Tax-Efficient Motoring: An Update

Alan Pink points out that a company car can be tax-efficient in certain cases.

Running cars and vans on business is par excellence one of those areas where you have options with widely divergent tax effects. Questions of who should own and run the car, and even what business structure you should adopt, are highly relevant in arriving at the end tax result. The problem is that car usage is very much an environmental issue, and therefore heavily politically charged. The tax rules are framed not so much with tax equity in mind, as the wish to engage in ‘social engineering’. 

Let’s take the straightforward ‘company car’ scenario first. If the government were thinking about equity in taxation, they would be seeking to tax employees, who are provided with the benefit of a car which is available for private motoring, on as close an approximation as possible to the actual cost to the employer of running that car; including depreciation, financing costs, and all the rest of it, in addition to the actual day-to-day running costs. No doubt, it would be impossible to arrive at an absolutely accurate figure because the apportionment between private motoring and business motoring is always going to cause problems, particularly with the fixed costs. However, in a very rough and ready way, that’s what the ‘old’ system (before 2003) sought to achieve.

Things are very different now. Instead of the old system, which was based on cylinder capacity and had rebates for higher levels of business motoring, there is now a much simpler approach. You take the list price of the car when new and multiply this by a percentage, which is higher the more grams of CO2 per kilometre the car emits.

The ratio of private to business mileage is now completely irrelevant, as is the age of the car. So, a salesman, for example, driving 25,000 miles a year in a beaten up old Mercedes (whose only private use is driving to the office) will have a huge benefit-in-kind charge to pay, regardless of the fact that the actual value of what he is receiving as a benefit is tiny. 

When these rules were introduced in 2003, and indeed ever since, there has therefore been a lot of attention given to the alternative way of employees running cars on business. That is, the employee owns the car himself or herself, and meets all of the standing and running costs. To take account of the fact that the car is being provided on the employer’s business (for some of the time) a mileage charge is levied to the employer. 

The only problem is that this mileage charge is absurdly low for most upper range vehicles, at 45p per mile, going down to 25p per mile if more than 10,000 business miles are claimed for in a year. 

We’ve given a brief example, of the salesmen in the old car, where the tax rules are clearly anomalous and unfair if you are thinking about the much-vaunted wish to charge the ‘right amount of tax’ on an employee’s earnings. But, of course, there’s always a flipside where the tax rules don’t quite fit into reality, as here. What follows is a fairly extreme example, no doubt, of how the anomaly can be made to work in the taxpayer’s favour, but it’s by no means an implausible or uncommon scenario, and it does illustrate the way the principles work.

David and Margaret run a family company, analysing financial data for hedge funds. Their work is completely office bound, and indeed the office is at their home. So, they have absolutely no need for company cars, as they never drive anywhere, except a very occasional trip to the station to take the train to London for a meeting. Their oldest daughter, Denise, is eighteen and will be going to university in the autumn. Her parents decide to make things easier for her by buying a little car for her to run around in whilst at university. Rather than buying the car out of their salaries, drawn out of the limited company which runs the business, the company itself buys the car, and they choose for Denise an energy efficient car which has the low list price of £9,500. 

Notice that what the parents are not trying to do here is claim that the car is provided to Denise by reason of her work for the company. There’s no pretence of that. Instead, they accept that there will be a tax charge on them, as directors of the company, for the benefit being provided to a member of their household. 

But, when you work out what the tax charge actually is, you can see that they are actually getting a huge bargain. 

The car they choose has very low CO2 emissions, and as a result of the applicable percentage, applied to the list price, is 7%. 7% of £9,500 is £665 which, at the parents’ 40% income tax rate, gives rise to a tax charge of £266. There is also a National Insurance contributions charge payable by the company based on this very low deemed income figure, which amounts to about £92.

Without wishing to get involved in pages of figures comparing this annual tax ‘hit’ with the amount that the individuals would be paying if they drew the money out of the company in salary, you can see that, with running costs (including the insurance) taken into account as well, doing things the company car way results in a tax liability which is a very small fraction of what the alternative would have cost.

To distil this example into one or two key principles:

You will notice that all of the above is considering tax efficient motoring from the point of view of the employee and the employer, rather than the self-employed person. This is because the situation is more problematic in the case of employees; and also, employment income is much more common in practice than self-employed income. However, what can and should we say about the tax treatment of motoring by the self-employed?

In cases where there is a lot of business motoring, and therefore the company car/mileage reclaim basis is bound to give an inefficient result, the self-employed set-up shines out as a beacon of fairness in an unfair world. If you are self-employed, you simply put through all of the car expenses, including capital allowances, and then disallow a proportion corresponding to the private use of the car. 

Where there is effectively a choice (there isn’t always) between a person operating on a self-employed and an employed basis, the treatment of his car could be decisive. Remember that it is possible to operate as self-employed and yet have the benefit of limited liability, by operating as a limited liability partnership (LLP). 

A recent change which will affect some of those undertaking company car planning is the clampdown on ‘salary sacrifice’ schemes. Under these arrangements, a person could agree to take a lesser salary in return for a benefit-in-kind. Where the benefit-in-kind was taxed at a lower rate (for example, company cars where the scale charge is less than the actual cost to the employer of providing the car) this was an advantageous arrangement, but it is no longer available for company car provision, unfortunately. Note, however, that this only applies where there is a choice, and not where, for example, the employer wishes to provide a company car in any event. 

Finally, for a limited period, there’s also an incentive for the employer to acquire an energy efficient car, which is a new car that is either electrically propelled or has a low CO2 emission figure (i.e. emissions of less than 75 grams per kilometre). The acquisition by companies of cars in this category is eligible for 100% tax write-off in the form of ‘capital allowances’, for expenditure before 1 April 2018. 

So, this is definitely an example of a window of tax planning opportunity which will close quite soon.