By Sarah Bowen, Tax Director at Thompson Wright
Every year lots of businesses supply vehicles to employees, either as a reward to retain them or because a vehicle is an essential part of their job.
Many years ago, having a company car was seen as a tax-efficient way of remunerating employees thanks to the tax advantages it offered.
However, over the last few decades, the Treasury has caught on to this and has sought to tax company cars through the Benefit-In-Kind (BIK) tax system.
Under BiK, cars are regarded as an additional taxable benefit that falls outside of an employee’s regular wages, which are subject to income tax and National Insurance contributions.
There have been significant changes to BiK for cars in the last year and businesses and their employees must consider these new rules, as it could affect the vehicles they purchase.
Company Car Tax 2020/21
The latest BiK rates for the 2020/21 financial year started on 6 April 2020 and have seen changes due to the stricter new European WLTP (World Harmonised Light Vehicle Test Procedure) emission and economy tests.
Emissions are key to the amount of company car tax paid, and the new WLTP tests, which replace the former NEDC (New European Driving Cycle) tests, mean that most cars on-paper will have higher CO2 (carbon dioxide) emissions, meaning a higher rate of tax.
The Treasury has recognised that the test may unfairly disadvantage some company car users and so to achieve fairness the Treasury has reduced the BiK rates used for older, NEDC-assessed cars registered under the new WLTP system by two per cent.
This reduction will fall to one per cent in the 2021/22 financial year and will disappear altogether in the following year. This means that there will be no reduction in its BiK rate for these vehicles from April 2022.
People looking to purchase a new company car in the next year should review the Government’s latest rates, which can be found here. Be aware though that these rates change annually and may differ after April 2021.
Reducing company car tax
If businesses and employees review the latest company car tax rates, they should be able to determine which vehicles suit their needs and can reduce their BiK liabilities.
However, while diesel-engine vehicles may once have been the most tax-efficient choice for many companies these are now subject to new rules.
This stipulates that if they do not meet the RDE2 (Real Driving Emissions) element of WLTP tests they will be subject to a four per cent higher BiK rate than petrol cars.
Many manufacturers of popular company vehicles are aware of this and are producing models that meet these strict standards so that it is still possible to take advantage of the reduced tax rates that diesels incur thanks to having low CO2 emissions compared to petrol equivalents.
However, with advances in electric and hybrid technology, there may be an even more tax-efficient solution for companies to utilise.
The advantages of electric vehicles
There are several tax incentives for both company car users and fleet operators who switch to electric vehicles and so it is not surprising, as technology advances, that more businesses are considering purchasing a fully electric or hybrid fleet.
In fact, according to a survey by electric car specialists, Go Ultra Low, one in three UK fleet managers expect half of their company car fleet to be electric by 2025 and seven in 10 fleet managers are preparing to buy an electric car within two years.
Looking further ahead, the Government is now committed to a ban on the sale of new purely petrol and diesel-engine vehicles by 2030, which is now less than a decade away.
Business tax relief
It is possible to get a full Corporation Tax deduction for purchasing a new electric car, or a new car with CO2 emissions of 50g/km or less if the car is used for business purposes.
If a company were to purchase a new electric car for £40,000, this would reduce the company’s taxable profits by that amount and result in a corporation tax saving of £7,600.
Businesses should be aware though, that if the car is later sold, an adjustment would be made in the tax computation equal to the proceeds on the sale.
A 100 per cent first-year allowance (FYA), against taxable business profits, also applies for zero-emission vans, where the vehicle is purchased new and unused before 1 April 2021.
Unfortunately, if the electric or low emission vehicle is purchased second hand the Corporation Tax relief is less generous at 18 per cent per annum on a reducing balance basis.
This would mean that in year one the Corporation Tax saving on a £40,000 car would be £1,368, then £1,321 in year two and less each year after that until sold or written down to nil.
There would still be an adjustment when you sell the vehicle, but this would depend on how much relief has been claimed at the point the car is sold. This is still more attractive than the relief available for cars with higher CO2 emissions.
Electric cars for employees
Company cars producing zero CO2 emissions attract a zero per cent BiK tax rate, meaning businesses pay no company car tax on a pure electric car for that tax year.
The zero per cent rate also applies to hybrid vehicles that are first registered from 6 April 2020 that produce between one and 50g/km of CO2 and are capable of at least 130 miles on battery power alone.
These rates then increase to one per cent for 2021/22 and two per cent for 2022/23 for vehicles registered after 6 April 2020.
In addition to the BiK tax charge, Class 1A National Insurance (NI) is normally payable by the business, providing a vehicle. The Class 1A NI rate is currently 13.8per cent, charged against the taxable benefit each year.
The Government recently confirmed that BiK rates for all company cars for the tax years 2023/24 and 2024/25 tax year would remain at the 2022/23 levels.
Reclaiming VAT on a vehicle purchase
VAT cannot be claimed on electric cars unless it can be demonstrated that the car is only available solely for business purposes. As with all cars you can reclaim 50 per cent of the VAT though when the vehicle is leased.
VAT can be reclaimed on electric vans (commercial vehicles), assuming VAT is charged by the dealer. If there is only insignificant private use of the van, 100 per cent of the VAT can generally be reclaimed.
Vehicle Excise Duty
Zero-emission cars are exempt from the Vehicle Excise Duty ‘expensive car supplement’.
Before this, high-value electric vehicles costing over £40,000 would be subject to a £320 Vehicle Excise Duty supplement. It means that all fully electric cars are now exempt from Vehicle Excise Duty.
If a company decides to buy an electric car for use in the business, then it can utilise the plug-in grant which can reduce the purchase price by up to £3,000.
Dealers will often highlight this during the sale of an electric vehicle to demonstrate the savings on offer.
Electric car charging points
Where a business installs a charging point before 2023, it can claim a 100 per cent FYA tax allowances for the costs, against its taxable profits.
There is no taxable benefit charged on employees, who use the charge point owned by the business, subject to other minor conditions.
To help with the costs of installing charging points, businesses can apply for the Workplace Charging Scheme. This provides support for the purchase and installation of electric vehicle chargepoints.
There are also schemes available to support funding towards the charging point for the car where it is at a person’s home address.
As with any significant capital expenditure or remuneration package that incorporates employee benefits, it makes sense to seek advice on the tax implications first.
To find out how Thompson Wright can help you with your next company car purchase, please contact us.