Many employers provide their employees with company cars if their job requires frequent travel.
However, the concept of company cars has become less attractive over recent years as a result of numerous tax changes.
So how exactly do the tax rules work when it comes to company cars? And what about electric vehicles, are the tax rules any more favourable for those?
Company Cars as a Benefit in Kind
If a company car is being used for personal reasons (shopping, cinema etc), it is regarded as a perk or ‘benefit in kind’ by HMRC. Just like other benefits in kind, the individual must pay tax on the value of the benefit, and the employer must pay Employers National Insurance (NI) on the value of the benefit.
In the case of a Limited company, if you are the car owner and a director of the company, you will be paying the tax twice (firstly as the individual receiving the benefit, then as the company/employer). So, this is a key consideration when it comes to tax efficiency!
Reporting Taxable Benefits to HMRC
Benefits in kind must be reported to HMRC by the employer. To do this, the employer must complete a P11D report, and this ensures that the employer and individual pay the correct amount of tax in relation to the benefit.
The steps involved in making the calculation are as follows:
- The p11D value is calculated and this is multiplied by the relevant percentage rate of income tax
- A percentage charge, depending on the vehicle’s emissions is then applied
(Which is why electric vehicles result in greater tax savings!)
Calculating P11D value for Company Cars
To calculate the p11D value, the following is considered.
- List price – the price of the car at the point it was made available to the employee. It includes the addition of VAT
- How many days the car was available within the tax year
- Capital contributions (expanded on below)
- Engine size, fuel type, and CO2 emissions – The CO2 figure that’s important for the vehicle is the one from the vehicle’s first registration
Just to complicate things, as tax systems often do, there are two sets of Benefit in Kind rates when it comes to company cars. Cars registered prior to 6 April 2020 are subject to one set of rates, and those registered after that date are subject to a different rate.
Luckily, the Government’s Fuel Benefit Calculator is a handy tool for this calculation.
Example of a Company Car Benefit in Kind Calculation
Your £40k salary puts you in the 20% tax bracket. Your car attracts a 25% benefit in kind rate (based on its official CO2 emissions). You will pay 20% of 25% of its list value.
More on Capital Contributions
For this aspect of the calculation, you would deduct any ‘capital contributions’ made by the employee. This could be up to £5,000 for the vehicle, and these contributions are deductible for tax purposes. The more the employee contributes personally, the lower the value of the benefit, which equates to less tax.
It’s also possible, if agreed by the employer, for an employee to contribute towards the costs of the private use of the car. This value would need to be agreed in advance of the car being used and would need to be quite specific.
The benefits of an electric vehicles for limited companies
To encourage greener options, the Government has used taxation to encourage employers to move away from petrol and diesel vehicles. While a petrol or diesel car attracts a percentage charge of 30% or more, electric vehicles are chargeable at a rate of just 2% (frozen until 2025).
Therefore, a company car driver who opts for an electric vehicle will save thousands compared to the driver of a diesel.
As electricity is not classed as a ‘fuel’, in the way that petrol and diesel are, there is no need to apply employee fuel benefits when using an electric car, which means no Class 1A NI charge for the employer.
The fuel advisory rate for electric vehicles is significantly lower than the rate for petrol and diesel cars as it is based on the size and type of engine.
Companies can use capital allowances to claim tax relief on the assets they buy which, reduces their Corporation Tax bill. A 100% first-year allowance is available for any expenditure on fully electric vehicles, which is effectively the full value of the asset. Allowances are also available on petrol/diesel fuelled vehicles, but at a higher rate according to their CO2 emissions.
Super Deduction does not apply to the purchase of cars, but it can be used against electric vehicle charging stations. Classified under ‘machinery, computers and tools’, the 130% first-year capital allowance can be applied to electric vehicle charging stations. So, if a business spends £10,000 fitting electric vehicle charging points, they can claim the 130% allowance and reduce their profits subject to Corporation Tax by £13,000.
Example of a Company Car Capital Allowance
The company purchases a car for £50k and spends £5k on a charging point.
100% of £50,000 car = £50,000
130% of £5,000 point = £6,500
Total Saving = £10,735
This assumes the car is purchased in the 22/23 tax year
There is a further benefit to the introduction of electric vehicles as the government allows employers to install charging facilities without treating recharging as a benefit-in-kind. Employees can therefore charge their vehicles ‘for free’ while at their company offices. It is also possible for employers to pay for the installation of charging points at the home of an employee and this wouldn’t be treated as a benefit-in-kind either.
How does a company account for electric company cars?
The process of accounting for electric company cars is the same as any other vehicle, but the benefit of electric cars is that the full capital allowance is available in the first year.
Assume that the vehicle has been purchased using a hire purchase scheme. In this case, the total amount of the loan would be reported on the balance sheet, and this would reduce each year as loan repayments are made. The interest element of the repayments is accounted for in the profit and loss account as an expense.
On the other hand, if the car is leased with no purchase option, then it does not belong to the company, and you would instead receive a reduction of the expense payable against your corporation tax bill as opposed to the above allowances.
VAT implications of Electric Company Cars
It is not possible to reclaim VAT on the purchase of vehicles, whether or not they are electric. The only exception to this would be if the vehicle (electric or fuel) is used for business purposes only. However, it is likely this would prove tricky to justify to HMRC as it doesn’t even allow for commuting to and from the business, it would need to remain on company premises overnight.
Further advice on Company Cars and Benefits in Kind
The calculation of tax for Benefits in Kind, can be complicated, and in area such as company cars where the calculation rules and rates are frequently subject to change, the challenge only increases.
If you need support or advice on this area of taxation, either from a business or personal perspective, please don’t hesitate to get in contact with us.