How to Stay Safe from HMRC
16 June 16 | By: Jas Jhooty
Company cars are a major benefit-in-kind and generate the most tax revenue out of all employee reportable benefits. Employers have to wade through a raft of benefits legislation and calculation processes before the taxable value can be established. In this article we explain in simple terms how to work out the company car benefit.
A cash equivalent is the amount any employee will have to pay tax on for an employer provided benefit. For company cars it is more complex to calculate than the standard formula, which is the cost to the employer less the amount made good by the employee. For company cars the cash equivalent calculation can be stripped down into the following components:
([Price of car for tax purposes] x [the appropriate percentage} x [availability])
[Private Use Contributions made by the employee]
Firstly, you have to ascertain the price for tax purposes. You start with the list price of the car at the date of registration of the vehicle i.e. the manufacturer’s recommended price inclusive all taxes & delivery charges, not the price actually paid. Please note that there is no longer an upper cap of £80,000. Also in the rare occurrence that the car is over 15 years old and has appreciated in value to more than the original list price, it is deemed to be a classic car and you should use the current market value.
Onto this value you should add the cost of any optional accessories added when the car is first acquired. Do not include any equipment required by disabled employees to use the car. You also have to add on the price of any replacement accessories you have paid for after the car was first made available that cost more than £100.
Finally if you are an employer who purchases your own car fleet you are allowed to deduct an amount that the employee contributes towards your purchase of the vehicle. The maximum capital contribution that is allowable is £5,000.
The appropriate percentage is primarily dependent on the carbon dioxide emissions figure of the company car. Since 1 March 2001 every UK registered vehicle has had the CO2 emissions figure included on the V5 Vehicle Registration Document.
The CO2 figure is then looked up against a ready reckoner of appropriate percentages for calculating the car benefit charge for that tax year. If the CO2 emissions figure falls between two points round down to the next one down unless otherwise stated. E.g. CO2 emissions of 197g/km are treated as 195g/km.
Adjustments are then made to this appropriate percentage based on the fuel type of the vehicle: For years up to and including 2015-16, add 3% if car runs solely on diesel up to a maximum of 37% in 2015-16. Electric cars have 0% CO2 emissions and enjoyed a 0% tax charge up till 2015. This period of grace has now ended:
Discounts are allowed for periods of unavailability of the vehicle during the tax year. A car is treated as being unavailable on any day if the day falls:
You are not allowed to have any overlapping dates for periods of car availability. In real life, this means that when an employee changes their company car, the exchange of cars usually occurs on the same day. However, for tax purposes, these must be difference days i.e. the replaced car should be unassigned on the day before the replacement car arrives.
Replacement hire cars provided for less than 30 days in the event of their main car is off the road being repaired, etc. can be ignored if they are not appreciably different than the employee’s regular car
Finally, any private use contributions made by the employee (out of their net pay) towards the private use of the vehicle will reduce the cash equivalent value. Some employers place a limit on the value or type of car that they make available to an employee. Occasionally the employer is willing to allow an employee to have the use of a more expensive car, if the employee pays a monthly sum representing the excess; for example, the additional leasing costs over and above the employer’s limit. In these cases, the payments do not reduce the benefit charge because they do not qualify as payment for the private use of a car, they are merely for the availability of a more expensive car.
We have written this article to serve as a useful reference piece that hopefully simplifies the complex legislation into an easy to understand format.
Readers may also be interested in the following associated articles:
Please do not hesitate to contact us if you require any further information about this or any other employment tax related issue.