Company cars and fuel benefits 12th January 2013

Posted in: Business Tax, Corporation Tax, Personal Tax

So you’re thinking of buying a car and putting it down as a business expense. Should you do this?

Generally the answer is going to be no, but as with many things in life the real answer is it depends.

Company car tax has a long and varied history. When I first qualified as an accountant, the company car tax was based on the engine capacity and the number of business miles an employee did in a year. This meant that people such as sales reps got less of a benefit (and therefore a smaller tax bill) than those who just made the occasional business trip and for whom the car was a perk.

Since then, the company car tax system has been overhauled.

First, let’s get a few things straight. There are different set ups for a business and depending on whose perspective we are looking at the car from there are tax breaks and possibly additional tax liabilities.

Sole trader

First up is a sole trader. Is there any company car benefit to the trader? No. Company car benefits are just that – benefits given by a company to an employee. If you’re a sole trader and you buy a car through the business, then you cannot have an employee benefit because you are not an employee. If you have any employees and you buy them cars, they will have a car benefit, but you won’t.

Further, your business will be able to claim capital allowances against the car as it is a business asset. It’s all looking great, except your capital allowances will be restricted to the business use. If you use the car 30% for business and 70% for personal use, then you will only be able to claim capital allowances on 30% of the cost of the car.

This applies equally well to a partnership.

Limited company

This is where things get interesting, because now regardless of who you are (employee or owner/manager) if you get a car through the company you will have a taxable benefit.

The company will still be able to claim capital allowances (just like our sole trader business above), however, there is no restriction for personal use. The company can claim capital allowances on 100% of the cost of the car.

Car benefit

The way this is “balanced up” is by taxing the employee for the benefit. The employee no longer gets a reduction for business miles or anything else remotely like that. These days, it’s all based on CO2 emissions.

Let’s look at the calculation.

List price when new A
Accessories B
Less: capital contributions (max £5,000) (C)
Revised list price D

The first thing to note is that the calculation is based on the list price of the car when it was new. In other words, buying a second hand nearly new car will not save you on the taxable benefit. Worse, buying a second hand car several years old will likely cost you far more in tax than you actually paid for the car in the first place.

We take the list price and to that we add any accessories (alloy wheels, sat nav, heated seats) and deduct any contributions the employee may have made towards the car.

To this revised list price we apply a percentage. The percentage is based on the CO2 emissions of the car, which we get from a table published by HMRC. The maximum percentage is currently 35%. There is a surcharge of 3% if you have a diesel car, although again the maximum percentage is 35%.

Revised list price (above table) D
Multiplied by car percentage: (D x %) E
Less: non availability (F)
Less: employee contributions (H)
Car benefit I

For 2012/13 there is a baseline figure of 100 g/km. This means that all cars that have CO2 emissions of 100-104 g/km will be taxed at the minimum percentage of 11%. The percentage increases by 1% for every additional 5 g/km. For higher emissions we use a formula to work out the percentage as follows:

% = [(emissions – 100) / 5] + 11%

For cars that do not emit CO2 emissions, there is no percentage, so the taxable benefit is zero.

For low emission cars (<75 g/km) the percentage is 5% or (76 g/km to 99 g/km) the percentage is 10%.

This will change in future years, as the baseline will shift in 2013/14 from 100 g/km to 95 g/km for the 11% starting rate. The 10% low emissions rate will be abolished in 2014/15 and in 2015/16 the 0% for zero emissions and the 5% rate low emissions rate will also be abolished. In 2016/17 the maximum percentage will increase to 37%.

Example: You just bought a car for £30,000, the accessories cost another £4,000 giving you a revised list price of £34,000. The car has CO2 emissions of 211 g/km.

The percentage we need is [(211 – 100) / 5] + 11% = 33%

The car benefit is therefore £34,000 x 33% = £11,220. If you are a higher rate taxpayer, you will therefore pay additional tax of £4,488 on the car.

Fuel benefit

There is a separate fuel benefit that arises if the company provides any fuel to the employee for personal use. If the employee reimburses all of the cost of the fuel for personal use there is no benefit. For 2012/13 the fuel benefit is £20,200 x % (same percentage as calculated above).

So in our example above, let’s suppose you use the car just at weekends to do a bit of shopping or to see friends. Your annual fuel bill is £500 and this is paid for by the company. You will get an additional fuel benefit of £20,200 x 33% = £6,666 and will have additional tax to pay of £2,666 – considerably more than the cost of the fuel! Note that you must repay every penny of the fuel provided for personal use to avoid this additional tax charge.

How’s that company car looking now?

[Update: the fuel benefit changes each tax year, for 2013/14 it is £21,100, for 2014/15 it is £21,700, for 2015/16 it is £22,100]