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TaxationWeb by Steve Sanders

Steve Sanders of LexisNexis Tolley Tax Training considers the rules for calculating company car and fuel benefits where cars are made available by an employer to an employee or a member of his family.Employees are taxed on car benefits either if their earnings (including benefits) are more than £8,500 per annum or they are company directors.

The taxable benefit is the list price of the car when new, multiplied by a percentage. The percentage we use depends on the vehicle’s carbon dioxide (CO2) emissions. The minimum percentage is 15%, rising to a maximum of 35%.

CO2 emissions are measured in terms of the “grams per kilometre” (g/km) of gas emitted. Cars emitting no more than 140 g/km of CO2 will benefit from the 15% rate. The rate increases by one percent for every additional 5 g/km emitted. The figure is rounded down to the nearest 5 g/km.

The 140 g/km baseline applies until 5 April 2008. It is decreasing to 135 g/km from 2008/09.

Illustration 1

A Mercedes (list price £39,500) is provided to an employee. CO2 emissions are 212 g/km.

The relevant percentage is;

15% +	(210 - 140)	= 29%
	5

The car benefit will be £39,500 x 29% = £11,455

                                        _______

Where the percentage exceeds 35%, it is capped at 35%. This will be the case for cars with emissions of 240 g/km or more. 3% is added to the percentage if the car runs on diesel (giving a minimum of 18%). The 3% supplement cannot take the percentage above 35%.

If a car is not available for the whole of the tax year, the benefit is pro-rated accordingly. A monthly apportionment is acceptable. A reduction is not available if the car is off the road for less than 30 days (for example, for MOT / repair etc).

Any contributions made by the employee to the running costs of the car (eg, MOT, repairs, servicing etc) will be deducted from the taxable benefit (see separate rules for fuel below).

If an employee makes a one-off “capital contribution” to the employer (for example to enable the employer to provide a better / more expensive car), this capital contribution reduces the list price on which the benefit is computed. The maximum reduction is £5,000.

The cost of any accessories provided with the car are added to the list price. These will typically include leather seats, a CD player etc. If an accessory is added to the car after it was first made available to the employee, it is added to the list price only if the accessory cost more than £100. If not, it is ignored.

This list price cannot exceed £80,000 for tax purposes.

For those preparing P11Ds, CO2 emissions figures can be obtained from the Society of Motor Manufacturers & Traders at www.smmt.co.uk.

Some vehicles do not have a recognised emissions level. In this case, the taxable benefit will be the list price of the car multiplied by a percentage based on engine size. The scales are as below;

   Engine size	           Cars registered before 	Cars registered on or after

                              1 January 1998                  1 January 1998

	 	                               Relevant %

   0 – 1,400cc	                   15%	                           15%

   1,401 – 2,000cc	           22%	                           25%

   Over 2,000cc	                   32%	                           35%

A 3% supplement is again added for diesel cars (again up to a maximum of 35%).

Car fuel benefits

Where car fuel is provided to an employee for private use, a taxable benefit will arise. The benefit will be at a fixed rate calculated as follows;

£14,400 x % (same % used in calculating the car benefit).

The taxable benefit bears no resemblance to the amount of fuel actually paid for / reimbursed by the employer for the year. Therefore any partial reimbursement by the employee will not affect the taxable benefit.

No benefit will arise if an employee fully reimburses the employer for private fuel provided. Therefore where small amounts of private fuel are supplied, it may be in the taxpayer’s interests to reimburse the full costs of any private fuel, as this will be cheaper than paying tax on what could be a high benefit.

If fuel is not available for the whole of the tax year, the benefit is pro-rated accordingly.

Illustration 2

Mark is provided with a car on 1 July 2005 when he joined the company. The list price of the car is £24,000. The CO2 emissions of the car are 167g/km. All fuel for the car is paid for by the employer.

Mark makes a payment of £100 per month for the use of the car and a further £25 per month towards the cost of private use fuel (which actually amounts to £45 per month on average).

Calculate the car benefit and fuel benefit assessable on Mark for 2005/06.

Answer

	

									  £

List price								24,000

	                                                                ______



@ 20% (W1)								 4,800

Less: non-availability (3/12)	                                        (1,200)

								        ______	

									 3,600

Less:  contributions (£100 x 9)					          (900)

									______

Car Benefit								 2,700

Add: fuel charge (£14,400 x 20% x 9/12)

(no deduction for part private fuel reimbursement)                       2,160

									______

Total car and fuel benefits						£4,860

									______          									

W1:	15% +  [165 - 140]5  = 20%

NIC

Employers will pay Class 1A NIC at 12.8% on the taxable benefits arising. Employees have no NIC liability on the car or fuel benefits.

Miscellaneous points

“Classic” cars

A "classic car” is one that is more than 15 years old and whose market value at the end of the tax year is more than £15,000. If an employee is provided with a “classic” car, to work out the cash equivalent we use the market value of the car when it was given to the employee instead of the list price when new.

“Pool” cars

No benefit will arise if an employee has some incidental private use of a pool car. A pool car is essentially a shared vehicle which is mainly used for business purposes.

As long as private use is incidental and the pool car is not normally kept overnight at the employee’s residence, no benefit will arise. Many employers have a small fleet of pool cars which are normally kept somewhere on the premises and which are used for business journeys.

Low emission cars

From 2008/09 onwards, cars emitting CO2 at 120 g/km or less will be charged at a new lower rate of 10% (rather than 15% as now).

Administration

Employers have to file quarterly returns to the Tax Office on form P46 (car) giving details of any changes in cars provided to employees. This will enable the Tax Office to amend the employee’s tax coding as appropriate.

Note: Practice Question and Answer is provided below.

Question

Fernando has use of a Renault car (list price £12,000 and CO2 emissions 148g/km). On 1 July 2005 his employer exchanged the Renault for a Ford Focus (list price £14,000 and CO2 emissions 139 g/km). The Ford Focus runs on diesel. The company reimburses Fernando for his business fuel costs.

Calculate Fernando’s taxable benefit for 2005/06.

Answer

Renault (3 months)
List price £12,000

Cash equivalent						£		£

£12,000 x 16% [(145-140) / 5 = 1 + 15]		      1,920	

Less:  non availability		

          £1,920 x 9/12	                             (1,440)	

						     ______	

		                                                       480

Ford Focus (9 months)		

List price £14,000		

		

Cash equivalent		

£14,000 x 18% [15% + 3%]	                      2,520	

(<140 g/km plus diesel supplement)		

Less:  non availability		

          £2,520 x 3/12	                               (630)	

                                                     ______ 	

	                                                             1,890

                                                                    ______   

Total benefit		                                            £2,370

                                                                    ______

Note: no fuel benefit as employer pays for business fuel only.

Steve Sanders is a member of the tax training team at LexisNexis Tolley where he lectures and writes material for ATT & CTA courses, and audio visual CD ROMs for the student training market. Steve can be contacted via the Tolley Tax Training website at www.tolleytraining.co.uk.

"LexisNexis Tolley® Tax Training" provides quality correspondence, classroom and e-training for the ATT, CTA, AIIT and ADIT examinations. In addition their e-learning package "Tolley’s Tax Tutor" is excellent preparation for anyone studying tax for any professional examination (ACCA, ICAEW, ICAS, AAT etc). For further information please click the following link: www.tolleytraining.co.uk or email your query to taxtraining@lexisnexis.co.uk