13th April 2018
Company cars have become less and less attractive over recent years, however, from April 2020 this could be set to change, especially for electric / hybrid cars.
First though a quick background to company cars and the benefit in kind (BIK) regime. At present, if you have a company car the taxable benefit is calculated by looking at the list price of the car (note this is not necessarily the price you paid for the car!), the CO2 emissions (a percentage is applied dependent on your emissions
) and whether it is diesel or petrol (your percentage is increased by 4% for diesel cars - up to a maximum of 37%).
List Price x CO2 emission percentage (including diesel surcharge if applicable) = BIK
Your benefit in kind is included as taxable income on your self-assessment tax return. For example, if you had a petrol car with C02 emissions of 130g/km (25%) and a list price of £30,000 then your benefit in kind would be £7,500. This is "added" to your taxable income. Therefore if you receive £30,000 salary then you would have tax of £1,500 to pay personally, however if you were a higher rate tax payer you would £3,000 to pay (40% of the benefit in kind).
If the company pays for your fuel as well then this is also a benefit in kind. The fuel charge (currently £22,600) is multiplied by your CO2 emission percentage to get arrive at the fuel benefit in kind. In the example above this would therefore be £5,650 (£22,600 x 25%).
Another factor to consider is that as cars become more efficient the CO2 emissions percentage is likely to increase. If we take the example of the 130g / km:
- 2018/19 the percentage will be 27%
- 2017/18 the percentage is 25% (as noted above)
- 2016/17 the percentage was 23%
- 2015/16 the percentage was 21%
As you can see the percentage has increased 6% over the 4 year period yet the list price of the car for the calculation remains the same. Therefore, if you entered in to a 4 year lease in 2015/16 your BIK would have been £6,300 however by 2018/19 the BIK would be £8,100 - resulting in an increased tax liability. Any time you enter in to a new car lease it is important to take these factors into consideration, which is why the changes from April 2020 will have an impact.
From April 2020 there will be a reduce rate applied to low emission cars. For vehicles that are purely electric this reduced rate is 2%. For hybrid vehicles the rate is between 2% and 14% dependent on their electronic range:
- > 130 miles = 2%
- 70 - 129 miles = 5%
- 40 - 69 miles = 8%
- 30 - 39 miles = 12 %
- < 30 miles = 14%
For example, a BMWI3 has a list price of £33,340 and has a 195 mile range. Below are the BIK charges:
- 2017/18 9% £3,001
- 2018/19 13% £4,334
- 2019/20 16% £5334
- 2020/21 2% £667
As you can see, from 20/21 this car becomes a lot more attractive from April 2020, in addition to this BMW offer a range extender which has a petrol reserve that powers the electric engine to give it a 275 mile range and only 13g/km of CO2 therefore still qualifying for the 2% rate. With these new rates it is likely that these types of cars will become more prevalent as they are now more attractive and company cars may be making a comeback.
Finally, here are some other issues to consider:
- Enhanced capital allowances are available for new cars with < 50g / km (100% capital allowances compared to 18% or 8% for other vehicles)
- Lower road tax for electric vehicles
- No fuel BIK for electric cars
- The employer can install a charging port at the employees home - no benefit in kind
- The employer may wish to install a charging port at the office - their electricity bills are therefore also likely to increase
- Only 50% of the VAT on leases is recoverable
- Generally speaking, VAT is not recoverable on car purchases
- Tesla have separate rental agreements for the car and the battery!
- As time progresses it is likely that the technology will improve and so is your car going to be outdated in 3 years time - this is not so much an issue if you are leasing but if you purchase a car it could create an issue for the residual value of the car
- There are potential tax planning options here for company directors that require some in depth analysis. Please feel free to contact us to arrange a consultation to determine if we can provide you with a bespoke tax planning service.
The following sites may also be of interest
*This article was originally produced pre 5th April 2018 and therefore the “current year rates” referred to in the article relate to the 2017/18 tax rates.*