Company Benefits and Expenses – Areas to Consider: Vehicles

27.04.2020
Matthew Waters
Tax

Employers have until 6 July to report any taxable benefits and expenses provided to their employees (including company directors) during the 2020 tax year on the forms P11D, and will have to settle any National Insurance arising on these by 19 July.

These forms cover everything from company cars to employee loans and Mat Waters, a Manager at our Halesworth and Lowestoft offices, will be writing a series of articles covering the main areas to be considered when it comes to both providing and reporting benefits and expenses.

The series begins with one of the main benefits which 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 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 their original 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 105 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 2020 tax year, regardless of its current value.

From the 2021 tax year onward, in order to incentivise businesses to provide electric, hybrid or other low emission vehicles, HMRC are revising the emissions-based percentages used to calculate car benefits. The new rates see vehicles with CO2 emissions of 0 to 99 g/km being taxed at between 0 and 8% making these a much more tax efficient option.

What about fuel?

If the company also pays for any fuel relating to employees’ private journeys, then the same percentage applied to the vehicle list price to determine the car benefit is applied to a flat amount set by HMRC - £24,100 for the 2020 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 most 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.

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 £3,430 and £655 respectively for the 2020 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.

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. 

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