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Cars – a topical round-up. By Rebecca Benneyworth
This week, I have prepared a round-up of all of the current tax issues relating to cars and business motoring, with indications of what is likely to change in the short to medium term.Capital allowances
For cars owned by the business (whether incorporated or not), we still have the “expensive cars” rule for at least another year. There are proposals to reform capital allowances on expensive cars, which were the subject of a detailed consultation document in this year’s Budget, which may well signal the end of balancing allowances on luxury cars, as it moves towards pooling for all cars, and giving allowances based on the emissions of the car. As you would expect, more generous allowances will be available for low emission cars.
However, there is some good news; the current 100% first year allowance on cars emitting no more than 120g/km of carbon dioxide looks set to stay in the medium term. There are lots of models now available that will give businesses up front tax relief on their purchases, but the small business owner who is not a limited company needs to beware – his private use of the car may mean a substantial balancing charge is incurred when the car is sold.
Benefits in kind
We have been through a few years of relative stability in benefit tax on cars, but benefits are set to rise again next April when the table is once more revised upwards by 5g/km leading to an increase in the benefit in kind of 1% of the list price for many drivers. This will represent around a 7% increase in tax for some drivers, although some will see no increase at all, as they are already at the top of the scale.
Next year also sees two other changes to the benefit in kind rules, with a new rate of benefit of 10% of list price on vehicles emitting no more than 120g/km. So the business will benefit from the capital allowance, and the driver will benefit from the reduced benefit in kind, leading to a further saving for the employer in Class 1A National Insurance contributions. Note that the emissions are not rounded down for this purpose – emissions must be strictly no more than 120g/km to qualify.
The second change is to introduce a new reduced benefit for cars capable of running on E85 fuel – a mixture of normal fuel and biofuels. These cars will attract a 2% discount from the Table figures.
Fuel
The fuel benefit multiplier has been £14,400 since the new regime commenced, and remains unchanged for this year. This puts the benefit in kind on free fuel for private motoring at between £2,160 and £5,040 for drivers of conventionally fuelled vehicles.
When employees prefer not to have this benefit, the cost of all private fuel must be paid for by the employee. To simplify this process, HMRC publish recommended fuel only rates which can be used to reimburse fuel for business miles to employees who pay for the fuel in their company car. The rates may also be used to reimburse the employer for the private journeys in a company car, but great care is needed to evidence that all private fuel is paid for in this way, otherwise a taxable benefit will still arise. If employers want to use different rates than the recommended rates to reimburse fuel, they will need to obtain approval from the tax office through a dispensation.
The fuel only rates changed without warning from 1 February this year, and will be revised again if fuel varies in price by more than 10% up or down. Employers should bear this in mind and check the HMRC website regularly for announcements.
VAT on fuel
Where VAT is recovered on fuel in a car owned by the business it is necessary to pay an output tax charge to recognise the private use of the fuel. This applies to company cars where the driver incurs the fuel benefit charge, and also to the self employed. The fuel scale charges applying were amended in Budget 2007 and now also recognise the carbon dioxide emissions of the car, instead of being determined by the engine capacity. New fuel scale charges apply for the first complete VAT quarter starting on or after 1 May 2007. Overall many drivers will see a slight reduction in the VAT they pay as a scale charge, although those with diesel cars will suffer a small increase – there is no separate scale for diesel vehicles.
It is also possible to recover VAT on fuel in where the employer does not provide fuel for private motoring, either as part of the charge of the overall mileage rate paid, or as a fraction of the fuel only rate paid in respect of a company car. Since 2006, however, the employer must ensure that he has sufficient fuel receipts to cover the VAT reclaimed in this way.
Mileage allowances
The AMAP’s scheme, or Authorised Mileage Allowance Payments permits the employer to reimburse employees for business mileage in a privately owned car. This scheme provides for statutory exemption, and also a statutory deduction from income in respect of business miles travelled at a rate of 40p per mile in a car or van for the first 10,000 miles in a tax year, and 25p thereafter.
Generally speaking, unless the employee drives a very small car, these rates are unlikely to reimburse the full cost of the journey, so employees who have to drive long distances for work are likely to be disadvantaged by this.
Mileage allowances are also often paid in schemes known as ECOS – Employee Car Ownership Schemes. Under these schemes, the employee normally receives a salary increment to reflect the loss of his company car, and to provide the car in which business journeys made. The employer will then often reimburse at a much lower rate per mile than 40p, reflecting the fact that the salary rise has in part paid for the running costs of a car. Employees in this position should ensure that they have claimed the additional mileage allowance, as they too are entitled to the full 40p per mile tax allowance or deduction. Some staff may need to make a claim against their income for this, and will receive a repayment of tax.
Those reconsidering their business motoring should also be aware that the AMAP’s rates are under review at present and may change, once again to reflect the emissions of the car – this is one of the options being considered. Making a firm decision before the outcome of the review is known could mean that drivers are disadvantaged later this year (or early next year) when the changes are finalised.
Car parking
Don’t forget that the provision of free parking by the employer at or near the place of work is tax exempt. Employers can book spaces for their employees at public car parks and then provide them for free to staff, and there is no tax or NIC charge on a benefit provided in this way.
AccountingWEB.co.uk 30-May-2007
Categories: Tax Features, Tax - Rebecca Bennyworth
Times read: 11511
by 9 user(s)
A good feature, very useful. I also find the http://www.businesscar.co.uk useful. Particularly the taxcalculator for company cars.
