IF YOU drive a company car you’ll probably know how the real value of this perk has been seriously eroded in recent years by tax rule changes.
Now it seems the tax issues around company cars may become even more complicated as they get caught up in the revenue’s tax avoidance clampdown.
HM Revenue & Customs has recently taken a number of cases to court where aggressive tax avoidance arrangements have been entered into, with the result being the failure of arrangements involving service partnerships, leasing company cars to employees, joint ownership schemes and hire purchase schemes. Given the current HMRC initiatives against tax avoidance schemes generally, it is probable that other schemes will also come under attack.
So, how can you make sure you minimise the tax you pay on both the provision of your company car and on the provision of fuel, without upsetting the taxman? Here are a couple of ideas.
Car benefits are now directly related to the CO2 emissions and range from 0 per cent of the list price for cars with emissions of 0 grams per kilometre, up to a maximum of 35 per cent for the most polluting cars. Given that these are annual charges based on the original cost price of the car when new (the fact that it may have been purchased second hand is irrelevant), these charges can be very hefty indeed.
The first, and most obvious answer is to choose cars with low CO2 emissions. For example, a typical family car with emissions up to 75 grams per kilometre will suffer an annual tax charge equal to 5 per cent of the list price of the car when new, so that on a car costing £15,000, the annual benefit-in-kind charge would be £750.
The actual tax payable would depend upon the marginal income tax rate of the employee. It must be remembered that there is no maximum list price to which the relevant percentage is applied; this was removed from 6 April, 2012.
The value of the car for calculating the tax charge can be reduced if you make a capital contribution towards its cost of up to £5,000. Consequently, the annual charge for a car costing £15,000 would be reduced by one-third if a £5,000 capital contribution were made. When the car is subsequently sold, the you would be entitled to one-third of the proceeds of sale.
Another way of reducing, or possibly completely eliminating, the tax charge is to make a personal contribution to account of private use. Arrangements such as this should be fully documented, however, so that HMRC may be satisfied if it raises an enquiry.
Another highly effective strategy is not to have a company car at all and instead charge your employer a rate per mile for using your own car on company business. The statutory tax free mileage rates which can be claimed for cars and vans are 45p per mile for the first 10,000 miles, with an additional 25p per mile thereafter. If an additional passenger is carried, a further 5p per mile may be added. For motorcyclists, the tax- free limit is 24p per mile.
Some companies do not fully reimburse at the statutory mileage rates, and in those cases you can claim tax relief on the difference between the amount per mile which is paid by the company and the statutory rates referred to above.
Company cars can still be an effective perk, particularly when taking into account the high cost of insurance, servicing, repairs and so on.
The tax cost is not as easy to minimise as it used to be – and may become harder – but it can be done very effectively if care is taken at the outset.
• Ronnie Ludwig is a partner at Saffery Champness chartered accountants in Edinburgh