A company car can be a useful tool for running a business while also offering a perk to employees.
For employers providing company cars and fuel to their employees, there are many National Insurance and reporting obligations they must be aware of.
Employers need to report company cars used for private journeys and the fuel used, any volunteer work and company cars for employees working from home during the Covid-19 pandemic.
The car or fuel must be reported to HMRC if they are provided as part of a salary sacrifice arrangement.
Employers may also have to pay National Insurance on the value of the benefit.
It can be a minefield, so what do you need to know about company cars and taxes?
Tips for working out the value
Employers who provide company cars or fuel to employees for private use need to calculate the taxable value. Then, the value needs to be reported to HM Revenue & Customs (HMRC).
This taxable value can be worked out via payroll software, or you can use HMRC’s online company car and car fuel calculator.
Or you can calculate it manually using a P11D form. This method needs to be used if the car was unavailable for at least 30 consecutive days during the relevant tax year and the employer was providing fuel for private use but stopped.
Remember, the taxable value of a car is not the same as its cost. The taxable value also depends on the car’s fuel type and level of CO2 emissions and the amount of time the car is unavailable during a tax year.
Tips for employees
If an employee is driving a car provided by their employer and it is available to use personally, it is viewed as a taxable benefit. HMRC attaches a monetary value to the private use of the vehicle and collects tax on it, which is called a Benefit in Kind Tax (BIK)
There are two separate BIK tables, one for those driving a car registered after 6 April 2020, and one for those that drive a vehicle registered before that date.
Calculation of the tax is based on CO2 emissions of the specific car provided combined with other factors, such as the list price, the tax rate the driver is in and the type of fuel the car runs on.
Employees can use HMRC’s own car tax calculator, which will ask for all of the above details, plus any tax-reducing facts like the driver’s contribution to the initial cost of the vehicle and the percentage of use.
Make sure you know what is exempt
Cars used for business journeys only are exempt, so employers must ensure their employees understand they should not be used for private journeys and follow this rule.
Business journeys are defined as travel that is part of an employee’s duties and journeys an employee must make to get to a temporary workplace.
If an employer wants to ensure they remain exempt, employees must understand not to use the vehicle for private journeys.
Cars adapted for an employee with a disability are exempt if the only private use is for travel between home and work and to work-related training.
Fuel paid for by employees, ‘pool’ cars, and cars provided to close relatives are also exempt.
Keep up with advisory fuel rates (AFRs)
Mileage rates can be applied to employees using a company car. Employers should use the rates when they need to reimburse employees for business travel in company cars or they need employees to repay the cost of fuel used for private travel.
HMRC reviews the AFRs quarterly on 1 March, 1 June, 1 September and 1 December.
For the latest rates, visit the gov.uk website here.
Consider the benefits of going electric
More people than ever are turning to electric cars in the face of battling climate change and spiralling fuel costs.
There are also some tax implications of buying or leasing electric cars for business owners.
Electric cars qualify for first-year allowances, which means businesses can deduct the cost of the car from profits before tax in the accounting period during which the car was purchased.
It is worth business owners thinking about the tax year in which the car is purchased as it may be beneficial to choose a year with a higher income.
For advice on company cars, benefits and their tax implications, get in touch with our expert team today.