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Company car tax under the new regime

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Ray Chidell of Mazars Neville Russell has written a book on the new emissions-based car tax scheme with his co-author Alison Sampson. In the workshop he explains many of its nuances and deals with some frequently asked questions.

Introduction
(Gary Mackley-Smith) Welcome to the first tax workshop for August 2001. This week Ray Chidell, author of the Company Car book, published by ABG, is going to answer questions on company car tax.

In future weeks we will be looking at company car software and employees leasing their own cars for business.

Cars

The new rules for company cars
Firstly Ray, what is going to change next year on company car tax?

(Ray Chidell) That’s a nice gentle starter! Well from 6 April 2002, there will no longer be any reduction in the benefit in kind tax charge for achieving certain levels of business mileage or because the car has reached a certain age. Instead, you will have to establish the “appropriate percentage for the year” of the “price of the car as regards the year”.

(Gary Mackley-Smith) What is this “appropriate percentage”?

(Ray Chidell) This is calculated by reference to CO2 emission levels for cars first registered from 1 January 1998 and by reference to engine size for cars reregistered before that date. Obviously the engine-size calculation will be become less used as time goes by.

(Gary Mackley-Smith) I see. Are any other matters taken into account in the calculation?

(Ray Chidell) Yes. Whichever method is used, the result is then adjusted to take account of any periods when the car is not available and of any employee contributions. In both these cases, the same rules will apply as at present.

(Gary Mackley-Smith) Ray, what did you mean earlier on when you referred to the “price of the car as regards the year”?

(Ray Chidell) It’s a rather cumbersome phrase, but the steps for obtaining this are contained in ICTA 1988, s 168(5)(e). You find the list price, add on any car accessories, take account of employee capital contributions, consider whether the car is a “classic car”, as defined in the legislation, and consider if the price needs to be capped (where it is an expensive car).

(John Line) What sort of figures are we talking about? Pre-1-1-98 cars? What percentages? Post-31-12-97 cars? How does one ascertain the percentage for a particular type of car?

(Ray Chidell) Under the new rules, for most cars the % will be determined by the CO2 emissions, ranging from 15% of list price to 35% for gas-guzzlers. For older cars, it is a question of looking at engine size.

Diesel cars
(Patrick Smith) What is the advice to people driving or thinking of buying a diesel car – what is the diesel “prognosis” looking ahead

(Ray Chidell) I am just driving a diesel car now for the first time and enjoying it! In tax terms for those under Schedule E the balance is whether it is worth incurring a 3% surcharge – the penalty for diesel cars reflecting the fact that their CO2 levels are lower but they emit more of other pollutants.

LPG Gas powered cars
(David Bowyer) what happens to the fuel scale charge for lpg “gas” powered vehicles. Given the price of the fuel and increase in the number of outlets it will surely increase

(Ray Chidell) Am I right in thinking that these cars also use petrol or diesel to start them, for example?

(David Bowyer) yes as a dual fuel! – see your point!

(Ray Chidell) The only new rule that springs to mind in this area is that any part of the list price that is attributable to converting a car to such fuel can be ignored in calculating the list price.

Traffic

High mileage cars
(Richard gee) We run a Ka and a Mondeo – covering 20,000 and 50,000 business miles per annum – I still think it is better for us to run them as company cars. I own the company. Am I right?

(Ray Chidell) Richard: there is not a straightforward answer to this very important question. You will certainly find that the tax charge rises substantially, at least for the Mondeo, as you have only been paying tax on 15% up to now.

You also need to bear in mind, though, that there are changes to the treatment of privately owned cars as well as company cars. From April, if you were to own it privately, you would be able to claim only 40ppm for the first 10,000 miles and 25ppm thereafter.

(Richard gee) OK – but I’ve got it into my head that upping a salary to cover a car is all very well, but at least when it’s a company car, the company owns the car and residual values are still several thousands pounds. We have cheap insurance and cheap servicing costs which are not a burden. I cannot see how it is better to say, increase a salary by £250 per month, when at the end of it, there is no tangible asset whatsoever. The only benefit of that I can see is that we don’t incur the running costs/insurance, but these are v. small. Is there a solution that doesn’t involve what is effectively a massive salary hike for an employee?

(Ray Chidell) Richard: Yes there are advantages of both company and privately owned cars. Some of these are measurable, but there are also “softer” factors.

Emissions
(Russell Tallyn) How can we be certain that the same spec of car in different parts of the country will be judged the same emissions wise

(Ray Chidell) Russell: all new cars now have an official CO2 figure. The figures can be obtained from www.smmt.co.uk – the Society of Motor manufacturers and Traders.

(John Line) I have just looked at the www.smmt.co.uk Website mentioned above. Oh this is going to be fun? Appears, for example, a car rated at 245, will be taxed at 31% in 2002-03, 33% in 2003-04 and 35% thereafter.

List Price
(Ray Chidell) Can I lead the conversation to the concept of “list price” because this is important too, though not changing under the new rules.

In nearly all cases the list price is the price published by the manufacturer, importer or distributor as the inclusive price appropriate for a car of that kind if sold in the UK singly in a retail sale in the open market on the day before the car’s registration. So bulk discounts cannot be taken into account.

(Gary Mackley-Smith) There can be problems here, can’t there, with dealer’s list price and the manufacturer’s list price?

(Ray Chidell) Gary: Yes, but the Revenue has copies of Glass’s Guide which they will consult where there is a problem. There is no statutory basis for the figures in this guide, so they can be challenged if necessary.

Imported cars

(Gary Mackley-Smith) What is the list price of an imported car? We’ve had a few questions on this

(Ray Chidell) Just because the car is imported does not mean that the way the price is determined changes. If there is no precise equivalent model in the UK to that imported then a “notional price” is used. This is basically the price which might reasonably have been expected to be the list price if it had been sold in the UK.

(John Line) For the avoidance of doubt, any difference whatsoever in ascertaining the list price of the car? In other words, will it always be possible for the list price used in 2001-02 to be carried forward to 2002-03 (assuming no new accessories).

(Ray Chidell) John – no change to list price rules. Incidentally, also no change to rules re employee contributions.

Petrol

Fuel benefit
(Patrick Smith) As a broad generalisation is it now the case that private fuel benefit is now a dead duck – for “normal” private mileage and say 2 litre car

(Ray Chidell) Yes, Patrick. I think this is one area where the position is becoming relatively clear. Unless an individual covers a very high level of private mileage, the fuel scale charge should be avoided.

(Hugh Blake-Thomas) These changes are for the car benefit right, but is the fuel benefit affected?

(Ray Chidell) These changes are for car benefit. However, the Government intention is to increase the fuel benefit by 20% pa in real terms, for several years to come – all part of the green thing, of course!

More on fuel scale- bear in mind that it is all or nothing for the year – no good changing now: wait until just before 5th April – lots of pitfalls in this area!

(Hugh Blake-Thomas) Ray, you say a high private mileage is needed to be worth the benefit, is that in mileage or % terms?

(Ray Chidell) Hugh: in mileage terms – if you are not spending much on private fuel then it is better to pay for it privately than to pay an exorbitant fuel scale charge. Also, if the employer is not paying for private fuel, he may pay a higher salary!

Under the present regime tax would be paid on 35% of the list price. Under the new rules, 35% will be worst case and it could be much less than that.

(Hugh Blake-Thomas) Thanks for clarifying that Ray.

Calculator

Calculation
(Russell Tallyn) forgive me for sounding negative but I still do not understand why each year we have to take the list price of the vehicle (brand new) rather than the actual present value

(Ray Chidell) Russell: don’t shoot me – I am only the piano player! The rules simply say that you have to look at the list price (even ignoring any discounts obtained) rather than at the value.

(Russell Tallyn) Ray – please don’t take offence

(Ray Chidell) Russell: no offence at all!!

<Examples of the car charge
(Gary Mackley-Smith) Ray, can you give a typical example of a computation under the new regime?

(Ray Chidell) Gary: A very simple example would be someone who has a company car with a list price of say £20,000, bought next year. The employee pays tax at 40 per cent and makes a capital contribution of £5,000. The car has CO2 emissions of 202 g/km. The calculation would be (£20,000 – £5,000) x 22% = £3,300 x 40% = £1,320.

(Gary Mackley-Smith) How does that compare with the current regime?

(Ray Chidell) If he bought the car this year and say he did 10,000 miles a year, the figure would be £15,000 x 25% x 40% = £1,500. So he’s better off under the new rules in this example.

(John Line) Ray, am I right? Using your example … 22% in 2002-03, 24% in 2003-04 and 26% in 2004-05 ?

(Ray Chidell) John: 22% and 24% are correct. It is not yet established policy that the levels will continue to rise thereafter.

(John Line) Ray, I have to say that the SMMT Website does not make that clear. It has three well-defined columns of percentages in its table at :- http://www.smmt.co.uk/co2/co2intro.asp

(Ray Chidell) John: sorry – you are absolutely right – I was miscounting my years in the haste. We do have figures up to and including 2004/05, which are the figures you have shown.

Low mileage
(Hugh Blake-Thomas) I’ve read/heard that the perk car, i.e. less than 2500 business miles, for a 40% taxpayer is generally going to be cheaper (or no more expensive) under the new regime than the old. Is that right? Is there a cut off price in each band at which that alters?

(Ray Chidell) This is why – against the public perception – the new rules can be good news for some people. The Government is actually forecasting a substantial increase in the number of new company car drivers. It is all a question of individual circumstances.

Emission percentages
(Hugh Blake-Thomas) Are the emissions ratings for cars up to 3 years old published anywhere yet?

(Gary Mackley-Smith) Hugh, take a look at the cartax table. This helps to explain the emissions.

(Ray Chidell) Hugh: the SMMT Website should have these details, and for newer cars the figures will be on the registration document.

(John Line) OK, what about the percentages for pre-1-1-98 cars ?

(Ray Chidell) John: for older cars – first registered before 1/1/98 – the figures is based on cylinder capacity – 15%, 22% (sic) or 32%.

22% for up to 1400cc, 22% 1401 – 2000 cc, and 32% thereafter.

(John Line) Ray, check …. 15% up to 1400cc ?

(Ray Chidell) John: yes – the figures look odd but 15% is correct for the smallest cars.

(Hugh Blake-Thomas) but only if they were doing more than 2500 business miles Ray? For big car drivers to be worse off I mean

(Ray Chidell) Yes. In simplest terms, from April 2002, drivers of smaller cars will tend to be better off than at present, whether the cars are company cars or privately owned. Drivers of larger cars will tend to be worse off.

Drivers of larger company cars doing say 10,000 business miles may still be worse off – it depends on the CO2 levels. Drivers of larger private cars will almost certainly be worse off because of the changes to the FPCS rules.

Car

Company car or not?
(Gary Mackley-Smith) Ray, so is it still worth having a company car?

(Ray Chidell) That’s the question everyone is rightly asking, but it really does depend on all the circumstances. There are lots of factors to take into account in answering that question Gary. And they are not all tax factors. Cash flow, motivation of employees, the cash or car alternative, admin matters for the employer and employee (if he / she were to use his own car on business), etc.

(Gary Mackley-Smith) Ray, will the new rules from April next year affect the decision on whether to have a company car?

(Ray Chidell) Gary: yes, quite probably. A company car driver who does less than 2,500 business miles cannot be worse off under the new rules. But if the car’s CO2 emissions are low or moderate then the driver will be better off under the new rules.

(Hugh Blake-Thomas) Ray, thank you, you have confirmed all my conclusions, including that it is still a nightmare for everyone to work out whether to have a company car or not!

(Ray Chidell) Oh yes, and no change to rules re periods when the car is not available for private use (but lots of pitfalls in this area too).

(Ray Chidell) Hugh: you had better find a good book on the subject so that you can consider it at a more considered pace!!

(Hugh Blake-Thomas) I don’t suppose you have one in mind Ray!

(Ray Chidell) Hugh: I couldn’t possibly comment!

Second car
(John Line) Ray, thanks for that. What about a second car (at the same time as the first car) ? Any change ?

(Ray Chidell) John: yes, there is effectively a change re second cars. At the moment, they get penalised by shifting the business mileage thresholds required before the tax charge is reduced. Under the new rules, second cars will be treated in exactly the same way as first cars. For this reason, providing a company car to the wife – whoops, I mean spouse – of the director may become a good idea under the new regime.

(John Line) Ray, so a (1400cc car, pre-1-1-98, rated at 15%, could be just the job for the spouse !

(Ray Chidell) John – absolutely (or even a newer one with low CO2)

Own companies
(Gary Mackley-Smith) For those running their own companies, would it be a good idea to take out an interest-free loan from the company to fund the private purchase of a car for business use?

(Ray Chidell) This can be worth doing. A loan of up to £5,000 would not normally have any adverse tax consequences. Going above this figure brings the benefit in kind rules into play on cheap loans. The Companies Act also prohibits larger loans. Don’t overlook s 419 either.

(Gary Mackley-Smith) Picking up on Richard Gee’s earlier point, as a director of my own company doing little business miles, would it be better to transfer the car into my own name?

(Ray Chidell) Gary – there are really two issues here. There is the one-off tax charge on transfer and then the ongoing tax consequences of having the car in private ownership.

On transfer, the taxable benefit is calculated by reference to the market value of the car – and Class 1A NIC will be due on that value, negating any tax advantage in the actual act of transfer. However, the overall tax position for future years may be better if the car is held privately. Yet again, it needs to be looked at on a case by case basis.

FPCS
(Gary Mackley-Smith) What happens to the Fixed Profit Car Scheme under the new rules?

(Ray Chidell) Touched on this above. The proposal is to have a single uniform rate for all cars (and vans). This is expected to be at 40p per mile for the first 10,000 miles each tax year, reduced to 25p per mile thereafter. This will encourage the driving of smaller cars.

(Ray Chidell) I have my VAT expert colleague, Alison Sampson, in with me. Anyone want to throw some VAT queries this way?

(Hugh Blake-Thomas) Have you got a PAYE specialist there too?

(Ray Chidell) Hugh – try us!

Record keeping

Record keeping
(Gary Mackley-Smith) What mileage records will I need to keep under the new rules?

(Ray Chidell) Under the current rules for a company car, it is necessary to demonstrate the level of business miles – unless the car is expected to do less than 2,500 business miles per year. From April 2002, it will not be necessary to keep mileage records for benefit in kind purposes. But such records will still be needed if fuel is provided for private use and it is claimed that the full cost of such fuel is being made good by the employee.

(Gary Mackley-Smith) What about VAT records?

(Ray Chidell) This depends on the method of accounting used. No mileage records need be kept where not VAT on fuel is claimed or where all VAT on fuel is claimed and the private use is accounted for by using the scale charges.

(Gary Mackley-Smith) Do records need to be kept in other situations?

(Ray Chidell) Yes. Where a business makes a charge to the employee for private use, or claims input tax only on the fuel for business use, records need to be kept. Where the employer pays a business mileage allowance and claims VAT on the fuel element of that allowance, it is only necessary to keep records of the business mileage.

(Gary Mackley-Smith) Ray, many thanks for answering all these questions. We have run out of time. Company car tax is a burning issue at the moment and anyone wanting further information will find it in Ray’s book (see below for details) and in our CarZone.

(Ray Chidell) Goodbye, all – thanks for joining in!

Further information from Mazars
For any further advice or assistance in this area, please contact Ray Chidell or Graham Hole on 01273 206788, or your usual contact at Mazars Neville Russell if you have one.


See Ray’s previous bulletins on such matters as employee medical expenses, the choice between van or car, payments in lieu of notice, employee clothing, employee contributions to company cars, tax-free benefits, FPCS, employment status, P11Ds, PAYE Settlement Agreements, Class 1A National Insurance, Company car issues, loans to employees, Christmas parties, and many more.


Company Car Book
abg professional information: ISBN 1-84140-151-X

Written by Ray Chidell and Alison Sampson, this newly
published book has more than 50 frequently asked questions and extensive coverage of tax planning in relation to company cars and other vehicles, all taking full account of the April 2002 changes. The book is available (price £40) from the publishers on 020 7920 8991.


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