business premises when not in use, it should be used by more than one employee and should not ordinarily be used by one employee to the exclusion of others and there must not usually be any private use of the pool car except for any private use which might be incidental to business use, for example an employee taking the car home in the evening before an early start for a business journey the next day.

In practice, the Revenue would expect to see very detailed records in support of a car being classed as a pool car which would probably need to include a log of every journey undertaken in the pool car detailing the purpose of the journey and who use the car with a note of how many miles were undertaken and a running total of the miles which should be reconciled to the odometer readings from the car.

Are there any circumstances in which a company car is beneficial from a tax point of view?

If very low emission cars are provided to employees then the taxable benefit can equally be very low and indeed for electric cars can be zero.  If CO2 emissions are 75 gms/km or less then only 5% of the car’s list price is taxable on the employee.  Furthermore, if the car is electrically propelled or has CO2 emissions of 95 gms/km or less then the company should be able to claim 100% capital allowances on the cost of the car as long as it is acquired brand new from the forecourt.  The CO2 emissions level at which 100% capital allowances are available has reduced over the last couple of years and is expected to reduce further to 75 gms/km in next year’s finance bill.

What about the fuel benefit?

It is relatively rare that the provision of fuel for private motoring in a company car is tax efficient but this can arise in a situation where an employee’s private mileage is very high.  In most other cases it is sensible to ask the employee to meet all the fuel costs and for the company to then reimburse them for business journeys (using HMRC’s advisory fuel rates) or, if the company meets all the fuel costs, to ask the employee to then reimburse the company for private journeys.  HMRC publish these advisory fuel rates quarterly via their website.  Again, to avoid a benefit in kind arising detailed mileage logs should be maintained to record any business or private journeys as appropriate to evidence that only the cost of business journeys has been reimbursed to the employees or the cost of private journeys has been repaid to the company by the employee, depending on who meets the cost of the fuel.

The above is for general guidance only and no action should be taken without obtaining specific advice