In this blog we take a look at how company cars are taxed. We explore the tax treatment for the company itself as well as the benefit-in-kind for the director/employee. We also take a look at the position where the director/employee owns the car in their own name and the position for the self-employed.
Tax treatment for the company
Purchasing or leasing the car
When a company purchases a car, leases a car under a hire-purchase contract or under a finance lease contract lasting more than seven years, it can’t usually claim an immediate write-off of the cost against its taxable profit. Instead, the cost is usually spread over the life of the car through the mechanism of ‘capital allowances’.
Where cars are acquired under other types of lease, the tax treatment is different With a pure lease (operating lease) the hire charges are deductible in calculating the taxable trading profit.
Where cars are acquired on finance lease for a period of less than seven years, the cost is depreciated over the period of the lease in line with accounting standards. The depreciation charges are deductible in calculating the taxable trading profit as are the interest charges.
The company can claim a deduction for any running costs it incurs in relation to the cars it owns / leases.
See our blog Leasing of Cars and Equipment — TN Accountancy | Accountants Tunbridge Wells for more information on leasing.
Electric, hybrid or petrol/diesel
For outright purchases and hire-purchase leases, the rate of capital allowances depends on how eco-friendly the car is. This is measured in terms of the car’s CO2 emissions rating.
A company which purchases a new or unused car with CO2 emissions of 0g/km or an electric car can claim 100% capital allowances in the accounting period in which the car is bought. The same applies for the cost of new (not second-hand) electric vehicle charging points.
For cars with CO2 emissions of 50g/km or less, or second-hand electric cars, capital allowances can be claimed at a rate of 18% per year on a reducing balance basis.
For all other cars, the cost can be deducted at a rate of 6% per year or a reducing balance basis.
For operating and finance leases (where the hire charges are deductible in calculating the taxable trading profit as they arise) there is a 15% restriction on the amount which can be deducted for high emission cars (CO2 emissions of more than 50g/km). Any maintenance element under the leasing contract is not restricted however.
Benefit-in-Kind reporting and Employers National Insurance Contributions
Where a company makes a car available for the private use of an employee, the employee is taxed on that ‘benefit’.
Where a company pays for an employee’s private fuel (other than electricity for electric cars – but see below), the benefit to the employee is also taxed.
The employer must also pay Class 1A National Insurance Contributions (NIC) at 13.8% (currently) on the value of the benefits provided.
Employers must submit a form P11D for all employees who have a company car (and fuel) benefit along with an employer annual return P11D(b) and pay over the Class 1A NIC for each tax year by 6 July and 19 July following the tax year, respectively.
Where an electric car is charged at the employee’s workplace at the employer’s expense, there is no taxable benefit for the employee. The same applies where an employer installs an electric charge point at the employee’s home and pays for the electricity directly.
However, if an employer reimburses an employee for the electricity costs of charging a company car at the employee’s home, HMRC’s view is that a taxable benefit arises in respect of any private use. The full amount of the reimbursement goes through payroll and the employee can claim a deduction for the business electricity separately.
Where an employer reimburses an employee for business mileage in their personal car, there is no reporting requirement provided the reimbursement is at no more than HMRC’s prescribed mileage rates (HMRC has a rate for reimbursement of electricity for electric car mileage as well).
VAT considerations
VAT can only be recovered on the cost of purchasing a car if it will be used exclusively for business purposes. This means that VAT will not be recoverable on the purchase of most company cars.
Where a car is leased rather than purchased, full VAT recovery on the lease payments is only available where its use will be exclusively for business. However, 50% of the VAT can still be recovered where the car is available for private use. This applies for operating leases or finance leases but not hire purchase leases.
Tax treatment for the employee / director
As mentioned above, the provision of a company car for private use is a taxable benefit for the employee.
The annual benefit is calculated as a percentage of the car’s list price less any capital contribution towards the cost made by the employee. The percentage depends on the CO2 emissions rating of the car and in the case of electric cars by their electric range with the highest being 37% for a car with more than 160 g/km and the lowest being 2% for an electric car with a range of 130 miles or more (rising to 5% in 2027/28). Any payments which the employee makes to the employer for their private use can be deducted from the taxable benefit figure.
The benefit covers all costs associated with the car paid for by the employer such as running costs, road tax and insurance but not fuel (except electricity for an electric car).
The provision by the employer of fuel for private motoring is a separate taxable benefit. The benefit is a flat rate irrespective of how much private fuel is paid for. The benefit can be avoided if the employee reimburses the employer for the private fuel at the HMRC prescribed ‘fuel only’ rates. The flat rate does not apply to electricity for electric cars.
The benefit of employer-provided electricity for an electric company car is included in the benefit charge for the car. However, a taxable benefit arises where the employer reimburses the employee for electricity costs in relation to their private use of the car (see above).
Where an employee has a choice of a company car or a cash allowance or has the option to sacrifice salary in exchange for a company car, the employee is taxed on the higher of the car benefit or the cash allowance / salary foregone except where the car concerned has a CO2 rating of 75g/km or less. Thus the benefit of salary sacrifice has been preserved for electric and low emission cars.
Tax treatment for the self-employed
The tax treatment for self-employed individuals and partnerships is the same as for companies except that the costs are restricted pro-rata to private use of the business owner. Note that there is no adjustment for private use of employees.
If an unincorporated business has employees, the same benefit in kind reporting rules as for companies also apply.
Alternatively, small businesses (sole traders or partnerships with no corporate partners) with annual cash receipts of £150,000 or less can claim a tax deduction for cars based on mileage at HMRC’s prescribed rates. This means that the actual costs do not need to be recorded nor do capital allowances need to be calculated.
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Please note that the above is for general information only and does not constitute financial or tax advice. You should not rely on this information to make or refrain from making any decisions. You should always obtain independent professional advice in respect of your own situation.
