South: Company car on way out, says Baker Tilly

Is this the end of the road for the company car?

This latest Budget and its predecessors introduced a number of important changes in tax legislation which will have a direct impact on the company car. Indeed some came into effect on April 1, 2009.

The changes are complex but in summary:

2.1 Employee benefit in kind

The Government has continued to increase the amount of tax employees have to pay for their company car, in particular:

• Against a backdrop of lower fuel costs after their summer peak, the benefit in kind tax charge for employees provided with free fuel for private motoring has increased by about 17%. This means the total costs of the fuel paid by the employer and the benefit in kind tax paid by the employee will far outweigh the actual cost of the fuel itself. As a simple guide, unless the average employee’s private mileage is more than 30,000 miles per year he would be better off paying for his own fuel (with possibly a small addition to salary) rather than claiming it from the employer.

•Currently the ceiling on which employee tax charge is calculated is set at £80,000. From 2011 the ceiling will no longer apply and so the benefit in kind charge will be calculated on the actual list price of the vehicle. This will result in a very substantial increase in personal taxes for employees provided with the most expensive cars.

• The benefit in kind tax charge for the car itself, particularly for cars with higher CO2 emissions, means that for many employees a move to a cash allowance or more fuel efficient vehicle should be strongly considered.

2.2 Tax reliefs for purchasing company cars

Smaller more fuel-efficient cars will attract the highest rate of tax allowance and lowest tax charge on employees. From April 2009 expenditure incurred on cars will qualify for a tax writing down allowance at either 10%, 20% or 100%.

Expenditure on cars with CO2 emissions

• exceeding 160 g/km - 10% allowance

• exceeding 100 g/km but less than 160 g/km - 20% allowance

• not exceeding 100 g/km - 100% allowance

Expenditure incurred before April 2009 will continue to be subject to the old rules for a transitional period of 5 years.

Leased cars: The calculation of the tax relief available for leased cars will also be amended (and to some extent simplified). From 1 April a flat rate disallowance of 15% of the lease payments will be used. This will only apply to cars with CO2 emissions above 160g/km. Lease costs on cars with CO2 emissions below 160g/km will be fully deductible for tax.

Expenditure under leases that commenced prior to April 2009 will continue to be subject to the old rules.

While it is not yet the end of the road for the company car, we are on the finishing straight for cars with high CO2 emissions and also for fuel being provided to employees for private use. The company car remains a target of the taxman and to the extent employees are provided with company cars, and/or private fuel, there may be scope to reduce current costs.

Baker Tilly