Company Benefits and Expenses – Areas to Consider: Vehicles

Due to the reversal of the additional 1.25% on national insurance rates in November 2022, Class 1A national insurance on employee benefits is at a rate of 14.53% for the 2023 tax year. 

P11D forms cover everything from company cars to employee loans and so Mat Waters, will be covering the main areas to be considered when it comes to both providing and reporting benefits and expenses. 

We begin with one of the main benefits our clients discuss with us throughout the year… 

Vehicles 

The “Company Car” is one of the most well-known of employee perks. But, in recent years, HM Revenue & Customs (HMRC) have made providing your employee with a car for their own private use much less tax efficient unless you’re shopping for newly registered vehicles with very low or zero CO2 emissions. In some instances, the benefit arising from being given a car and having private fuel paid for could wipe out an employee’s annual personal allowance completely, greatly impacting their monthly take-home pay. 

How are company cars taxed? 

Cars are taxed on a percentage of the original manufacturer’s list price, with the percentage being derived from the vehicles CO2 emissions measured in grams per kilometre. HMRC publish the emissions tables in advance for each tax year and the more polluting vehicles can be taxed at a percentage as high as 37%. 

A car with CO2 emissions of 100 g/km, which is considered low for the likes of vehicle tax, would still give rise to a taxable benefit of 25% of the original list price of the vehicle if provided during the 2023 tax year, regardless of its current value. 

Given that the company car tax is based on carbon emissions, it is no surprise that HMRC reward drivers of electric vehicles with more favourable percentages. For zero emissions vehicles, the percentage applicable for the 2022/23 tax year is 2% and will remain at this rate through to the end of the 2024/25 tax year. 

For those electric vehicles with emissions between 1 and 50 g/km, there is a rising scale of percentages from 2% if the vehicle has an electric only range of 130+ miles up to 14% if the range is sub 30 miles. 

What about fuel? 

If the company also pays for any fuel relating to employees’ private journeys, then the same percentage applied to the vehicle’s list price to determine the car benefit is applied to a fixed amount set by HMRC - £25,300 for the 2023 tax year – to arrive at the taxable fuel benefit. 

Therefore, unless the employee is going to be travelling a large number of private miles during the year, in many cases it is more tax efficient for the employee to cover the cost of their private fuel, or even pay for all the fuel personally at claim back the business proportion of their fuel on a mileage basis using the HMRC advisory fuel rates rather than the usual 45p/25p mileage rates. 

As electricity is not considered as “fuel”, the fuel benefit charge does not arise where an employer pays for the cost of charging the electric vehicle. There is also no employment benefit if the company pays to install an electric charge point at an employee’s home. 

Cars vs. vans? 

If the company provides vans or certain models of truck/double-cab for private use, then these are classed as “Commercial Vehicles” rather than cars and as such are taxed on a more generous basis. 

Each tax year, HMRC will publish a flat rate for both use of the vehicle and the provision of private fuel, these being £3,600 and £688 respectively for the 2023 tax year. 

Given the large variance between the tax treatments of commercial vehicles and cars, be sure to confirm with the dealer that they qualify. If the vehicle does not have at least a one tonne payload then it will be treated as a car for P11D purposes. 

What if I use my own vehicle for work instead? 

In many instances, an employee/director will need to undertake business journeys, outside of their ordinary commute, in their own cars. In these instances, business mileage can be claimed at 45p per mile up to 10,000 miles and 25p per mile above this. 

These flat rates cover the fuel, tax, insurance, depreciation, etc. which the employee incurs on behalf of the business and so long as these rates aren’t exceeded, then mileage payments to employees don’t need to be reported to HMRC, are an allowable expense for the employer and are not taxable upon the employee. 

Weighing up the benefits 

As with all business decisions, the purchase of a vehicle will have implications for other taxes and the employee benefit position shouldn’t be looked at in isolation. 

If you’re considering purchasing, financing, or leasing vehicles through your business to provide to directors and employees, be sure to check with your usual contact at Lovewell Blake to ensure that this is the most tax efficient approach, and also to ensure that any VAT and capital allowance matters have been considered.