The tax aspects of company cars have become more and more onerous over recent years. The laudable fact that government wants to encourage businesses to buy and use more eco-friendly vehicles is just one of the contributing factors.
Get Some Advice First
If you are not sure whether it’s worth the commitment, you probably need some guidance before offering company cars to your staff or having one yourself. Your outsourced bookkeepers could be your first port of call. They have probably dealt with this thorny issue for some of their other customers, or they will know someone to call on.
The Complications for Employers
You have to pay Class 1A National Insurance contributions on the taxable value of company cars. This value is based on the list price of the car and accessories at the time of purchase. You also have to collect income tax payable by employees on the benefit in kind of having a company car. To be able to do this, you must notify HMRC quarterly of any changes in company car use so that PAYE codes can be amended. No income tax is payable on electric vehicles.
For employees who use their own cars for work, no tax or NICs are due provided you pay them a mileage allowance that is not more than the HMRC approved rates. Check with your outsourced bookkeepers for the current rates that apply and make sure you are always compliant. Pool cars are not taxed either, but should not be available for employees’ to take home at the end of their working day.
Special VAT rules apply. This tax is only recoverable on fuel used for business purposes. VAT on fuel you provide for private use can be recovered, but then has to be paid at a rate dependent on the car’s CO2 emissions.
The Tax Implications for Employees and Directors
Only employees earning more than £8,500 a year have to pay tax on their company car. This does not apply to directors though; their earnings are not usually taken into consideration by HMRC.
For them and everyone else, a company car is a benefit in kind which is taxed at their top tax rate. The benefit is calculated as a percentage of the car’s list price, depending on its CO2 emissions. The higher the emissions, the higher the percentage used in the calculation. If a company car is shared, or only used for part of a year, the tax liability is reduced proportionately.
For bookkeepers and payroll operators, there are many pitfalls related to company cars, and they need to take particular care to get the tax aspects correct.