Employment Issues

Company Cars

The current regime for taxing company cars is intended:

to encourage manufacturers to produce cars which are more environmentally friendly and
to give company car drivers and their employers a tax incentive to choose more fuel-efficient vehicles.

We set out below the main areas of importance. Please do not hesitate to contact us if you require further information.

The Rules

Company cars are taxed by reference to the list price of the car but graduated according to the level of its carbon dioxide (CO₂) emissions.

Percentage charges

The percentage charge for the majority of cars is between 15% and 35%. The emissions table for the three years from 2006/07 to 2008/09 is set out below.

2006/07 and 2007/08		2008/09
CO₂ emissions in grams per kilometre	% of car's price taxed	CO₂ emissions in grams per kilometre	% of car's price taxed
140	15	120 or below	10
145	16	121 to 135	15
150	17	140	16
155	18	145	17
160	19	150	18
165	20	155	19
170	21	160	20
175	22	165	21
180	23	170	22
185	24	175	23
190	25	180	24
195	26	185	25
200	27	190	26
205	28	195	27
210	29	200	28
215	30	205	29
220	31	210	30
225	32	215	31
230	33	220	32
235	34	225	33
240	35	230	34
		235	35

Examples

Jane was provided with a new company car, a Mercedes CLK 430, on 6 April 2006. The list price is £50,000. The CO₂ emissions are 281 grams per kilometre. Jane regularly drives 20,000 business miles each year.

Jane’s benefit in kind in 2006/07 and later years will be £50,000 x 35% = £17,500

Phil has a company car, a BMW 318i, which had a list price of £21,000 when it was provided new on 6 April 2006. Phil does fewer than 1,000 business miles each year. The CO₂ emissions are 188 grams per kilometre.

Phil’s benefit in kind in 2006/07 (and the following year) will be: £21,000 x 24% = £5,040

Note: The CO₂ emissions are rounded down to the nearest 5 grams per kilometre - in this case 185.

Diesels

Diesel cars emit less CO₂ than petrol cars and so would be taxed on a lower percentage of the list price than an equivalent petrol car. However, diesel cars emit greater quantities of air pollutants than petrol cars and therefore a supplement of 3% of the list price applies to diesel cars. For example, a diesel car that would give rise to a 22% charge on the basis of its CO₂ emissions will instead be charged at 25%. The maximum charge for diesel is capped at 35%.

The 3% supplement will be waived if the car achieves the clean level of Euro IV standard emissions. From 6 April 2006, the waiver will cease for cars registered on or after 1 January 2006. The waiver was introduced to encourage early take up of Euro IV technology and has achieved that purpose. Euro IV emission standards will become mandatory for all new diesel cars registered from 1 January 2006. The waiver will be retained for the life of diesel cars that meet the Euro IV standards and were registered before 1 January 2006.

Obtaining emissions data

The Vehicle Certification Agency produces a free guide to the fuel consumption and emissions figures of all new cars. It is available on the internet at www.vcacarfueldata.org.uk These figures are not however necessarily the definitive figures for a particular car:

for all cars first registered from 1 March 2001 onwards, the definitive CO₂ emissions figure is recorded on the Vehicle Registration Document (V5)
for cars first registered between 1 January 1998 and 28 February 2001, the definitive figure is found by going to www.smmt.co.uk This is a service provided by the Society of Motor Manufacturers and Traders (SMMT).

The list price

the list price of a car is the price when it was first registered including delivery, VAT and any accessories provided with the car or subsequently made available (unless they have a list price of less than £100)
the list price is restricted to an upper limit of £80,000
employee capital contributions up to £5,000 reduce the list price.

Employer’s Class 1A contributions

The benefit chargeable to tax on the employee is also used to compute the employer’s liability to Class 1A.

The Exceptions

Cars first registered before 1 January 1998

There is no reliable source of CO₂ emissions data for cars registered before 1 January 1998. Such cars are taxed according to their engine size.

Engine size (cc)	% of list price charged to tax
0 - 1400	15%
1401 - 2000	22%
over 2000	32%

Imports

Some cars registered after 1 January 1998 may have no approved CO₂ emissions figure, perhaps if they were imported from outside the EC. They too are taxed according to engine size.

Engine size (cc)	% of list price charged to tax
0 - 1400	15%
1401 - 2000	25%
over 2000	35%

Private Fuel

There is a further tax charge where a company car user is supplied with or allowed to claim reimbursement for fuel for private journeys.

The fuel scale charge is based on the same percentage used to calculate the car benefit. This is applied to a set figure which for 2006/07 is £14,400. As with the car benefit, the fuel benefit chargeable to tax on the employee is used to compute the employer’s liability to Class 1A. The combined effect of the charges makes the provision of free fuel a tax inefficient means of remuneration unless there is high private mileage.

The benefit is proportionately reduced if private petrol is not provided for part of the year. So taking action now to stop providing free fuel will have an immediate impact on the fuel benefit chargeable to tax and NIC.

Please note that if free fuel is provided later in the same tax year there will be a full year’s charge.

Business Fuel

No charge applies where the employee is reimbursed for fuel for business travel.

HMRC have published guidelines on fuel only mileage rates for company cars. The advisory rates are not binding an employer may be able to agree higher rates with HMRC, perhaps where employees need to use particular types of car such as 4x4s to cover rough terrain. Employers can adopt the rates in the following table but may pay lower rates if they choose.

	PETROL			DIESEL
	1400cc or less	1401 to 2000cc	Over 2000cc	Up to 2000cc	Over 2000cc
1 July 2005 to 30 June 2006	10p	12p	16p	9p	13p
1 July 2006 to 31 January 2007	11p	13p	18p	10p	14p
From 1 February 2007	9p	11p	16p	9p	12p

Employees’ Use of Own Car

There is also a statutory system of tax and NIC free mileage rates for business journeys in employees’ own vehicles.

The statutory rates for 2006/07 are:

	Rate per mile
Up to 10,000 miles	40p
Over 10,000 miles	25p

Employers can pay up to the statutory amount without generating a tax or NIC charge.

Payments made by employers are referred to as ‘mileage allowance payments’.

Where employers pay less than the statutory rate (or make no payment at all) employees can claim tax relief on the difference between any payment received and the statutory rate.

How We Can Help

We can provide advice on such matters as:

whether a company car should be provided to an employee or a private car used for business mileage
whether employee contributions are tax efficient
whether private fuel should be supplied with the company car.

Please contact us for more detailed advice.

For information of users: This material is published for the information of clients. It provides only an overview of the regulations in force at the date of publication, and no action should be taken without consulting the detailed legislation or seeking professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material can be accepted by the authors or the firm.