Ray Chidell of Mazars Neville Russell provides TaxZone readers with the latest in his series of bulletins on employer-related tax issues. Ray is author of the P11D Handbook and the abg book on company cars. He offers employers a free, regular e-mailed tax advice bulletin, Employer Tax Update (ETU).
To get on the mailing list for his free bulletins, simply send an e-mail note of your name and company to ETU@mazars-nr.co.uk
The following factsheets can be given to employees to explain the new company car tax rules. Many employees do not yet understand the implications.
FACTSHEET 1: Company cars
This factsheet deals with company cars – cars that are bought or leased by an employer and made available to an employee.
The tax rules concerning such cars are changing radically from 6 April 2002. There will be big winners and big losers amongst company car drivers. Many companies are seeking to cut back their company car fleets but at the same time the Government are predicting that there will actually be an increase of some 200,000 company cars over the first few years of the new system.
Current tax rules
At present, a company car driver will typically pay tax on 25% of the list price (not the cost) of the car each year.
Example
John drives a car with a list price of £16,000. John pays additional tax each year as if he were receiving an extra salary of £4,000, calculated as 25% of £16,000. John will pay tax at 22% or 40% (or partly at each rate) on the £4,000.
This 25% figure is used for drivers covering between 2,500 and 18,000 business miles each year. If the business mileage falls below 2,500 miles then the car is treated as a perk rather than a business tool, and the tax charge is calculated on 35% of the list price (so, on £5,600 rather than on £4,000 in the example given). If, on the other hand, the business mileage rises above 18,000 miles per year then the car is seen as primarily a business tool and the tax charge is on only 15% of the list price, so on £2,400 in this example. The definition of “business mileage” is a tight legal one and, in particular, normally excludes travel between home and the main workplace.
Under the current rules, a further reduction is given if the car is more than four years old at the end of the tax year in question. Where two cars are made available (eg one to a director and one to his wife) the current system normally penalises the second car with a higher tax charge.
New tax rules applying from 6 April 2002
From April 2002, the level of business mileage will no longer be relevant in calculating the taxable benefit of a company car. Similarly, no reduction will be given for an older car.
Instead, the tax charge will normally (ie for nearly all cars registered from 1 January 1998) be calculated by reference to the carbon dioxide (CO2) emissions of the vehicle, measured in grams per kilometre (g/km). If the CO2 emissions are very low then the tax charge may be on just 15% of the list price. If they are very high then this will rise up to 35%. Most diesel cars (but excluding a few that meet stringent pollution criteria) suffer a 3% loading, but not so as to take the taxable percentage above 35%.
Built in to the new system is a mechanism for increasing the tax charge each year.
CO2 figures
For all new cars, the official CO2 figure should now be shown on the vehicle registration document (V5). The figure for any vehicle can also be obtained free of charge from the website of the Society of Motor Manufacturers and Traders (www.smmt.co.uk).
Having found the figure for a particular model of car, then if that figure is not divisible by five it needs to be rounded down to the nearest five below. For petrol cars, the taxable percentage is then given for each of the first three years of the new tax system.
Cars registered before 1 January 1998
The CO2 calculation is not applied to such cars. Instead, the appropriate percentage to be used is calculated by reference to the cylinder capacity of the car. The figure is 15% up to 1,400cc, 22% between 1,401cc and 2,000cc and 32% for cars over 2,000cc. There is no differential in this case between petrol and diesel vehicles.
Winners and losers
An example of somebody who will lose out badly under the new rules will be a salesman who covers 20,000 business miles per year in a large vehicle that has a CO2 figure of 265g/km or more. Such an individual will see his taxable benefit more than doubling, from 15% of the list price to 35%.
By contrast, an individual who works almost entirely at one location, and who has a company car with a very low CO2 emissions figure, can see his or her tax charge calculated on a figure reducing from 35% of the list price to 15%. For such a person, the company car may suddenly become very tax-efficient. Similarly, directors of family companies may find that it is now attractive to provide additional vehicles through the company for family members; there will no longer be any penalty for second cars.
The changes represent an opportunity for employers to re-think the fundamentals of their company car policies. This is clearest in the context of the family company. Take, for example, a director who decides to run both a family car and a smaller vehicle through the company. Assume that:
- he is paying tax at 40%;
- one car has a list price of £18,000 and CO2 emissions of 212g/km;
- the second car has a list price of £10,000 and CO2 emissions of 168g/km;
- both vehicles run on petrol rather than diesel.
For the year to 5 April 2003, the director’s tax bill for the cars will be calculated as follows:
£18,000 x 24% £4,320
£10,000 x 15% £1,500
Total taxable benefit £5,820
Tax due at 40% £2,328
In this example, two cars are being run through the company which bears (and receives tax relief on) all costs except private fuel. The total tax cost to the director personally is under £200 per month, a very attractive tax result. The ompany will incur a National Insurance liability of just under £700 for the year.
Employee contributions
Often, an employee is asked to make a contribution towards the cost of a company car. Such contributions will normally reduce the tax bill and the rules relating to these contributions are not changing. However, it is important to make sure that the agreement with the employer is properly worded. There have been several reported cases of employees who thought they would obtain tax relief on such a contribution but who failed to do so because the agreement has not been structured in the right way.
It is also important to consider whether a one-off contribution is more or less tax-efficient than a series of smaller annual contributions, or indeed whether any contribution makes sense from the tax point of view.
Car fuel
If, in addition to providing the company car, the employer pays for the fuel then an additional tax charge may arise. This will be avoided only if the employee makes good the cost of all fuel used for private purposes. For most individuals, the car fuel charge is now simply not worth incurring as the resulting tax bill is so high. Unless an employee is covering high private mileage, it is almost certainly cheaper to pay for private fuel rather than to incur the additional tax charge. Any decision to stop providing free private fuel can only be effective from the start of a new tax year (6 April) and, once more, great care is needed to avoid tax problems.
FACTSHEET 2: Private cars used for business
There has been reasonably wide publicity about the changing tax rules applying to company cars from April 2002. The changes to privately owned cars used for business purposes have been less well publicised.
Current rules
Under the present system, some employers have operated a formal scheme call the Fixed Profit Car Scheme. In practice, many employers have simply paid a standard amount for every business mile driven by employees in their own cars. The Inland Revenue have published figures each year to determine how much employers are allowed to reimburse without causing their staff to suffer an extra tax charge.
Up to now, the amount that can be reimbursed in this way tax-free has been related to the engine size of the car.
New rules
From 6 April 2002, the whole matter is being simplified. Some of those who use their private cars for business purposes will lose out as a result of the changes but others will gain.
From 6 April 2002, employers will be allowed to pay 40p per mile for the first 10,000 business miles driven in a private car by an employee in any given tax year. If the level of business mileage covered goes above that figure then the amount that can be reimbursed tax-free drops to 25p per mile for further journeys.
The Fixed Profit Car Scheme as such is withdrawn from 6 April 2002.
Alternative calculation
Under the present rules, it has been open to employees to use an alternative calculation. Under this system, they would calculate the total cost of running the car in the year and then claim the business proportion of that total cost as a tax-allowable expense. This has been particularly attractive for those with low overall mileage. Employees using this system have also been able to claim capital allowances. Under the new rules, this alternative calculation will no longer be available.
Interest
Whether employees have reclaimed a fixed amount per mile, or used the alternative calculation, it has been open to them to claim tax relief for interest paid on a loan used to buy the car. Relief has been available for the year in which the loan is taken out and for up to three subsequent years. Where the car is used both for business and for private purposes then only the business proportion of the interest can be allowed for tax purposes. From April 2002, it will no longer be possible to claim tax relief for such interest paid.
Winners and losers
The current tax year has some transitional figures but if a comparison is made between the last tax year (ending on 5 April 2001) and the next tax year (ending on 5 April 2003), the new system will create some odd results. Ignoring the possible loss of interest relief (which in practice many employees have never claimed) then the following will be the case.
All of the following statements assume that employers reimburse business mileage at the rates published by the Inland Revenue. Employers are not, of course, obliged to do so. If they pay less than the Revenue figures then employees will be able to claim tax relief on the shortfall (as indeed they already can). If employers pay more than the going rate then any excess will be liable to tax (again, as it already is).
Drivers of smaller private cars (up to 1,500cc) will always be better off next year than they were last year. They will gain most if they cover a high level of business mileage.
Example 1
Sarah drives a 1,400cc car which she owns personally. She covers 7,500 business miles each year. In the year to 5 April 2001, the amount her employer could reimburse tax-free was as follows:
4,000 miles @ 35p per mile £1,400
3,500 miles @ 20p per mile £700
Total = £2,100
In the year to 5 April 2003, she can be reimbursed 40p per mile for the whole of the 7,500 miles, so £3,000. Even if her employer continues to pay at the old rate Sarah will be better off as she can claim tax relief on the shortfall of £900.
Drivers of medium cars (between 1,501cc and 2,000cc) will be worse off next year than last year if their level of business mileage is relatively low. However, they will be better off if they drive more than 5,333 business miles in the year.
Drivers of cars over 2,000cc will in all cases be worse off next year than last year.
Example 2
John drives a 2,500cc car which he owns personally. He covers 7,500 business miles each year. In the year to 5 April 2001, the amount his employer could reimburse tax-free was as follows:
4,000 miles @ 63p per mile £2,520
3,500 miles @ 36p per mile £1,260
Total = £3,780
In the year to 5 April 2003, he can be reimbursed 40p per mile for the whole of the 7,500 miles, so only £3,000. If his employer continues to reimburse the old figure of £3,780 then the excess £780 will now be taxable.
Passengers
One further development from April 2002 is that employers will be able to reimburse an additional 5p per mile tax-free where passengers are carried for a business journey. A driver with three passengers could therefore be paid up to 55p per mile without incurring a tax charge. No tax relief can be claimed for any shortfall in passenger payments made by the employer.
Ray Chidell
Tax Partner
Mazars Neville Russell, Brighton
Tel: 01273 206788
e-mail: ray.chidell@mazars-nr.co.uk
Further information
For any further advice or assistance in relation to employer tax issues, please contact Ray Chidell on 01273 206788, or your usual contact at Mazars Neville Russell if you have one.
Disclaimer
The update is provided without charge and no responsibility can be accepted for action taken or not taken as a result of its contents. Formal advice will be provided on request under terms that will be agreed in advance.
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.
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