If you are thinking of setting up a company car scheme but don’t know where to start, Nationwide Vehicle Contracts has put together a short guide to explain the different types of company car schemes available and the tax implications involved.
A company car scheme is where a company or business offers its employees the use of a vehicle for personal and business travel. Company car schemes remain one of the popular employee benefits here in the UK, with company car fleets responsible for one in every two cars sold.
For many firms, a company car (or van) scheme is not just advantageous, but necessary, especially in organisations where a means of transport is necessary for the employees to do their job such as a building or repair work, or sales/client meetings.
Many companies also offer a company car scheme to employees who do not necessarily require a car for work purposes as part of their employee benefits package, presenting it completely as a perk, rather than something that has some direct business use.
If carefully planned and effectively managed, a company car scheme can help cut your employer national insurance contributions (NICs) and allow you to claim capital allowances that reduce taxable profits, as well as boosting morale among your existing workers and enhancing your strategy for recruiting new employees.
Many benefits may be attractive for both the employee and the employer.
On the flip side, a company car scheme also has lots of considerations.
A company car scheme is surprisingly easy to set up and provided you plan accordingly, can significantly benefit both the employers and the employees.
Both employers and employees need to consider the tax implications of company cars before making a decision, and there are some very important questions that need asking and answering before going ahead.
These are all things you must take into consideration before making a final decision.
The company car market has seen a move away from the traditional outright purchase method of procuring company cars for employees, and there are now a variety of methods of sourcing and funding cars. There are five main types of company car fleet funding available, each with their own advantages and disadvantages, all depending on the nature and needs of your organisation.
With around 80% of businesses opting for this when setting up a scheme, Contract Hire is the most popular arrangement in the UK. It enables you to budget accurately and removes the hassle of finding, looking after, and disposing of vehicles.
Contract hire is simple to set up and manage. All you have to do is select your cars, choose your lease term and estimate your annual mileage (an important part of the process as penalties will be charged if you exceed your mileage quota.)
It also delivers a broad set of accounting and tax advantages as you can see here.
With Contract Hire from Nationwide Vehicle Contracts, our comprehensive range of additional services includes servicing and maintenance, roadside assistance, fuel management, accident management and daily rental vehicles.
If you are looking to free up capital to invest elsewhere in your business, then Contract Purchase is likely to be the best option for you. Similar to Contract Hire, Contract Purchase gives you the benefits of reduced administration and fixed rental payments, as well as releasing capital for investment elsewhere.
With Contract Purchase, the vehicle appears on the balance sheet, allowing you to claim capital allowances, but the finance element of the rental payments is not subject to VAT, an obvious benefit if you are unable to recover VAT.
A Contract Purchase Agreement sees the business put down a deposit for a brand new car before paying fixed monthly instalments based on a monthly contract (often between 24 and 48 months), with the option of purchasing the car outright when the contract expires provided all terms have been met.
At the end of the contract, the business can pay a predetermined 'balloon' payment to complete the purchase of the vehicle or choose to return the vehicle back to us. The vehicle must be in good condition, otherwise further charges may apply.
If you are looking for greater transparency and flexibility, then the Finance Lease option may be best for you.
With Finance Lease, we purchase new cars for you and you lease them from us at a fixed monthly rate.
Finance leases may also be more flexible with their repayment plans, allowing you to pay for the car in fixed monthly instalments (on top of the initial payment).
Once you have made your vehicle selection, we calculate your monthly fee, taking into account the leasing term, mileage and the residual value of the vehicles. Unlike a contract purchase, the business will never assume ownership of the car.
The vehicle’s anticipated resale value is fixed at the beginning of the lease. However, at the end of the lease, if the resale value is lower than agreed, you pay the difference.
A Finance Lease allows you to show the vehicle on your balance sheet, with the outstanding rentals represented as a liability. This can be financially favourable if you expect the tax relief for depreciation to be greater than claiming capital allowances.
Considering a tax efficient, cost saving way to offer vehicles? Choose Salary Sacrifice. Last year, 5% of cars provided by FN50 leasing companies were funded through these schemes, and this is expected to grow.
The employee funds the car, by taking a reduction in salary, and pays company car tax. Because the cost of the non-cash type benefit is deducted from the employee’s gross salary before statutory deductions, he or she is able to save income tax and National Insurance contributions.
Salary Sacrifice for cars is ideally suited to organisations who want to attract and retain qualified and experienced employees. For the employee, Salary Sacrifice gives them the chance to own a brand new car at a cost they can afford, with the benefit of hassle-free motoring as the maintenance, servicing, breakdown cover and insurance are normally included in the price.
For the employer, Salary Sacrifice means the ability to introduce an additional benefit, either to all employees or to selected groups, without increasing overall wage costs. It also strongly encourages users to choose low CO2 vehicles, enhancing the organisation's green credentials.
With Outright Purchase, the main benefit is that right from the start, the car is the property of the company, with the company having complete control over its use, and taking complete responsibility for the servicing and maintenance.
This means that for the company there will be a regular draw on finances, as well as higher tax implications as tax deductible capital allowances are permissible only up to a total of 25% of the value of the vehicle, or £3,000, depending on which is higher.
Class 1A NICs are paid on the taxable value of cars and fuel provided for employees. The rate is 13.8% and employers must use the car benefit and fuel scale charges when doing calculations.
Certain schemes - such as Salary Sacrifice - will reduce employer NICs by lowering the employee’s pre-tax salary.
Company cars are eligible for capital allowances provided they are used solely for business purposes. This enables you to deduct some of the expenditure from pre-tax profits. Company cars are excluded from the annual investment allowance, so you must claim using writing down allowances.
The deductible amount will depend on the age of the car and its emission levels.
From April 2016, employers are able to claim enhanced capital allowances (ECAs) in addition to the standard allowances. ECAs enable you to claim a 100% write-down for the first year of ownership. Qualifying vehicles must be electric or emit ultra-low levels of CO2 (75g/km or under) as well as being brand new.
VAT can be recovered on fuel used solely for the purposes of business. This also applies when fuel is paid for by an employee and claimed on expenses. VAT on fuel bought by employers for private use can be recovered, but it must be paid using the fuel scale charges (based on CO2 emissions).
Businesses that own company cars are not taxed on the following:
Two things must be taken into consideration when deciding which cars to include in your scheme.
Firstly, it must be fit for purpose and relevant to the needs of your employees.
But equally as important for a company are the car's emissions. Vehicles are taxed according to their rate of CO2 emissions; the higher the CO2 levels, the greater the tax charge. It is your employees who will shoulder the benefit-in-kind tax bill, and the greater the emissions of the vehicle, the less it benefits them. So it is advisable that you utilise the scheme by choosing low emission vehicles.
Employees receiving a car will have to pay tax on the benefit and the fuel used for travel, with the rate of tax determined by the amount of CO2 emitted by the vehicle.
Employees can reduce their tax burden by either contributing up to £5,000 towards the purchase of the car and lowering the taxable valuable of the car, or paying for fuel used for private travel.
These rates range from 7% (for the least polluting cars) to 37% (for those with the highest CO2 emissions). A further 3% is levied on diesel engines up to a maximum of 37%.
All employees must pay car tax unless:
They earn under £8,500 a year (including employee benefits). This excludes company directors.
The employee received the car through an ECO scheme
The car is a pool car used by more than one employee
The tax charge on fuel will be the same as the charge for car benefit and therefore will be lowest for cars with low emissions. You’ll need to calculate the taxable value of each car on your annual P11D form, while employee tax records have be amended to account for NIC and VAT changes under some schemes.
Overall, company car schemes can be a complex aspect of business management, so it is advisable to seek professional advice before making your initial decision.