Understanding Company Cars: Your Tax Guide

The Company Car: More Than Just a Perk

In the UK, the term 'company car' often conjures images of a valuable employee benefit, a symbol of professional status. However, beyond the obvious advantage of having a vehicle provided by your employer, there's a significant tax implication that every employee needs to understand. This guide delves into the intricacies of company cars, clarifying what they are, when you'll be liable for tax, and how various factors influence the amount you pay. Whether you're a new recipient of a company vehicle or looking to clarify your tax obligations, this information is designed to provide a comprehensive overview.

Defining a Company Car and Van

For tax purposes, the definitions of 'company car' and 'company van' are crucial. As per relevant legislation, a car is broadly defined as any mechanically propelled road vehicle, with specific exclusions. These exclusions include:

• Goods vehicles: Vehicles primarily designed for carrying goods, such as lorries. Estate cars and off-road recreational vehicles are, however, classified as cars.
• Motorcycles.
• Invalid carriages.
• Specialised vehicles: Vehicles not commonly used as private vehicles and unsuitable for such use, like Formula 1 racing cars.

It's important to note that the legal definition of a car can encompass vehicles that might not be considered cars in everyday language. This means it's always best to refer to the official classifications.

A van, on the other hand, is defined as a vehicle primarily suited for carrying goods or burden, excluding people. A key characteristic is its design weight, which must not exceed 3,500 kilograms when laden.

The Double Cab Pick-Up Conundrum

A specific point of clarification concerns vehicles commonly known as 'double cab pick-ups'. Since April 2002, these vehicles are classified as either cars or vans, aligning with their VAT treatment. This classification remains consistent for later years.

When Does a Tax Charge Arise?

A tax charge for a company car or van benefit is incurred when a set of conditions are met:

• A car or van is made available to an employee (or a member of their family or household).
• This provision is made without any transfer of ownership.
• The vehicle is provided by reason of the employment.
• The vehicle is available for private use.

For vans specifically, from April 6, 2005, onwards, a tax charge is incurred if private use by the employee or their family/household is more than 'insignificant'.

Employee Part-Ownership and Employer Provision

The High Court has confirmed that car benefit charges apply even if the employee has a part-ownership in the vehicle. This principle also extends to vans. Furthermore, where an employer provides a vehicle for an employee's private use, it is generally deemed to be provided by reason of employment, effectively going with the job. There's a statutory exception if the employer is an individual and can demonstrate the vehicle was provided in a normal domestic, family, or personal context, and crucially, that it wasn't treated as a business asset and no capital allowances were claimed.

Who is Considered Family or Household?

For the purposes of these regulations, an employee's family or household typically includes:

• Spouse or civil partner
• Sons, daughters, and their spouses or civil partners
• Parents
• Domestic staff
• Dependents
• Guests

Exemptions and Special Cases

There are instances where individuals or their families may not be taxed on the benefit of a company vehicle. For directors or employees earning £8,500 or more annually (for the 2015-2016 tax year), they are not taxed on a vehicle or fuel provided for private use to a family member if that family member is already chargeable for the benefit in their own right. Similar exemptions apply to relatives if the primary recipient isn't chargeable, provided the vehicle is received in their own right as an employee and either equivalent vehicles are available to unrelated employees in similar roles, or the provision aligns with normal commercial practice for that job.

Cash Alternatives to Company Vehicles

Many employers offer employees the option to receive a cash payment instead of a company vehicle. The tax treatment here depends on the employee's choice. If the employee opts to keep the company vehicle, the benefit is taxed as usual. If they forgo the vehicle and take the cash, this cash payment is treated as part of their taxable remuneration.

Calculating Your Company Car Tax

The calculation of the tax charge for company cars and vans is detailed in separate chapters. If fuel is also provided for personal use, this incurs a separate fuel benefit charge.

The Scope of the Tax Charge

Generally, the car, van, and fuel benefit charges are the sole tax liabilities for the private use of a company vehicle or its fuel. However, the expense of a chauffeur is considered an additional benefit and is taxed separately. Similarly, private motoring expenses paid directly or reimbursed to the employee for a company vehicle are typically covered by the existing benefit charge and do not create an additional tax liability. Certain motoring expenses, such as those met by settling personal debts or reimbursing employee expenditure, are considered when determining if an employee's remuneration reaches the £8,500 threshold, although Approved Mileage Allowance Payments (AMAPs) are excluded from this calculation.

The Chauffeur Benefit

If your employer covers the cost of a chauffeur, whether for a company vehicle or your own private car, this is treated as a separate benefit in kind and is assessable on you. The cash equivalent is calculated similarly to other benefits in kind.

Company Car Fuel Benefit

It's important to understand that the standard car or van benefit charge does not include the cost of fuel provided for personal use. If fuel is supplied for your company car, or for a company van where the benefit charge falls under specific regulations, you will also incur a fuel benefit charge. The specifics of this charge are outlined in Chapter 13.

Exceptions to the Benefit Charge

There are specific circumstances under which the car, van, and fuel benefit charges do not apply. These exceptions include:

• Pooled cars or vans: Vehicles available for general use by multiple employees, not assigned to a single individual.
• Prohibited private use: Vehicles where private use is explicitly forbidden by the employer and, crucially, no private use is actually made by the employee. Both conditions must be met.
• Adapted cars for disabled employees: Cars adapted for an employee's disability or automatic transmission vehicles for those unable to drive other types are exempt if they are only used for business travel, home-to-work travel, and training, with no other private use permitted or undertaken.
• Emergency vehicles: From the 2004-2005 tax year onwards, certain emergency vehicles used by individuals employed in emergency services (police, fire, ambulance) are exempt. This exemption applies if the vehicle is used to respond to emergencies, has fixed flashing lights (or would have them but for security concerns), and is provided on terms that prohibit private use except when on call or commuting. For commuting, the use must be required for on-call duties, and the travel must be ordinary commuting or substantially so.

Motor Industry Specifics

In the motor industry, demonstration, test, and experimental vehicles present unique scenarios. If sales staff or demonstrators take a vehicle home solely for the purpose of visiting prospective customers, this alone does not constitute private use. However, if the vehicle is otherwise available for private use, such as during weekends or holidays, the relevant benefit charge will apply. For engineers using test or experimental vehicles, any private use will result in a taxable benefit charge.

Understanding Business vs. Private Travel

Business travel refers to journeys for which an employee's expenses would qualify for tax relief. This broadly includes travel undertaken as part of an employee's duties and travel to attend places for their duties, excluding ordinary commuting and private travel. More detailed guidance on qualifying business journeys can be found in HMRC's "Employee travel – A tax and National Insurance contributions guide for employers".

Private use is defined as any use of the vehicle other than for the employee's business travel, explicitly including commuting journeys.

Hybrid and Electric Company Cars

For employees driving hybrid company cars with CO2 emissions between 1 and 50g/km, the tax calculation is based on the vehicle's 'zero emission mileage' or electric range. This is the distance the car can travel solely on electric power before the battery needs recharging. You should contact your employer to ascertain your car's specific zero emission mileage figure.

Keeping HMRC Informed

It is vital to inform HM Revenue and Customs (HMRC) of any changes related to your company car or fuel. This includes when you receive or return a company car, or if your employer starts or stops providing fuel for your personal use. HMRC will update your tax code accordingly to ensure you are paying the correct amount of tax. You can often check or update your company car tax details online.

Estimating Your Tax Liability

HMRC provides a helpful company car and fuel benefit calculator on its website, allowing you to estimate the potential tax you might have to pay. This tool can be invaluable for financial planning.

Summary Table: Key Factors Affecting Company Car Tax

Frequently Asked Questions

Q1: Do I have to pay tax if I only use my company car for business?

A1: If the car is available for your private use, even if you don't actually use it privately, you will likely incur a benefit-in-kind tax charge. The exemption for private use requires that private use is specifically prohibited and that no private use is actually made.

Q2: What if my employer provides me with a cash allowance instead of a car?

A2: If you opt for a cash allowance instead of a company car, the cash amount will be added to your taxable income and taxed accordingly through PAYE.

Q3: Does my family's use of my company car affect my tax?

A3: Yes, any private use by your family or household members is treated as your private use and contributes to your taxable benefit.

Q4: How is the taxable benefit calculated for a company car?

A4: The calculation generally involves the car's list price when new, its CO2 emissions, and the fuel type. Specific percentages are applied, which can be found in HMRC guidelines.

Q5: Can I avoid company car tax by refusing to use it for commuting?

A5: Commuting is considered private use for tax purposes. Even if you only use the car for commuting, you will still be liable for the company car tax benefit.

Understanding the nuances of company car tax is essential for managing your personal finances effectively. By familiarising yourself with these rules, you can ensure you are compliant with HMRC regulations and avoid any unexpected tax liabilities.

If you want to read more articles similar to Understanding Company Cars: Your Tax Guide, you can visit the Taxis category.