Company cars are one of the most desired benefits for employees and are a great perk for recruitment consultants and sales teams nationwide. However, since April 2002 a graduated system of tax has been in force, which uses a vehicle’s list price and CO2 emissions to determine the level of tax applied. In recent years the government has continually altered these bands in order to increase the tax charge; consequently, company cars are fast becoming an uneconomical and inefficient benefit. Since April 2015, further increases to company car and fuel benefits were introduced. These now affect zero emission and electric cars. Below are two examples of the taxable benefits for 2014/15:
- Car: 5% of the list price of the new car (previously exempt)
- Fuel: £21,700 @ 5%
Emissions >210 g/km:
- Car: 37% of the list price of the new car (previously 30%)
- Fuel: £21,700 @ 37%
These considerable increases mean that it is recommended you now review your company car policy to establish whether it is cheaper to switch your company car type, or even to stop providing company cars altogether and instead reimburse your employees business mileage.
Low Emission Vehicles
If you need to provide your team with company cars, switching to a Low Emission Vehicle or one which is electric operated is worth considering.
E.g. the new Mitsubishi PHEV GX4h Hybrid is advertised as saving businesses thousands, thanks to low petrol costs and consumptions and having one of the lowest Benefit in Kind charges (5%). It also has a fraction of the CO2 emissions of smaller cars, allowing for significant tax savings.
Use the Company Car Tax Calculator to see how much you can save by switching.
Despite HMRC having strict guidelines as to what constitutes a pool car, if you are able to engineer a policy there are clear financial incentives for choosing this option.
Pooled cars are extremely worthwhile where several employees drive frequently on business. They’ll be able to rotate use of the cars to make sure they don’t fall foul of any of the criteria.
For a vehicle to qualify as a pool car the following conditions must be satisfied under Section 167 of the Income Tax (Earnings and Pensions) Act 2003:
- The car was made available to, and actually used by, more than one employee
- The car was made available, in the case of each employee, by reason of the employee’s employment
- The car was not ordinarily used by one of the employees to the exclusion of others
- In the case of each employee, any private use of the car made by the employee was merely incidental to the employee’s other use of the car in that year. For example, if an employee takes the car home in order to make an early start on a business journey the next morning. This business journey could not reasonably be undertaken from the normal place of work.
- The car was not normally kept overnight on or in the vicinity of any residential premises where any of the employees was residing, except while being kept overnight on premises occupied by the person making the car available to them. Kindly note a car is usually accepted by HM Revenue & Customs as being ‘not normally’ kept at employees homes if the total number of nights on which is taken home by the employees is less than 60% of the total number of nights in any given tax year. Please note that this limit is not mentioned in legislation and is intended as a ‘rule of thumb’ so there may be room for agreeing a slightly higher amount, but in practice this will be very rare since if a car or van is taken home often enough to approach the 60% limit, it is unlikely that all the home to work journeys will satisfy the merely incidental test.
Meeting the pool car conditions and being seen to meet them by HMRC are separate issues. To avoid trouble from a pedantic tax inspector you must keep a log that records who drove each pool car for each and every mile their odometers show.
Alternatively, to save on the cost of company cars, you can choose to simply reimburse your employees their mileage. This saves you considerably as you are not charged on the car itself. The mileage rates for cars and vans are 45p per mile for the first 10,000 business miles then 25p per business mile thereafter.
If you require further information on company cars and capital allowance, please contact Paul Dell at email@example.com for more information.