Traditional fuelled vehicles v’s low emissions vehicles

This article reviews the tax implications of traditionally fuelled vehicles versus low emissions vehicles.

In particular it looks at the following areas:

• Ultra low emission car definition
• How businesses receive tax relief
• How employees are taxed
• Commercial Vehicles
• Leased cars
• Pool Cars
• Cycle to Work Scheme

An ultra low emissions car is where the CO2 emissions are less than 75g/km.  This is a growing sector of vehicles which includes electronic and hybrid engines.  There are cars included such as the BMW i8 and Tesla model S.

There are 3 different ways that businesses receive tax relief when writing off the cost of a car, and the way depends on the CO2 emission.

1. If the car is an ultra low emission vehicle (as described above), then it is possible to write off the full value in the year of acquisition.
2. If the car has CO2 emissions of between 75 and 130 g/km, then it is put into the general capital allowances pool and is written down at 18% pa.  There are no first year allowances.
3. If the CO2 emissions are above 130g/km, the car is put into a special rate pool and can be written off at 8% pa. Again, there are no first year allowances.

Therefore the higher the emissions of the car, the longer it will take the company to write off the cost of the vehicle for tax purposes.

When an employee receives a company car, they will be taxed on it as a benefit in kind. The tax is calculated using the car’s list price, then multiplied by a predetermined percentage depending on the cars CO2 emissions, the higher the emissions, the higher the benefit of the car will be to the employee.

The car’s list price should be sourced as price published by the manufacturer (including accessories) no matter how much was actually paid. However if a contribution has been made from the employee to the cost of the car, up to £5,000, this can be reduced from the list price when working out the car benefit. For 2016/17 the percentage will be calculated using a table that ranges from 50g/km at 7%, to 200g/km at 37%, also diesel cars will have an additional 3% charge. Once you have worked out the benefit, you are taxed on it at either basic or higher rate depending on your other income.

If the car in question was an ultra low emission car, then the CO2 emission would result in a low percentage charge for the benefit. The lowest percentage charge is 7%, which would need a CO2 emission of 50 or less.

The yearly emissions boundaries will continue to be reduced in the following years as ultra low emission cars become more commercially available. However using the current benefit table, the advantage of having a low emission car is quite notable.

There are two ways to provide fuel for a company car, through the business paying the fuel, and through the employee paying for fuel, and being reimbursed for business mileage.

1. When the employee is paying for their own fuel, they will have to keep a record of their business mileage, and only then can they claim a set cost for each mile. The cost is associated to the size of the engine, therefore using an electric car which saves on fuel, will not necessarily have a reduced rate. The current advisory fuel rates for a Petrol car with an engine size of over 2000cc are 19p per mile.
2. The fuel benefit is calculated in a similar method to the car benefit, but instead of using the list price, you multiply the percentage of CO2 emission by the annual rate, in 2016/17 the annual rate is £22,200. The advantage of having a low emission car in this case would be how low the percentage charge would be for the benefit.

When you are paying both the company car benefit and also the fuel benefit, you will be profiting twice from having a low CO2 emission car, as the accompanying percentage is used in calculating both charges.

Commercial vehicles include vans, pickup trucks and vehicles with payloads of 100kg. They are classed as a benefit in kind to an employee if they have personal use, however the tax due is imposed at a flat rate.

For employees, the tax liability due for employee who use a commercial vehicle depends on whether they have any personal usage of the vehicle.

• If the employee has unrestricted private use of the vehicle, there is a set benefit in kind liability of £3,170 for 2016/17 with a fuel benefit charge £598. If the vehicle in question does not omit any CO2 then the charge could be reduced, however this is a specialist case.
• If the employee has wholly restricted private use, where the vehicle must be used only for business, then there is no benefit in kind tax liability.

For employers annual investment allowances are available for the initial purchase of a commercial vehicles to help the reduction of taxable profits. In addition to this, if the business is VAT registered and the vehicle is used only for business use, the business will be able to reclaim VAT on the purchase.

• Class 1A national insurance is due on the vehicle when used by an employee, this rate is currently set at 13.8%.

Leasing a low emission car can have a huge tax advantage for a business, as for cars with CO2 emissions less than 130g/km the whole cost can be deducted from taxable profits. If the cars CO2 emission is higher than 130g/km, then 15% of the charge is disallowed.

• Employees are still subject to tax through benefits in kind on leased cars being made available to them.
• Businesses can claim back VAT on the lease at either 100% or 50%, depending on the private usage.

The notion of a pool car is to reduce the amount of cars on the road, by giving the option for employees to share one car instead of having multiple company cars. However the criteria to allow a pool car are strict, the following applies:

• The car must be made available and used by more than one employee.
• The car cannot be ordinarily used by one employee to the exclusion of others.
• It must be available to employees as a result of their employment.
• Any private usage of the pool car must be merely incidental to the business use.
• The car cannot be normally kept on or in the vicinity of any residential premises where any of the employee resides except when being kept overnight on premises occupied by the person making the car available to them.

To ensure all usage of a pool car concurs with the guidelines set out be HM Revenue and Customs, a detailed log of usage is advised.

The cycle to work scheme is part of the government’s Green Travel Plan, to encourage employees to ride a bicycle to work and help reduce congestion and environmental pollution, whilst providing a tax free benefit.

The scheme allows up to £1,000 worth of bike and safety gear to be purchased through the employer. The employee then pays a monthly salary sacrifice typically done over a 12 or 18 month period. After this period the employee then has the option to buy the bike outright, continue hiring it for free, or give the bike back.

The calculation saves the employee 32% tax and national insurance on paying for the bike through salary sacrifice. The largest acceptable market value to purchase the bike is 25% of the purchase price for 12 a month period, this gives the employee a minimum saving of 7%. The longer the period you rent the bike the more money you save as the fair market value reduces over time.

If you would like more information on anything covered in this article, please contact James Sewell, Director at Wright Vigar by email – james.sewell@wrightvigar.co.uk or call 01522 531341 and ask to speak to James or a member of the tax team – we would be delighted to be able to help you.