Will company cars continue to be a popular employment-related benefit, despite further increases to the generally high income tax charges on them?
A director or employee who is provided with a company car and who also receives free fuel from his employer is taxed on the cash equivalent of the benefit each tax year. The tax charge is based primarily on the net cost of the car, including fixed accessories at time of purchase, adjusted by a calculation based upon its carbon dioxide (CO2) emissions.
The percentage adjustments are determined as fixed figures in relation to emission threshold values. The benefit against tax clearly declines for the company car taxpayer, as car emission levels increase, encouraging companies to purchase and supply smaller and lower emission vehicles.
The changed Revenue and Customs (HMRC) measures, are in response to the UK’s environmental carbon reduction targets and subject to EU carbon emission requirements. Government and EU requirements are designed to favour cheaper cars with lower CO2 emissions. These changes, which affect any business making a company car purchase are effective from this month (April 2013).
Changes from 2013-14
The lower threshold will be reduced from 120g/km to 115g/km. The lowest appropriate percentages are still 0 per cent and 5 per cent. 10 per cent will now apply to cars with CO2 emissions of 76g/km to 94g/km. The appropriate percentage will increase by 1 per cent for all vehicles with CO2 emissions between 95g/km and 215g/km, to a maximum of 35 per cent.
Changes from 2014-15
The lower threshold will be reduced from 115g/km to 110g/km. The lowest appropriate percentages are still 0 per cent and 5 percent. 11 per cent will now apply to cars with CO2 emissions of 76g/km to 94g/km. The appropriate percentage will increase by 1 per cent for all vehicles with CO2 emissions between 95g/km and 210g/km, to a maximum of 35 per cent.
Changes from 2015-16
The appropriate percentage for zero emission cars reverts to 9 per cent unless this figure is changed in any future announcement. The special rules for cars with CO2 emissions not exceeding exactly 75g/km will be abolished.
Businesses and employees need to examine carefully the implications of these changes and other changes like reductions in capital relief, in relation to the benefits of company cars.
Alternative arrangements exist, including where directors and employees do not have company cars, but use their own vehicles for business purposes. Here HMRC identifies set rates, regardless of engine size, at which an employer can reimburse such employees without triggering a tax liability.
Where an employee is provided with a company car but is responsible for providing the fuel, HMRC also publishes mileage rates. These can be used for agreeing dispensations in respect of reimbursed business mileage for company car drivers.
Where businesses, directors and employees see an importance in having company cars which come with higher levels of CO2 emissions, they should anticipate taking on board an increase in additional tax liability, even beyond what has just been announced!
If you have any questions or queries relating to this area of tax planning, contact one of the team who will be happy to help.