Company Cars – Tax Efficient and Cost Effective?

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A company car can be an essential business tool for employers and employees. It can also be an expected component of a remuneration package. But changes in taxation costs and the rising cost of fuel etc, should cause all businesses with company cars to critically evaluate and review their arrangements on a regular basis.

Added to the cost element, should be consideration of the business efficiency of having a company car at a time when electronic communication is becoming more common-place, alongside a growing concern for the environment and the size of our 'carbon-footprint.'

As HMRC informs us, there is a tax charge where, because of their employment, a car is made available to and is available for private use by a director or an employee earning £8,500 a year or more, or to a member of their family or household (a 'company car').

There is a further tax charge if free or subsidised fuel is provided for private use in a company car. When a company car is made available for the private use of an employee, a 'benefit in kind' value is calculated in relation to the car and the fuel, if that is also provided for private use. These tax and national insurance costs could mean that your company car may not be the most tax-efficient option for either employer or employee.

It may also be worth reviewing the company car policy completely, as it could prove more beneficial to pay employees for business mileage in their own vehicles, at the statutory mileage rate.

The alternatives to the company car include the use of public transport and any review of travel arrangements will need to compare costs - public transport can turn out to be expensive. With no company cars, the use of private transport with the payment of travel expense can come into play, either as mileage or, more complicated, with the payment of 'essential car user allowances'.

Travel expenses incurred in earning income are deductible for tax purposes where they have been wholly and exclusively incurred for the purpose of the business, whereas expenses with a material private purpose, including home to work travel, are not allowable as a deduction. HMRC has detailed information on tax and NI arrangements, including in relation to other expense, eg, congestion and parking charges.

For an employee, having a company car, is not just a tangible remuneration benefit in terms of capital cost, but it also gives stress relief and peace of mind during the car's subsequent use, upkeep and depreciation.

Company car packages can be very generous, but for the company increasingly costly! However the employee will pay tax if a company car is made available for their private use (this includes commuting) or they are provided with free or subsidised fuel for private use in that car.

The tax to pay is broadly determined by three factors: the list price of the car plus any accessories, the CO2 emissions of the car, and the fuel type of the car. In general, the benefit tax charge is lower for cleaner and cheaper cars. This encourages the choice of cars that are less damaging to the environment.