How to Stay Safe from HMRC
12 November 15 | By: Jas Jhooty
While having a company car with all the added the bells and whistles is an added bonus for the driver, how can you keep the tax bill for these to a minimum?
The tax payable on company cars is calculated from a combination of how much CO2 it emits and its original list price. The higher the emissions, the greater the percentage of the list price is treated as a Benefit-in-Kind. This includes the cost of any extras fitted, such as a sat-nav.
James decides his four-year-old car needs replacing. He’s looking at a similar model costing £20,000 with CO2 emissions of 175g/km. The taxable benefit is 30% of the list price, i.e. £5,800. But James decides to treat himself to the manufacturer’s fitted “entertainment pack”. This adds £2,000 to the list price and another £600 to the taxable benefit (£2,000 × 30%).
HMRC won’t charge tax on extras with a list price totalling £100 or less, but that’s not going to get you much these days. However, there’s an exemption that’s often overlooked. There’s no tax on extras if they’re to be used for the business. HMRC gives an example of a tow-bar that’s used to pull a trailer for carrying equipment.
If your employees’ job role means that they drive to many different locations, it’s fair to say that a sat-nav could be a used for this. It can therefore be excluded from the Benefit-in-Kind tax charge.
Make sure that whoever is preparing your Forms P11D (end of year benefits and expenses return) is aware of any extras that need to be excluded from the list price of the car.
However it is difficult to justify a tax exemption for a DVD player as an extra on the basis that it’s necessary for your business. But even if you can’t avoid a tax charge, there’s a way you can reduce the amount payable. The cost of extras is only added to the list price of the car if they are fixed to the vehicle. So, a DVD player, or any other accessory that isn’t fitted in the car, won’t be charged to tax under the same rules. Instead, the Benefit-in-Kind is calculated at a flat rate of 20% of the cost of the extra.
Assume the same facts as the example above, but instead of adding the manufacturer’s options James purchases DVD and sat-nav systems that are detachable. These cost him the same amount as the built-in ones – £2,000. But he’ll now pay tax only on a Benefit-in-Kind of £400 (£2,000 × 20%).
Some low emission company cars have a Benefit-in-Kind rate of less than 20%. If this is the case, then adding fitted extras will cost less in tax than detachable versions.
The tax payable on a detachable extra for a company car is based on what the company pays for it, rather than the original list price. That’s useful in today’s market because there are some good discounts to be had if you shop around.
Employers’ Class 1A NI contributions are due on Benefits-in-Kind at 13.8%. So if the employee can reduce the Benefit-in-Kind charge on a car accessory, not only will the employee save tax but the employer can also cut their NIC costs.
Our consultants are experts in all areas of employment taxation including benefits legislation. We can help you devise tax efficient benefits policies. For more advice on how we can help you save money please do not hesitate to contact us.