One of the most frequently asked questions we receive is in relation to the use of cars for business purposes and how this will affect the tax liability.
Here, we will look at the various options available for business owners when it comes to work transport.
The current system of tax relief and benefits in kind are all linked to the CO2 emission of the car. There are a number of initiatives now underway to reduce emissions from vehicles. Thinktank Policy Exchange have reported that 70% of nitrogen dioxide emissions in London are caused by diesel cars and vans.
The tax system has long been used to incentive behaviour. With air pollution and congestion becoming key issues within London and other major cities, the government has put in place a system which encourages company car buyers towards efficient green vehicles.
How the existing car tax system works
If you decide to purchase a car for your limited company, the tax relief available will be determined by the CO2 emission of the vehicle. In general, cars with emissions of more than 130g/km will only benefit from an 8% tax deduction on a reducing basis.
In contrast, the cost of a car with emissions of 75g/km or less are available for 100% tax relief in the first year provided they are bought brand new by the business. Electric vans are also an option for 100% tax relief but do check that what you are buying meets the HMRC criteria for a van.
Up to 5th April 17, the personal cost to the driver in terms of the benefit in kind they pay is also linked to the CO2 emission – with the relevant percentage based on emission being applied to the cost of the car plus accessories.
For all new arrangements or new cars ordered after this date, the benefit in kind value will now be calculated as being the higher of the benefit derived from the emissions and company car value and the cash allowance where this is an option offered as an alternative.
For tax year 17-18, even cars with emissions of 50g/km or less will attract a benefit in kind charge of 9%. This rises to a staggering 37% for cars emitting over 190 g/km.
What are the options ?
- Check your cash allowance first and compare this to the benefit in kind on your proposed company car. It may be more tax efficient to take the cash and source a vehicle privately.
- Update your vehicle – in the past, many drivers bought diesels in good faith thinking these were less polluting. Consequently, around a third of the UK car fleet is now made up of diesels. The planned abolition of the 3% diesel supplement on car drivers originally announced for April 16 has now been delayed until April 21 meaning a real cost for diesel drivers who anticipated the reduction in their personal tax. New petrol cars will benefit from cleaner technology and lower emissions. Green cars such as hybrids and electrics can be costly but benefit from grants of between £2,500 and £4,500 and a fraction of the fuel costs going forward. Use the link here to choose your new company car and assess the personal tax impact: http://comcar.co.uk/
- Get a van – these attract a much more favourable tax rate than cars as they are classed as plant and equipment by HMRC. The purchase of a van can qualify for 100% tax relief within the current annual investment allowance of £200,000. Company vans also have a fixed rate of benefit in kind which is not related to CO2 emission and in general is much lower than those for car drivers. You can check the current list of vans approved by HMRC here.
- Have a pool car – provided you meet certain conditions about use and where the car is kept overnight, this will save employees suffering any car tax benefits. The car must be available to all employees not just the boss to qualify as a pool car.
- Lease a car – tax relief is available on the monthly payment and VAT can be claimed with a reduction of 50% if there is private use. Drivers will still suffer from the benefit in kind charge though.
- If you don’t want to put the cost of the vehicle and the running costs through the business, the more straight forward option is to record your business mileage and then claim 45 pence per mile for the first 10,000 miles and 25 pence thereafter per tax year. Whether this produces a higher cost and therefore a lower tax bill than the other method will depend on the type/age of car and how you drive it. We will be able to advise which method is more beneficial to you. Once you choose a method, you have to apply this each year on a consistent basis until you change the car.
- Hire a car as and when you need it – Where there is no company car, there is no benefit in kind arising on a hire car that is used by an employee providing that the car being provided for business travel with only ‘incidental’ private use. According to HMRC guidance, incidental private use is not measured by the actual number of private miles driven, but rather in the proportion of the private element of the journey when viewed as a whole. A hire vehicle provided for a business journey which is taken home overnight to serve this purpose the following morning will be classed as incidental private use. A benefit in kind charge will arise where the vehicle has been used for private purposes over the weekend. The charge will be based on the normal rules of CO2 emissions, apportioned by the actual time used over the tax year. Where a hire car is being used say whilst the company car is being repaired, then there is no change to the main benefit in kind where for the company car providing it is not unavailable for a period of 30 days or more. There is no additional benefit arising from the use of a hire car provided it is not significantly better than the company car itself.
Always check with your car dealer or leasing company what the CO2 emission of your chosen car is before placing your order. If you are looking to replace your car, we recommend Bristol based Lane Pearson Automotive Group. They can help you a buy a new or used car and provide financing. http://www.lanepearson.co.uk/
Remember that as a company director, a leased car will still be reportable and taxable as a benefit in kind.
This means you will need to calculate the corporation tax saved on the lease costs against your personal tax bill and employers national insurance on the P11D.
Looking to the future
Tax from fuel, road tax and personal tax on benefit in kind charges are key revenue streams for HMRC. Go Ultra Low is a government backed initiative to promote electric cars. They predict that 50% of all new car sales will be electric by 2027 so where does this leave the government in terms of it’s finances ?
One option is that they will find other ways to tax the motorist – congestion charges are already in place in London but have little real impact on driving within the capital with a significant increase in private hire vehicles who now make up around 38% of car traffic in central London (The Economist).
It is likely that use will be made of GPS to charge drivers based on date and time of journeys and locations. According to The Economist, Singapore is already planning on adopting this from 2020 meaning drivers will receive real time information on the cost of driving certain routes at certain times so alternative options can be considered.
A Word About Fuel
Sole traders have more flexibility here as they can buy fuel through the business with the private use element being disallowed when the tax return is prepared.
Company directors as a rule should not buy fuel through the company as this incurs a fixed benefit in kind charge of a staggering £22,600 multiplied by the same percentage as the car benefit based on the CO2 emission for the car.
Fuel can be claimed by directors at the HMRC fuel rates which are based on engine size. These rates are reviewed twice a year so do check the latest official rates herehttp://www.hmrc.gov.uk/cars/advisory_fuel_current.htm