Company cars were not popular until recently due to the high benefit-in-kind (BIK) fees associated with them. It has been easier and more tax efficient for directors and employees to claim business mileage. The Government has introduced tax incentives to encourage environmentally-friendly cars.
Ultra-low emission vehicles (ULEVs) emit less than 50g/km CO 2.
It is now possible to lease or buy a vehicle for an employee or director under the new rules applicable to ULEVs.
This article examines the tax benefits and costs associated with company ULEVs.
What capital allowances are available?
The car’s CO2 emissions will determine the amount of capital allowance that is available.
All new or unused cars that emit zero emissions can be eligible for a 100% first-year capital allowance. This allowance will apply from April 2021. This allows the company to offset the total cost against its taxable profits for the year, resulting in a 19% reduction in corporation tax. The 100% allowance was available for vehicles that emit less than 50g/km CO2 before April 2021.
You can get an annual allowance of 18% for new or second-hand cars that emit between 1g/km & 50g/km.
The annual writing allowance for cars new or second-hand with emissions exceeding 50g/km is 6%.
Here are some points to be aware of regarding capital allowances:
- The actual amount spent is more important than the list price when calculating the allowance.
- It can take many years for full relief to be achieved by writing down allowances.
- You will likely get a clawback of any capital allowances if you buy the car directly from the company.
- If the loss of the entire amount is not possible to use, you can opt to claim less than 100% and then claim the balance using the writing down allowances.
- The 100% First Year Allowance is only available for new vehicles and the year of purchase.
What benefit in kind (BIK) will be incurred?
When a company purchases a car for an employee or director, a BIK is created. The benefit accrues each year that the car is made freely available, as it is assumed that there is some element for personal and business use. You must include the BIK on your personal tax return. This will allow you to pay the appropriate tax rate based on your income for that year, at either 20%, 40% or 45%. On the BIK amount, 13.8% employer-sponsored insurance will be charged to the company.
The rate of the BIK is determined by the CO2 emissions and list prices (rather that the final amount). It can reach as high as 37% of the price list.
New ULEV cars that are registered after 6 April 2020 will be subject to a very high BIK.
2021/22: 1% of the price list pa
2022/23 – 2 % of the list price
Cars that emit CO2 at a rate of 1-50g/km or more will be subject to a BIK between 1% and 14%, depending on their electric range. The BIK will be lower the further the car can go on electric power.
The 2020 budget confirmed that the 2022/23 rates will remain unchanged for 2 more years, until 2025. The 2021 budget did not contain any changes.
This HMRC calculator can be used to calculate the tax on your car HMRC business car and fuel benefit.
These are the current and proposed BIK Rates for Electric Cars, which will be in effect from April 2020.
|Vehicle CO2 emissions
|1-50 g/km and electric range >130 miles
|1-50 g/km and electric range 70-129 miles
|1-50 g/km and electric range 40-69 miles
|1-50 g/km and electric range 30-39 miles
|1-50 g/km and electric range <30 miles
What is the fuel benefit in kind?
You will be charged an additional fuel fee if the company pays fuel. If you are unable to reimburse the company for private fuel use, you may incur additional fuel charges BIK
The BIK on fuel for 2021/22 is PS24 600 multiplied with the BIK multiplier. For example, if the BIK on fuel is 8%, then the fuel BIK would be PS24 600 x 8% = PlayStation 1,968. You would include the PS1,968 on your tax return. It will be taxed according your tax bracket (20%, 40% or 45%). The cost of this benefit will be PS787 if you are subject to a 40% tax rate. In addition, the company will have to pay 13.8% Employers National Insurance (PS272). Depending on the BIK, it may be more advantageous to not reimburse any petrol or to reimburse the company for private mileage. HMRC provides fuel advisory rates that outline the minimum amount that must be reimbursed HMRC Fuel advisory rates
Fully electric cars can be claimed 4p per mile, for each business mile traveled, to pay the electric cost. There are no tax consequences. Hybrid cars are subject to the fuel advisory rate.
Can I reclaim VAT incurred on the purchase?
VAT cannot be claimed if the car is only used for business. This excludes personal trips, which is extremely unlikely. There is no option to split the VAT reclaim between personal and business use. Therefore, VAT cannot generally be claimed.
Are the lease payments deductible for corporation tax?
If the car emits less than 50g/km, then the monthly payments can be deducted and offset against profits. This allows for a 19% corporation tax savings.
For cars with emission levels above 50g/km, 85% can be claimed.
Contracts entered into before April 2021 were exempted from the restriction.
What benefit in kind (BIK) will be incurred?
Every year, the same BIK is issued as for car purchases – see below.
Can I reclaim VAT on the lease payments?
If the vehicle is used both for personal and business purposes (almost always), the company can claim 50% VAT.
The trend towards zero-emission cars has changed and will likely continue to grow until 2030. Although it’s impossible to predict if the very low BIK rates currently applicable to ULEVs might increase, it seems likely that the Government will keep these rates low in electric cars.
The decision to lease or purchase the vehicle from the company depends on several factors. These include how long you believe you will use the vehicle and whether you feel confident that you will continue trading through your company while the lease agreement is in effect (you could face severe penalties if you have to leave early). Both options offer tax deductions that are favorable to your company. You should make sure that the purchase invoice or lease agreement are in your company name if you decide to buy the car for your company.
Many car dealers will offer financial comparisons for the vehicle you are considering before you make your purchase. A government grant may be available for new cars that emit less than 50g/km CO2 and have a range of 70 miles or less. Grants for zero emission cars