New year, new car?
QUESTION: I own my own business and operate through a limited company. I'm considering changing my car and having the company purchase the car for me. What are the tax implications of this?
ANSWER: Many businesses provide a company car as part of an overall remuneration package for employees. The private use of a car however is considered to be a benefit in kind (BIK) by HMRC and therefore is taxed as part of the employees overall employment income.
The BIK is a notional figure which the employee is taxed on and which is supposed to represent the effective amount of remuneration the employee has received by being provided with the car. The employee must pay tax on the deemed remuneration and the amount of this will dictate the amount of national insurance contributions the employer has to pay.
The BIK value is calculated based on a number of factors including the type of fuel used by the car, the carbon dioxide emissions and the UK manufacturers list price for the vehicle. It is irrelevant what the company pays for the vehicle as BIK is based on the manufacturers list price. To this BIK percentage HMRC adds 4 per cent based on other emission factors such as the use of diesel fuel. This enables the company to arrive at a cash value and this is returned on a form P11D in July of each tax year. The maximum amount that you could pay under BIK is 37 per cent of the vehicle list price.
With the increasing focus on green technology and the government's attempts to reduce congestion and CO2 emission levels, a generous tax regime exists for employers providing electric and ultra low emission vehicles. These vehicles have a much lesser BIK percentage and for the current tax year the BIK percentage is 16 per cent of manufacturers list price provided the vehicle emits less than 50 grams of carbon dioxide per kilometre.
The tax benefits of providing ultra low emission vehicles are however reducing and in fact the benefit in kind cash value upon which the tax charge is based has increased by 78 per cent over the last three years whereas the equivalent increase for diesel and petrol cars is approximately 25 per cent.
At the end of the day, however, there is a relatively straightforward calculation that can be done to work out what the net cash effect on you is by having a company car provided and measure this against the amount of income that you would need to earn to arrive at the same net figure.
Company fuel benefit tends to be very expensive, and therefore generally speaking you are usually better paying for your own fuel and then charging the company the HMRC-approved mileage allowance of 45p per mile for the first 10,000 business miles and 25p per mile thereafter.
As a company owner you will also be interested in the tax implications of the car purchase for the company. The company is able to claim a special form of depreciation called “capital allowances” on the car. These allowances offset a percentage of the car cost against the company profits. For ultra low emission vehicles this is 100 per cent of the cost, falling to 8 per cent of the cost for the highest carbon dioxide emitting vehicles.
:: Paddy Harty (email@example.com) is director at PKF-FPM Accountants (www.pkffpm.com). The advice in this column is specific to the facts surrounding the question posed. Neither The Irish News nor the contributors accept any liability for any direct or indirect loss arising from any reliance placed on replies