Company Car Magazine – A beginner’s guide to company car taxation by Alastair Kendrick, Tax Consultant at London based Wilder Coe LLP Chartered Accountants.

Background

The taxation rules for company cars are now relatively straight forward and were recently reviewed in a study by HM Revenue & Customs. The results of that study showed that the objectives of company car taxation were in fact being met. These objectives include encouraging employees to choose lower CO2 emission vehicles and in the budget this year the Chancellor actually announced a further incentive by further reducing the level of taxable benefit on vehicles which have a CO2 emission below 120 from April 2008. However at present no such vehicles are on sale in the UK market.

It also seems that the taxation of fuel provided for private fuel is set for some years to come. The basis of the taxable benefit is again fixed by reference to the CO2 emission of the vehicle.

However, the area which is subject to review and change relates to how tax relief is claimed in the taxation computation of the employer. A consultative process was recently announced in this area.

Employee Benefit in Kind

If a company car is provided, the employee can almost always use this for personal purposes as well as business. This results in the car being classed as a Benefit in Kind. Certain benefits are tax free, however the use of a company car is a taxable benefit in kind. Employers must therefore calculate the taxable part of this benefit. Taxable benefit is determined by referring to the list price of the vehicle and its CO2 emission. It is important to include in the list price of the vehicle any initial extra accessories or later accessories fitted to the vehicle. In the case of accessories fitted later then only those costing in excess of £100 need to be included. If replacement accessories are acquired then the cost of these can be ignored subject to them not being an enhancement to the vehicle.

In regard to diesel vehicles there is a 3% additional benefit in kind up to a maximum benefit in kind of 35%. If however, the car is Euro IV compliant and was registered prior to 1 January 2006 then the 3% surcharge is excused until 5 April 2006.

In determining the level of benefit in kind it is important to bear in mind that the list price of a vehicle for benefit in kind purposes is capped at £80,000. It is also important to net from the benefit charge the cost of any capital contribution made by the employee. The maximum reduction for a capital contribution is capped at £5,000.

In also calculating the benefit in kind this should be reduced to take account of any private use contribution made by the employee.

There are special rules in regard to classic cars which are those 15 years old or more at the end of the year of assessment, and with a market value for the year of £15,000 or more. There are also special rules in regard to vehicles which run on road fuel gas.

There is no benefit in kind in respect of ‘pool vehicles’ if these vehicles are not available for private use. If an employee is simply allowed to take the vehicle home because they are travelling early on the following day then this does not give rise to a taxable benefit.

Provision of fuel

The taxable benefit arises if the employee is provided with fuel for private mileage. The benefit in kind is determined from 2003/04 onwards by taking the figure of £14,400 and multiplying this by the relevant percentage figure (the CO2 emission figure). Where does the £14,400 figure come from?

This benefit can only be reduced to nil if the employee is required to, and does, make good all fuel provided for private use.

An employer can reimburse an employee who uses a company car on business travel for the cost of the fuel they purchase. The Revenue will accept that no benefit in kind will arise if the rate of reimbursement is at or below the advisory fuel rates which are available on HM Revenue & Customs website.

It is also important to bear in mind that the mileage being reimbursed is qualifying business travel. In this context private mileage and normal commuting journeys should be ignored. If there are concerns over this point it is suggested that the Revenue pamphlet 490 be consulted.

Employees who use their own vehicle on business

An employer can reimburse an employee for their business travel at a rate which does not exceed the approved mileage allowance payment limits. These rates are currently 40P for the first 10,000 business journeys in a tax year and 25p per mile thereafter. If an employer pays a rate in excess of the approved rates then the excess will need to be reported and the excess will be taxed on the employee. National Insurance will arise on that excess but in calculating the National Insurance charge, 40P per mile is the rate to be used regardless of business mileage.

Again in paying for business travel it is important that you are satisfied that the journey was of a business nature and the mileage was reasonable. The Revenue would expect you to have detailed logs of the journeys claimed which they may from time to time audit

VAT on fuel

The rules changed from 1 January 2006 and it is now essential that VAT is not recovered unless an invoice is available to evidence the purchase of fuel. If therefore the fuel was purchased by use of a fuel or company credit card this in itself is the evidence required. If the fuel was purchased by the employee then they should provide a fuel receipt. This does not need to reconcile to the amount claimed but only VAT can be claimed on the business cost or the invoice value which ever is the lower. In the case when no invoice is supplied then there can be no recovery of the VAT.

Tax position on the company

This is a complex area and it is clear that the rules will be changed to try to promote greener fleets. We will need to see the results of the consultation on this.

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