Company Cars - Tax Saving Tips
At one time, company cars were highly tax-efficient perks. Successive tax
At one time, company cars were highly tax-efficient perks. Successive tax increases mean that those days are long gone, but a company car can still be a useful benefit for employees and directors – at least in some circumstances. You need to weigh up several factors, such as the amount of private and business mileage, the car's price and emissions rating and the salary alternative offered
Vehicles that are classified as vans still involve a very low tax liability for private use, but the tax on them is due to rise in the tax year 2007/08, making them less attractive.
Providing employees with fuel for private use of company cars is rarely worthwhile because it attracts a high additional tax charge. It is usually better for employers to pay employees a mileage rate for their business travel.
HM Revenue & Customs (HMRC) publishes advisory rates that employers can pay employees to cover the fuel costs in their company cars and has said that no tax charge will arise where employers pay these rates. But higher rates are allowed where the employer can show that the actual cost of fuel for the car concerned is greater.
Using the advisory rates is simpler but with rising fuel prices, it is worth reviewing the position. For example, the advisory rate for a petrol-driven car of over 2,000cc is 16p a mile, but it could be worth claiming 19p a mile for a car consuming at the rate of five miles per litre and at, say, 95p a litre.
Employers who reimburse business fuel and wish to claim the VAT input tax must have VAT invoices that at least cover the amount claimed. The VAT procedures changed with effect from 1 January 2006, and employers should now retain VAT invoices, including less detailed VAT invoices from fuel suppliers as proof of purchase. Employers can recover VAT input tax on the other costs of running company cars, such as repairs, but not on the purchase price of a car that is available for a director’s or employee’s private use. HMRC normally argues that all cars provided to employees may be used privately, except for pool cars where private use is prohibited.
However, the High Court recently allowed a claim for input tax on a car provided to its sole director where the company had minuted a resolution prohibiting private use and there was a genuine intention to use the car only for business. The car keys were kept in the company's office and the car in a car park nearby, although this was also very near the director's home. The decision may go to appeal, but at the moment the way is clear for input tax recovery on company cars, although in rather exceptional circumstances.
For the employer, capital allowances for the purchase of company cars costing over £12,000 are restricted to £3,000 a year, but there is one exception. The full cost is allowed immediately where a business buys a new car that has CO2 emissions of no more than 120 grams per kilometre. Although few cars meet this condition, the variety is increasing. These cars also attract the lowest level of car benefit tax for employees.
Deciding whether to provide or accept a company car and putting together the right package can be complicated and the tax involved can be considerable, so it is worth asking for advice in this area.
