The current regime
Long gone are the days of tax-free cars given as a perk. Now they’re ascribed a benefit in kind (BIK) value if there is any private use.
Helen Thornley, a technical officer at the ATT, says that “the value of the BIK is calculated by multiplying the list price of the vehicle and any accessories, with a percentage based on the car’s CO2 emissions. The benefit is scaled back if the employee has the car for only part of the tax year.”
For the current tax year (2019/20), the percentages range from 16% for an electric vehicle with no emissions or a low emission vehicle emitting less than 50g/km to up to a maximum of 37% for the most polluting cars.
To this comes the cost of fuelling. Matthew Brown, technical officer at CIOT, explains that if an employee is provided with fuel which they can use for private journeys, there is a fuel scale charge is based on a set figure (£24,100 for 2019/20) which is then “multiplied by the same appropriate percentage as used for calculating the company car benefit in kind”. He says that to escape the fuel scale charge detailed records are required of private and business mileage, as well as an appropriate regime for calculating the reimbursement of private mileage.
But where the process gets interesting, or less expensive, is where vans are concerned. As Thornley points out, “an employee who can use a van privately is taxed on a fixed sum of £3,430 (2019/20) for the use of the van and £655 (2019/20) if they are also provided with fuel for private use.” The CO2 emissions, she says, and cost of the van, are not relevant unless it is a zero-emission van, in which case the benefit in kind charge is discounted by 40% for 2019/20 down to £2,058.
A van, by the way, is defined as “a vehicle primarily designed for the carrying of goods and burden and with a design weight not exceeding 3,500kg”.
It shouldn’t be forgotten that while an employee pays income tax on the benefit-in-kind, the employer separately pays Class 1A NICs on the benefit-in-kind.
It’s never simple
With the differential in tax rates for vans and cars it’s easy to see why, in certain situations, some employers choose to give staff what is known as a ‘crew-cab van’ – a van with a second row of seats behind the driver.
HMRC has cottoned on to this and recently fought a case with Coca-Cola as declaring vehicles as vans doesn’t just impose a lower tax burden on staff but also helps capital allowances and VAT recovery.
And it’s a case that Thornley has taken an interest in.
“Back in 1997,” she says, “Coca-Cola moved to supplying technicians with vans instead of estate cars. The vans were three types of crew-cab vehicle – a series 1 or 2 VW Kombi and a Vauxhall Vivaro.”
She continues: “All three looked very similar and were based on a panel van design. Each had additional seating and windows behind the driver.”
All the vehicles had been treated by Coca-Cola as vans for BIK purposes. HMRC challenged this arguing that all were cars. This resulted in demands for additional National Insurance contributions and income tax from both Coca-Cola and its technicians. The company appealed and in March 2019, an earlier tribunal ruling which decided that the two VW Kombis were cars and the Vauxhall Vivaro was a van was upheld.
The difference appeared to be in how the vans came off the production line. The Vivaro left the assembly line as a panel van and was subsequently modified by Coca-Cola to add a second row of two seats behind the driver, together with a single window. The seats did not span the vehicle, leaving storage space to the side. These extra seats could be removed with tools.
Both the Kombi vehicles held to be cars arrived from the manufacturer with a second row of seats already fitted. This row spanned the vehicle, and there were windows on both sides. However, the seats could be removed without tools.
For Brown, the key to avoiding HMRC’s attention is to only buy crew-cab or kombi-type vans if they are primarily designed for the carrying of goods. “A ‘luxury’ kombi-van,” he says, “could be taxed as a car depending on the circumstances... the fact that a van is not used for the carrying of goods or burden for business purposes is irrelevant.”
Another complication is vehicles commonly known as ‘double cab pick-ups’; HMRC has a list of those it considers vans to help employers determine the position. Here Brown says to “watch for the addition of, say, a Truckman cab over the load area as this could reduce the payload to below one tonne.”
The internal combustion engine days are numbered. The end date for the sale of new petrol or diesel vehicles was previously slated for 2040, but early February the government brought this forward to 2035 (and possibly 2032) and it is to include hybrid vehicles and vans. This will encourage the move to electric vehicles.
Thornley again: “From April 2020, assuming that measures announced in July 2019 are included in the Finance Bill due to be published in March, there will be some big changes which will affect the amount of the BIK for electric cars and low–emission vehicles such as hybrids.”
But it’s good news for once as Brown explains: “At present cars with a CO2 emissions figure of under 50g/km (including electric cars) have an appropriate percentage of 16% but, from April 2020, cars registered after 6 April 2020 with a CO2 emissions figure of 0 (i.e. fully electric cars) will have an appropriate percentage of 0%.” The effect of this is that the benefit-in-kind charge will reduce to £0 for 2020/21.
However, the percentage will then increase over the next two years to 2%, a rate which isn’t going to break the bank.
Beyond pure electric vehicles, cars with very low CO2 emissions (less than 75g/km) – hybrids – will face a new series of bands that will reduce percentages used to calculate the BIK from the current 16% or 19%. As Thornley points out, “the most generous rates will apply to new cars registered on or after 6 April 2020, with the potential for a 0% rate for a car with emissions of under 50g/km and an electric range of more than 130miles”. There will also be a separate scale of lower rates available for low emission cars registered before 6 April 2020.
It’s interesting that for Brown hybrids have traditionally been subject to the same company car tax and fuel scale charge benefits in kind regimes as their petrol or diesel, or LPG, equivalents –“in effect, the electric part of a hybrid car has been ignored for benefit in kind purposes”.
The story isn’t so favourable for all other cars as, says Thornley: “The rates will continue to scale with emissions up to 37%, and for some cars registered after 6 April 2020 it is likely that the BIK charge will increase because new, stricter standards will be used for measuring their CO2 emissions.”
And the bad news applies to vans as the benefit in kind for a zero-emission vans will be increasing. Here Thornley notes that for 2019/20, the BIK on a zero-emission van is 40% less than the normal van charge. This discount is gradually reducing, so by 2022/23 the benefit in kind for zero emission vans will be the same as any other van.
It’s a write off
But apart from the painful tax rules surrounding the use of vehicles there are special rules for writing off the costs of the car against the company’s profits. It shouldn’t be a surprise that the lower the emissions, the faster relief can be claimed.
New cars with emissions of 50g/km or less are eligible for 100% first-year allowances – potentially the full cost of the car can be written off against tax in the first year; new cars with emissions of 50g/km – 110g/km or secondhand cars with emissions under 110g/km are eligible for writing down allowances so 18% of the cost can be written off in the first year, and 18% of the balance and so on; but new or used cars with emission of over 110g/km are written off at a rate of 6% of the balance each year.
On top of this, Brown says that where a business leases a car the expense is a deduction for tax purposes. “But,” he adds, “there are some restrictions if the car is leased for more than 45 days and has a CO2 emissions figure of more than 110g/km”.
From Thornley’s view, and as can be seen, “the position is best for very low emission or electric cars, with relief received potentially in full in the first year while relief for more polluting vehicles is given slowly, over a very much longer period”. To this Brown adds that “there can be advantages in purchasing an electric or hybrid vehicle as that may also reduce the business’s Class 1A NICs liability”.
But in terms of VAT, for cars it can only ever be reclaimed if there is absolutely no private use permitted at all while for vans, VAT is generally recoverable.
Tax minimisation techniques
It’s quite logical that HMRC has made it hard for company car users to escape the tax net. If a car is made available to an employee for any private use, even if insignificant, then the employee will be subject to the full BIK charge; the only way to avoid a BIK is to prohibit the employee from any private use.
That said, Thornley advises that one way of dealing with the BIK charge but still ensuring that employees can carry out the necessary travel is to make a pool car available: “There are various conditions to be met – such as ensuring that the pool car is available to more than one employee, and it’s kept at the business premises overnight.” She says that this can be a practical way of ensuring that employees are always in a suitable vehicle – one which could even be badged up with the company logo or livery.
Another option – one put forward by Brown – is to consider what the vehicle is being used for. He says that “if business mileage is high and private use is low then it is normally advisable to avoid a car fuel or van fuel scale charge. Normally, the employee will be asked to pay or repay or not to claim reimbursement for the private mileage fuel.”
Van users are in a better position. The definition of private use for a van is much more generous and as Thornley advises, “if a van is only used for insignificant private use then there is no benefit in kind at all… this includes ordinary commuting from home to work”. However, use of a van for regular shopping trips, or use in the evenings or at weekends would not count as insignificant; but if employees are restricted to ‘insignificant’ use, then this can avoid a BIK charge.
Could firms avoid the tax quagmire by giving staff a car allowance and letting them buy their own vehicle? According to Thornley they can’t. It’s just a similar, but different, can of worms: “If firms provide a car allowance, then this is taxed as additional salary and will be subject to PAYE and the employer will have to pay Employer’s NIC. The employee will also be responsible for the costs of the vehicle; however, the employer can then compensate for fuel costs.”
Brown goes further as the process of moving to employee owned vehicles could prove very expensive for staff. However, he says that the AA provides useful information on estimated running costs of vehicles and many manufacturers also now provide information on running costs.
He recommends employees “consider how much tax would be paid on having a company car or van. Calculate the benefit-in-kind on the car or van that would be provided, factor in the fuel scale charge if appropriate, and then ‘tax’ this at their marginal rate.
“If the tax ‘cost’ of the company car or van benefit in kind is greater than the net ‘cost’ of the car allowance less the vehicle running costs, etc, then, in theory, a company car or van may be better.”
Lastly, Brown offers a warning to employees. He says that “the onus is upon them to notify HMRC of a company car or van, when it’s replaced, and when it’s returned to the employer… the employee should never rely on the employer to notify HMRC of changes in benefits-in-kind”. To do this though, they’ll need to provide the information for an online car benefit calculator on gov.uk.
The moral here is very simple. Aim for electric vehicles or at the minimum, low-emission vehicles. Minimise personal use and keep HMRC informed. It seems that anything else enters a world of tax-related pain.