If you are responsible for the payroll and company cars are suddenly introduced, then don’t despair, you may even find that the tight structure is easier to control than payments for private car use. The simple availability of a car for private use is sufficient for the full tax charge to apply, and so there are no complications with regards to mileage, though you will still need mileage controls for business only fuel payments.
By Rupert Russell, publisher of www.comcar.co.uk, a specialist company car tax website.
Is it a company car?
Any car that is owned, leased or rented by the company and provided to an employee earning more than £8,500 or a director should be taxed on the driver.
Pool cars are not taxed and so present a tempting method of evasion. However the tax inspector will not be convinced by arguments such as “the car has to be taken home at night for security” and may respond by levying several year’s worth of tax on the individuals or company.
Alternative car ownership schemes which use the employee’s salary and car mileage payments to fund their cars should be simple on the payroll and may not require a P11D but they can go badly wrong if poorly designed or used inappropriately.
Problems can arise if an employee leaves suddenly and expects the company to sort out outstanding car liabilities. Some schemes depend on critical assumptions over levels of business and private mileage and either the employer or employee will be out of pocket if real mileages are different. These problems should not be ignored, and it should be possible to minimise future issues if they are addressed in advance.
Form filling
The P46 (car) is used to get an individuals tax code adjusted so that the PAYE system taxes at the right level throughout the year. If you don’t complete this, the driver could end up with a large adjustment at the end of the tax year.
Car benefits also make up the largest section of the annual P11D form, and the issue of a company car is probably the main reason for filling out these forms for the first time for an employee. The Inland Revenue provide guidance on completion but you should also consider the following points:
Getting the information
Make a big effort to get the car information at the point of purchase. As you can see below it is straightforward but won’t be easy to find later on. Make sure that the seller/buyer provide details of the car’s original list price.
The registration date, CO2 and fuel type letter will be on the V5 document. Don’t tolerate any delays from your leasing/contract hire supplier in providing this information. Getting information on older cars at a later date can be a nightmare, but www.parkers.co.uk provide original prices on old cars.
How the price is calculated
The price used is the official list price when new, including VAT, delivery charges, and options but excluding the first registration fee (FRT £38) and the Vehicle Excise Duty.
This is why the P11D price used in the tax calculation is slightly less than the “On the Road” price. It is only the official new prices which matter. All those special offers of £2,000 discount, cashback or ex-demo specials that you have seen will not reduce this. Even second hand cars are calculated on the new price. The main exception to this price rule is that the maximum price used is £80,000 but you can also exclude the cost of options necessary for disabled persons or extras required for work such as towbars, roof racks and security measures.
Ensure that all non-capital type costs have been excluded from the price. As well as VED and FRT, you can exclude petrol and servicing cost packages which may have been rolled into the list price.
If for instance the list price includes free servicing for three years the driver will be taxed twice on this unless the manufacturer specifies the value of the service element separately. This is because the annual company car tax charge is deemed to cover all servicing and fuel elements.
Finding the CO2 percentage band
All new cars other than very low volume hand built models are issued with a CO2 figure on registration, based on official test results of the carbon dioxide emissions measured in grammes per kilometre. This will be on the V5 document but you can also find a full history at www.vca.co.uk
This figure is then applied to a banding table to find the appropriate CO2 percentage for that car. The maximum is 35% and normal minimum is 15%, though even lower rates are possible for alternative fuelled cars. The P11D Working Sheet 2 will take you through this if necessary.
The company car tax rules are all laid out by the Inland Revenue at www.inlandrevenue.gov.uk/cars with links to other relevant documents.
What the 2005 Budget brought
One wonders if Gordon Brown’s treasury team bothered to look at the practical impact of the ‘simplification’ to alternative fuel discounts proposed in the budget.
The only car to be adversely affected is the Honda Insight. With official carbon dioxide emissions of just 80 grammes per kilometre of CO2 and a combined mpg of 83.1 it has a claim to be the most environmentally friendly car of recent years.
Company car drivers who chose this car and benefited from a low rate of company car tax will be surprised to learn that their car benefit tax will jump up by 20% in April 2006 when the simplified structure comes into place. Drivers of large bi-fuel vehicles such as the Mitsubishi Outlander LPG will benefit from marginally lower tax and everyone else will be unaffected.
The new rules which are to operate from April 2006 allow a flat 3% discount for hybrid electric and petrol cars. This compares to a current discount of 2% plus an additional 1% for each 20g/km the car’s emissions fall below the level of CO2 qualifying for the minimum petrol percentage. Since 80g is 60g below the 140 grammes per km set for future years the older rules would have given a 5% discount in total.
The overall adverse impact of the Budget simplification may only amount to a maximum tax increase of £136 pa ( for a 40% tax payer) for just a handful of drivers, but it is a perverse outcome for those individuals who led the way in adopting low emission car technology.
