Company car benefits can throw up a number of anomalies and confusion amongst employees. We consider the current benefits calculation that employers need to consider.
When employees are provided with company cars and fuel that are available for private use, they are usually taxed on these benefits under special income tax rules contained in sections 114, 120 and 149 of ITEPA 2003. An employer is liable to pay Class 1A NICs for:
- cars provided by reason of an employee’s employment to directors and employees who are paid at a rate of £8,500 or more a year (the £8,500 limit will cease next year), if the car is available for private use by the director or employee, or by members of their family or household, and the benefit is chargeable on the director or employee
- fuel provided for private use in those cars.
There is one statutory exception to this (section 117) where the employer is an individual and it can be shown that the car was provided in the normal course of ordinary domestic, family or personal relationships.
In addition to the statutory exemption, a director or employee earning at a rate of £8,500 or more a year is not taxed on the benefit of a car (or fuel for that car) where it is made available for private use to a member of their family or household if the person to whom the car was made available is chargeable on the benefit in their own right.
Calculation of car benefit (ITEPA 2003 Section 121(1)):
- Find the price of the car
- Add the price of any accessories which fail to be taken into account
- Make any required deduction for capital contributions by the employee
- Find the appropriate percentage for the car
- Multiply the figure at Step 3 by the appropriate percentage at Step 4
- Make any required deduction for periods when the car was unavailable
- Make any required adjustment for a shared car
- Make any required deduction for payments by the employee for private use of the car.
This calculation is modified in the case of:
- cars that run on road fuel gas
- classic cars (those 15 years of age or more).
There are special rules for disabled drivers affecting Step 2 and Step 4.
Finally, the benefit calculated may be reduced where the car is shared.
Cars which run on ‘road fuel gas’
Up to 2010 to 2011 there are different rules for the three types of car under this heading:
- cars manufactured to run on road fuel gas which were first registered in
2000 or later and which have approved CO2 emissions figures for gas and another fuel: adjustment at Step 4 for P11D for type B cars (gas only cars or bi-fuel cars which were type approved as bi-fuel cars and were first registered on or after 1 January 2000. These cars have two approved CO2 emissions figures, one each for petrol and gas)
- all other cars manufactured to run on road fuel gas: adjustments at Step 1
and Step 4 for P11D for type C cars (bi-fuel cars not in type B)
- cars converted to run on road fuel gas: adjustments at Step 2
- and Step 4 for P11D type for C cars.
Road fuel gas means any substance which is gaseous at a temperature of 15°C and under a pressure of 1,013.25 millibars, and which is for use as fuel in road vehicles.
The two types of road fuel gas currently in use are compressed natural gas (CNG) and liquid petroleum gas (LPG). From 2011 to 2012 these cars are categorised as Type A and there are no adjustments to the percentage used in Step 4.
The price of a car means its:
- list price, if it has one
- notional price, if it has no list price.
The list price is the inclusive price published by the manufacturer, importer or distributor of the car if sold singly in a retail sale in the open market in the UK on the day before the date of the car’s first registration. It includes standard accessories, any relevant taxes (value added tax, car tax (where appropriate), any customs or excise duty, any tax chargeable as if it were a customs duty) and delivery charges, but this excludes the new car registration fee because it is an administration fee, not a tax. The list price is not the dealer’s advertised price for the car, nor the price paid for the car, which may incorporate discounts or cashbacks from the list price.
The notional price of a car is the price which might reasonably have been expected to be its list price if its manufacturer, importer or distributor had published a price as the inclusive price appropriate for a sale of a car of the same kind sold singly in a retail sale in the open market in the UK on the day before the date of the car’s first registration. The notional price includes all accessories equivalent to the qualifying accessories available with the relevant car at the time when it was first made available to the employee and any relevant taxes.
Second-hand cars are dealt with in the same way as new cars. The list price is the price on the day before it was first registered, that is when it was new.
Capital contribution by the employee
This and fuel reimbursement can often cause confusion for employees. ITEPA 2003 section 132 sets out the rules. The effect of Step 3 is to reduce the amount carried forward from Step 2 where the employee has contributed a capital sum, or capital sums, to expenditure on the provision of:
- the car (Step 1)
- any qualifying accessory (so long as it is taken into account at Step 2).
The amount to be deducted is the lesser of:
- the total of the capital sums contributed by the employee in that and any earlier years to expenditure on the provision of the car or any qualifying accessory taken into account at Step 2
- £5,000 capital contributions are payments towards the cost of the car or qualifying accessories.
A classic car is 15 years old or more at the end of the year of assessment, and:
- with a market value for the year of £15,000 or more
- that market value exceeds the amount carried forward from Step 3 above.
When all the above conditions are met, substitute the market value of the classic car for the year less any capital contribution for the amount otherwise carried forward from Step 3 above.
The market value of a classic car is the price that it might reasonably have been expected to fetch at a sale in the open market on the last day in the tax year when it was available to the employee, on the assumption that any qualifying accessories available with the car on that day are included in the sale. Market values of classic cars may be found in specialist publications, contemporaneous sale documents or insurance details for the car concerned. If a classic car is bought in a poor state of repair and is restored during the year, then it is the market value of the restored vehicle on the last day in the tax year when it was available to the employee which is used, not the cost of the earlier purchase.
Until 2010 to 2011 the figure at Step 3 was restricted to an upper limit of £80,000. This applied to all cars, classic or otherwise. From 2011 to 2012 this price cap does not apply.
The appropriate percentage
For car benefit purposes, the appropriate percentage depends on the CO2 emissions figure that applies at the date of first registration of the car. Information on CO2 emissions for both new (unregistered) and used (registered) cars is available, as is more information on vehicles and CO2 emissions.
Qualifying low emissions cars
- from 2008 to 2009 up to 2011 to 2012, there are special rules for ‘qualifying low emissions cars’ (also known as QUALEC)
- from 2008 to 2009 up to 2009 to 2010, these are cars (other than type E cars – zero-emission cars) with CO2 emissions figures not exceeding exactly 120g/km; the normal rounding rules are not applied, so a car with CO2 emissions of 121g/km is not a qualifying low emission car. These cars have an appropriate percentage of 10%
- from 2010 to 2011 up to 2011 to 2012 a qualifying low emission car has CO2 emissions between 1 and 75g/km and the appropriate percentage is 5%. QUALECS are subject to an adjustment for diesel cars
- from 2012 to 2013 up to 2014 to 2015 and onwards there are no longer special rules for qualifying low emission cars, cars with emissions between 1 and 75g/km have an appropriate percentage of 5% (diesel cars are subject to an adjustment)
- from 2015 to 2016 there are two new appropriate percentage bands:
• 0 – 50 g/km
• 51 – 75 g/km
- the ready reckoner gives the appropriate percentages for a petrol-powered car for 2014 to 2015 onwards. The exact CO2 figure is rounded down to the next 5g/km for this purpose (that is, for 188 use 185) except where the car is a QUALEC.
Reduction for periods when the car is unavailable
When the car is unavailable for any part of the year, the figure carried forward from Step 6 is reduced in proportion to the number of days of unavailability. A car is treated as being unavailable on any day if the day falls:
- before the first day on which the car is available to the employee, or
- after the last day on which the car is available to the employee, or
- within a period of 30 consecutive days or more throughout which the car is not available to the employee.
If the normal car is not available for a period of less than 30 days, there is no reduction because the car is not unavailable. If during that period the employee is provided with a replacement car, it is not also charged as a benefit if:
- it is not materially better than the normal car, or
- it is not provided as part of an arrangement whose purpose was to provide the employee with a materially better car than the normal car.
Adjustment for shared car
A shared car is one:
- which is available to more than one employee concurrently
- made available by the same employer
- available concurrently for each employee’s private use
- for which two or more of those employees are chargeable to tax for that year.
Where these conditions are fulfilled the benefit of the car to each employee is:
- calculated separately
- then reduced on a just and reasonable basis.
However, only availability to those chargeable on the benefit of the car is to be taken into account in making this reduction. Any availability to employees not so chargeable (either because their earnings are insufficient or because they are prohibited from using the car privately and do not do so) is to be disregarded. The total amount chargeable in respect of the car is therefore the same as if the car had been available to only one employee for private use and there had been no sharing.
Reduction for payments for private use
Payments that an employee makes for the private use of the car are deducted from the figure carried forward from Step 7 and can reduce the benefit charge to nil.
To qualify as a deduction:
- there must be a requirement in the year to make payments as a condition of the car being available for private use
- from 2014 to 2015 the wording of this section changed to ensure that any payment for private use must be paid within the relevant tax year
- the payments must be specifically for that private use.
Payments for supplies or services, such as petrol or insurance, do not count. Any payments which the employee makes specifically for the private use of a replacement car, are allowed as though they were payments for the private use of the normal car in that period.
There is no tax charge on the benefit of a car if it is a pooled car, used only by employees. Similarly, there is no liability to pay Class 1A NICs for that car or for fuel supplied for that car. There may, however, be a liability for Class 1 NICs if a lump sum or mileage allowance is paid.
A car only qualifies as a pooled car if all of these conditions are satisfied:
- it is made available to, and actually used by, more than one employee
- it is made available, in the case of each of those employees, by reason of their employment
- it is not ordinarily used by one of them to the exclusion of the others and any private use by any employee is merely incidental to their business use of it
- it is not normally kept overnight on or near the residence of any of the employees unless it is kept on premises occupied by the provider of the car.
The reference to employees above means any employee irrespective of the level of earnings. If a car fails any of the conditions for being a pooled car, it may be regarded as a shared car.
Calculating the car fuel benefit charge
The car fuel benefit charge is calculated by multiplying two figures:
- a fixed sum £22,100 from 2015 to 2016; £21,700 from 2014 to 2015 and £21,100 for 2013 to 2014
- the appropriate percentage used to calculate the car benefit (read section 40 onwards).
There is never any need to calculate a new appropriate percentage for car fuel benefit. In every case, whether or not the car has an approved CO2 emissions figure, the appropriate percentage used to calculate the car benefit charge is used to calculate the car fuel benefit charge.
The car fuel benefit charge is reduced proportionately for periods for which the car is unavailable. The proportion by which the charge is reduced is the same for both car benefit and car fuel benefit.
The car fuel benefit charge is reduced if free fuel ceases to be provided to an employee during the tax year. However, if free fuel is received again later in the same tax year the car fuel benefit is not reduced.
If the employee reimburses the full cost of any fuel provided for private use, the fuel benefit charge is reduced to nil. Partial reimbursement by the employee of the cost of fuel provided for private use does not reduce the fuel benefit charge.
Article contributed by ACCA In Practice