Tax Factor
05 August 2010
Company car update
Further changes to the calculation of company car and fuel benefits came into effect from 6 April 2010. Businesses and employees will be affected and, as ever, there will be winners and losers.
For Businesses
The main changes that affected companies, partnerships and sole traders alike occurred in April 2009. The old rules restricting tax relief on “expensive” cars disappeared from both the capital allowances and leased car calculations. These were replaced by new rules based on CO2 emissions.
New vehicles with emission levels below 160g/km are now included in the “general pool” and are eligible for capital allowances at 20%, (18% from 1/4/2012). Cars with CO2 emissions greater than this are added to the “special rate pool” attracting an annual writing down allowance of just 10%, (8% from 1/4/2012).
Very energy efficient vehicles producing below 110g/km continue to qualify for 100% capital allowances but, other than this, annual investment allowances and first-year allowances are not available on cars. Balancing allowances and charges are no longer calculated when a car acquired by a company on or after 1 April 2009, or by other businesses on or after 5 April 2009, is sold or otherwise disposed of. To add to the confusion there are transitional rules in place for cars that were purchased under the old scheme and these will remain in force until April 2014.
The tax deduction available for leased cars has also changed. No element of the leasing cost of cars with emissions below 160g/km will be now be disallowed, whilst for cars with emissions above that level a flat 15% of the finance rental element of leasing costs will be disallowed in the business tax computation.
For Individuals
Having tinkered with the rules affecting businesses in 2009, Alistair Darling, in what was to be Labour’s last Budget earlier this year, focused on company car drivers, making various changes to the thresholds that affect the calculation of the taxable benefit arising when an employee has use of a car supplied by his or her employer.
Following June’s emergency Budget the new government has retained these changes and confirmed the rates of company car tax benefit for all tax years up to and including 2012/13.
In previous years even the most environmentally friendly cars were still taxed at a minimum rate of 15%. With effect from 6 April 2010 two new CO2 bandings have been introduced covering cars with CO2 emissions of 1-75 g/km (5% of list price) and 76-120 g/km (10% of list price). The rates for diesel powered vehicles have been similarly reduced.
Over the next 2 years the basic minimum rate of 15% for emissions under 130 g/km will be reduced by 5 g/km per year until it reaches 120 g/km in 2012/13, when the 2 new bands for low emissions mentioned above will become one 10% band for emissions below 99 g/km.
Drivers who are really prepared to “go green” with either an electric company car or van will suffer no taxable benefit at all for 5 years from 6 April 2010.
Currently discounts are also given on a range of less common “green” vehicles such as ‘hybrid’, and ‘bi-fuel’ vehicles as well as those that run on road fuel gas or bioethanol. However these discounts will cease to apply from 6 April 2011. Similarly some diesel cars were exempt from the usual 3% loading (compared to a petrol car) if they meet a Euro IV emissions standard. This is also to be withdrawn from 6 April 2011 so that ALL diesel cars will be subject to the 3% loading.
The basis of the car fuel charge increased from £16,900 to £18,000 from 6 April 2010 this year. This fuel charge is a tax cost for those drivers of company cars whose employer also meets the cost of private fuel. The employee pays tax on a benefit that is based on an ‘appropriate percentage’ of £18,000, which, as with the car benefit itself, depends on the CO2 emission level of the car.
'This means that from 6 April 2010, a driver of a company car with an appropriate percentage of 25%, whose employer meets the cost of fuel for private journeys will pay tax of £1800 per year, assuming that they pay tax at 40%. If we assume a fuel cost of, say, 12p a mile then this would equate to private mileage of 15,000 miles per year. Clearly, if our driver covers less private miles than this, then they will be financially worse off as result of having the cost of fuel for private journeys met by their employer.
All those with a love of expensive supercharged luxury cars should be warned that the amount on which company car tax benefits can be calculated is currently caped at £80,000 – but this cap is set to disappear from 6 April 2011. This could result in some steep tax increases when the car benefit is recalculated by reference to actual list price!
Businesses seeking advice on the tax consequences of either purchasing or leasing cars, or employees concerned about the effect on their tax bill of taking a company car should consult their usual Wilkins Kennedy contact for more detailed advice.
