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Company cars: Government tax and regulations

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30th Oct 2012
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Concerns about our environment have given the government cause to increase tax on company cars with the aim of reducing pollution through reducing business miles, writes CIPP'S senior policy liason officer Diana Bruce. 

A new system was introduced in 2002 for employees who also use their company car for private mileage, resulting in the lower the CO2 emissions, the lower the tax charge, so polluting cars now suffer greater tax charges. 

New cars are becoming more efficient so the average level of CO2 emissions is actually falling. The Budget announcement this year included more changes which will be introduced over the next few years, some with the aim of simplifying the rules. A very common phrase in taxation as one of the government’s broad objectives is to simplify where possible.

Emission changes

From 6 April 2011 there remain only three letters to describe cars: E for electric, D for diesels and A for all others.

There are to be no more reductions for alternative fuels, but the diesel surcharge still applies to all diesels whenever registered.  There is also no longer a restriction on the price of a car, so the £80,000 limit that was in place pre 2011 no longer applies.

Employees and directors who are provided with a company car and who also receive free fuel from their employers are subject to a fuel benefit charge. The multiplier used to calculate the cash equivalent of the benefit of free fuel increased from £18,800 to £20,200 for the tax year 2012/13.  

As a result of this change the fuel benefit charge will increase for fuel provided for all cars apart from zero emissions cars.  A welcome announcement is that the government have committed to announcing all future rates a year in advance. 

The multiplier will increase by two percent above the rate of inflation (based on RPI) in 2013/14.  The van fuel benefit charge multiplier will be frozen at £550 for 2012/13 and will increase by inflation in 2013/14.

Company car tax rates for the next few years were also announced. For company cars emitting more than 75g of CO2 per kilometer, the tax rate will increase by one percentage point to a maximum of 35% in 2014/15. 
In both 2015/16 and 2016/17, the appropriate percentages of the list price subject to tax will increase by two percentage points, to a maximum of 37%. And from April 2016, the government will remove the three percentage point diesel supplement so that diesel cars will be subject to the same level of tax as petrol cars. 
Also from April 2015, the five year exemption for zero carbon cars and the lower rate for ultra-low emission cars will come to an end. 
Car or allowance
According to research by Towers Watson company car and related allowance schemes continue to grow in popularity.  The services provider found that almost 80% of managers in the UK remain eligible for car benefits, however only 12% of businesses offer the ‘car only’ option. The more common alternative is the offer of a cash allowance plus a vehicle or purely just a cash allowance.
Of course, given that over the last few years many businesses have had to keep tighter controls over salary increases, they are looking to find ways to reward key staff but keep the expense to a minimum and providing company cars or car allowances is one way of providing an alternative to remuneration increases.
However according to GE Capital the number of firms offering cash payments instead of a company car has actually decreased and they state that the change in popularity is largely down to the shift in attitudes about cars from both employees and employers.  Giving employees a cash allowance for a car used to mean that employers could relinquish any responsibility over the vehicle but as a result of duty of care legislation this is no longer the case.
Cash options have also proved to be the more expensive option and GE Capital state that they have seen many cash takers return to company cars because they are a very worthwhile benefit.
The accompanying factors have to be taken into consideration such as service and maintenance and motor insurance cover. The reduction in the number of companies using cash options could also be a sign of the economic downturn as running your own vehicle has a much greater cost risk.
The calculation of cash equivalents of benefits in kind can be difficult as the rules to calculate the cash equivalents for certain benefits can be complex, company cars certainly being one. 
A variety of data is required before the cash equivalent calculation can be made so for example, the amount of company car tax an employee will pay is dependent on just some of the following data points:
  • the date the car is first registered
  • the list price of the vehicle
  • the cost of accessories
  • the CO2 emissions figure
  • the fuel type
  • period of availability
  • capital contributions made by the employee
  • any private use contributions deducted from the employee
Reporting
Since 1996 employers have had to calculate cash equivalents of benefits in kind, a requirement introduced with the arrival of Self Assessment.
So while offering benefits is great as part of an attractive remuneration package and the employer can also reduce costs, there is the administration to consider.  The cash equivalent is the cash value an employee will pay tax on according to the type of benefit that has been provided by their employer. 
The calculation in a basic form is the cost to the employer of providing the benefit (including VAT) minus the amount made good by the employee (out of their net pay) which then equals the cash equivalent. There is calculator on HMRC's website which allows you to calculate the benefit in kind value of a company car and, if appropriate the car fuel benefit and it also provides an indication of the tax liability.
Employers are required to submit end-of-year forms P9D, P11D(b) and P11D to HMRC by 6 July each year and employees must be issued with P11D information detailing the amount of the cash equivalent for each benefit. Most employers tend to provide employees with benefits statements in lieu of copy P11Ds due to the fact that the P11D is designed for HMRC purposes and it can be perceived to be quite an unclear form.
As P11Ds are submitted on an annual basis, employees’ tax codes do not reflect the benefits they are currently in receipt of. There is only one requirement for employers to report benefits information in-year and that is for company cars on the quarterly P46(Car) forms.
However, HMRC only wants to know when the company car is first allocated or ceased. They will not accept hard copy P46(car) forms filled in with replacement car information. This affects the vast majority of company car drivers who change their company cars every three to four years and it invariably leads to underpayments of tax arising.
Common errors
Most common errors can be avoided by completing P11Ds electronically as they include validation rules within their software that will automatically prompt you to correct your mistakes before you save or submit a form. However, not all errors in form completion can be prevented and the top two errors identified from 2009/10 P11Ds related to car and car fuel benefits. 
These were:
  • Fuel benefit not included – employers must include the details where this applies and significant numbers of P11Ds were submitted without this information. Amended P11Ds are required to correct the employee’s tax code
  • Incorrect completion of from and to dates – some employers completed the boxes for 'dates car available' giving the period dates, e.g. 6/4/2009 to 5/4/2010. If the car was available in the previous tax year then the 'from' box should not be completed. This also applies if the car will be available in the next tax year, the 'to' box should remain open so that the tax code is carried into the next tax year (2010-11 in this example)
Both of these errors led to HMRC systems automatically updating the affected employees’ tax codes based on incorrect information.
A number of employers now tax their employee benefits via payroll and while this is fine, it can cause problems for both you and HMRC if you have not made this clear before submitting information.
P11Ds are still required but you must inform HMRC before you payroll benefits and clearly mark any P11D submissions 'payrolled'. This will prevent processing the form to update the tax code and stops the employee from being taxed twice.
Of course with the introduction of RTI for all employers from April 2012, we do hope to see benefits in kind in ‘real time’ on the agenda in the not too distant future.  If HMRC truly want all employees to pay the right tax at the right time, then despite the perceived complexities, BIKs cannot be ignored forever.
A more accurate benefits information flow will mean better compliance as any mistakes arising can be spotted and rectified earlier, rather than over a year later as is the case now.
National Insurance Contributions
One last point to mention is an ongoing appeal case, Total People Ltd v HMRC, which is debating the question of when a car allowance is general earnings and when it is relevant motoring expenses.
Before the first-tier tribunal, Total People Ltd persuaded the judge that a monthly lump sum payment could constitute relevant motoring expenses and be exempt from National Insurance contributions (NICs).  This appeal concerns the appellant’s claim to be entitled to a refund of overpaid NICs for the four years ending 5 April 2003 to 2006.
A claim was submitted for the repayment of £146,165 and an appealable decision refusing that claim was given by the court. HMRC won on appeal before the Upper Tribunal; however a formal decision is now awaited from the Court of Appeal.
If this is something that may affect your business then it may be worth reviewing, if you have at any time over the past six years paid a car allowance to your employees (that is not linked to salary) for use of their private vehicles and you have paid a mileage payment at less than 40p per mile.

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