Minimising the Tax on Company Cars

It is a well known fact that the tax cost of being provided with a company car, which is also available for private use, is continually increasing at a rate above normal inflation. By way of example, a higher rate taxpayer, travelling 15,000 business miles per annum, would be liable to the following annual tax bills for being provided with a car and fuel for both business and private useage:

As a result of this, employers and employees alike are both now looking at new ways of structuring how cars can continue to be made available, whilst minimising the overall tax leakage. Listed below are some of the options that should be considered:

Tax Efficient Vehicles

To minimise the tax charge, within the new rules which took affect from 6th April 2002, the car should:

• Have as low an original list price as possible,
• Have as low a carbon dioxide emission as possible (which usually directly relates to the engine size),
• In order of preference, the car should run on: electric, gas, petrol, diesel.

Repay Private Fuel

The private fuel benefit in kind can be avoided if the employee makes good to the employer the full cost of all fuel used for private mileage. Such an arrangement can be beneficial even where private mileage is quite high, but where the related fuel cost is lower than the tax charge on the benefit. When calculating private mileage, home to work travel must be included.

Classic Cars

Special rules exist for assessing the benefit in kind value of classic cars over 15 years old, which are now worth over £15,000. For classic cars worth less than £15,000, such as old MG and Triumph sports cars, the traditional rules apply, basing the benefit on list price, which in this case may only be a few hundred pounds.

Own Vehicle Privately

Probably the most common solution to this perennial tax problem is to own and run the car personally, and charge the business a mileage rate for business travel. If a dispensation with the Inland Revenue is agreed before hand, the Fixed Profit Car Scheme mileage rates can be used, without any requirement for the employer to enter these transactions on year end payroll returns: P11D. For high business mileage users, such a structure can prove quite profitable.

Company Van

The rules for calculating, and hence taxing, the benefit on a company van are completely different to those for cars. There is a combined benefit, for both vehicle and private fuel, assessed at £500 for vans under 4 years old and £350 for those over. The definition of a van, for this purpose, is 'a vehicle built primarily to carry goods or other loads (but not people), with a design weight not exceeding 3,500 Kg'. This could include some off-road vehicles and certain pick-up trucks.

These rules are due to change during 2005/6.

Pool Vehicle

Where a vehicle is available for use by more than one employee, with any private usage being merely incidental to business use, and where the vehicle is not normally kept overnight at or near the residence of any of these employees, no taxable benefit is assessed on the provision of this vehicle.

Ownership within an Unincorporated Structure

For many years now, there has been a material difference in the tax cost of providing a car to an employee, compared to the equivalent cost of a car being provided to a sole proprietor or partner of a business. If unincorporating the business, just to save tax on the car provision, is considered too drastic, then consideration should be given to setting up a parallel unincorporated business to, amongst other things, own and run the vehicles. To protect against a potential Inland Revenue claim of artificiality, there should be other commercial reasons for such a scheme. Ring fencing the business fixed assets, outside of the company, which is permanently exposed to potential commercial litigation, may provide such a reason.