Tax and the Company Car (or Van!)

Many businesses need to have company vehicles to conduct their day-to-day work. When it comes to choosing a company vehicle, it is normal to purchase or lease for a period often of around 3 years, so it is important to choose the type of vehicle that suits the purpose. This might be a company car or a commercial vehicle taxed as a van, but before committing to the contract it is important to consider whether to purchase or lease, and the tax implications both for the employer and the employee over the intended period of use. 

As the government’s strategic approach to taxation continues to evolve, the choice of diesel, petrol, hybrid, electric or other fuel is also an important one. The current  government has increasingly encouraged the use of vehicles with a low C02 emission g/km which is reflected in tax charges and incentives.

Once the type of vehicle has been tentatively chosen, the tax implications are the next consideration.  These are the main points to bear in mind:

• Income Tax

• Company Van

• Keeping a company vehicle at home

• Company Car Fuel Benefit

• Company Van Fuel Benefit

• Electric Charging

• Corporation Tax

• Relief for Unincorporated Businesses

• Leasing of motor vehicles

• Planning for the Future – Electricity and Hydrogen

• Enhanced Capital Allowances (ECA)

Income Tax

A company car or van is regarded by HMRC to be a non-cash reward for the employee, or a benefit in kind.  This means that tax needs to be paid by the employee on this, which is referred to as a taxable benefit.  The taxable benefit is calculated from the list price of the car multiplied by the taxable benefit %.

This % is determined by the CO2 emissions of the car and the electric mileage range: the lower the emissions and the higher the electric mileage, the less tax is due. These are the rates for the period 6 April 2022 to 5 April 2025:

For company cars with CO2 emissions exceeding 54 g/km the employee’s taxable benefit increases by 1% for every 5 g/km up to a maximum of 37%.  Diesel cars are also subject to a 4% supplement.

The 2022 Autumn Budget Statement announced the rates until April 2028, which are:

• Appropriate percentages for electric and ultra-low emission cars emitting less than 75g of CO2 per kilometre will increase by 1% in 2025/26, and further 1% in 2026/27 and 2027/28 up to a maximum 5% for electric cars and 21% for ultra-low emission cars
• Rates for all other vehicle bands will be increased by 1% for 2025/26 up to a maximum of 37% then fixed for 2026/27 and 2027/28.

The taxable benefit will depend on the vehicle and will be taxed as employment income at the employee’s marginal rate of income tax.

For example, a company car with CO2 emissions of 30 g/km and an electric range of 50 miles would have a taxable benefit of 8%.  If the car had a list price of £35,000 the benefit in kind value for the tax year would be £2,800. As a result, a higher rate taxpayer with a marginal tax rate of 40% would pay £1,120 of income tax for the year.

If the employee contributes towards the purchase of their company car (classed as a capital contribution), this will reduce the list price for these purposes, resulting in less tax to pay, however the maximum deduction that can be made is £5,000.

Company Van

Company van benefits are calculated as follows:

Calculating a company van benefit is a much simpler process as the list price, CO2 emissions and electric mileage range are not considered when calculating the taxable benefit.

As with company cars, the taxable benefit on a van will be taxed as employment income at the employee’s marginal rate of income tax. However, if a company van is used privately, and the usage is insignificant or it is only for commuting purposes, then no taxable benefit arises.

HM Revenue and Customs defines a van as “a vehicle primarily constructed for delivering goods with a fully laden gross weight of 3.5 tonnes.” It is designed as a vehicle primarily suited for the conveyance of goods of any description.

Keeping a company vehicle at home

A company car used by an employee and kept at their home overnight is deemed by HMRC to be available for private motoring, which includes home to work commuting. This means that a taxable benefit will be incurred by the employee.

In contrast, a van can be taken home overnight, and if no other significant private motoring is undertaken in the vehicle, home to work site commuting will not create a taxable van benefit for the employee.

Company Car Fuel Benefit

Where the employer pays all the fuel costs, (including for private journeys) a separate taxable benefit arises, unless the employee, reimburses the employer in full for the fuel used for private motoring. Where the employee pays for all the fuel and the employer reimburses them only for the business fuel cost, no taxable benefit will arise on the employee. As with the company car benefit, the car fuel benefit is subject to  income tax, which the employee will pay at their marginal tax rate. In order to calculate the taxable benefit, the following formula is used for the 2022/23 tax year:

£25,300 x “taxable benefit %”

To calculate the appropriate percentage of taxation, the same method as detailed above is used. In other words, the taxable benefit % is calculated by the C02 emissions of the car and its electric mileage range.

Company Van Fuel Benefit

If free or subsidised fuel is provided to the employee for private use in a company van, they will be taxed on a van benefit of £688 for the 2022/23 tax year, at their marginal rate of income tax.  There is no reduction in the taxable benefit where an employee makes a contribution towards private fuel for the van.

From 6 April 2023, both the Car and Van fuel benefit charges, and the van benefit charge, will increase in line with the CPI.

Vehicle Excise Duty on Electric Vehicles

 From April 2025, electric cars, vans and motorcycles will need to begin to pay VED (Vehicle Excise Duty), commonly known as road tax.   Although different rates will apply to specific vehicles movement is towards the standard rate for zero emission cars of £165, and for zero emission vans of £290.

Electric Charging

Where electric charging is made available to an employee at their place of work, and provided this is available to all employees, this is a tax-free benefit and no benefit in kind charge arises, regardless of their level of private mileage.

In addition to this, where an electric company car is provided to an employee and an electric car charger is installed at their home, the cost of installing this is also tax free. However, if the employer pays to install an electric charger at an employee’s home for the employee’s private vehicle, this will result in an income tax liability on a taxable benefit for the employee at their marginal tax rate.

Where an electric company car is provided to an employee and the employer covers the charging costs, the way in which this is set up can affect the tax needing to be paid on the taxable benefit.  The most tax efficient method is to arrange for the employer to provide the electricity directly, as no additional tax benefit is incurred on the employee, even if this involves private mileage. Whereas if the employer reimburses the electricity costs paid by the employee, only the costs relating to business use are deemed to be a tax-free benefit, and the costs relating to private use are taxed as a benefit.

Corporation Tax

Businesses purchasing company cars are eligible for a Corporation Tax deduction. They will need to claim this as a capital allowance on the purchase, which means part of the value of the car can be deducted from a business’s profits before they pay tax. The current tax relief is:

The 100% First Year Allowances for zero emission cars is in place until 31 March 2025.

Vans and commercial vehicles are classed as qualifying assets for Annual Investment Allowance (AIA) purposes. This means that tax relief can be claimed at 100% of the purchase price, provided sufficient AIA is available. The AIA limit is currently £1m, however this is planned to reduce to £200,000 from 1 April 2023.

New vans and commercial vehicles purchased between now and 31 March 2023 will qualify for the Super Deduction Allowance which results in tax relief being obtained at 130% of the purchase price.

If the benefits provided to employees are not included within their payroll then a P11d must be submitted to HMRC by 6 July following the end of the tax year. Class 1A NIC is due to be paid by the employer at a rate of 15.05% for the 2022/23 tax year on the value of benefits provided to employees. This is payable to HMRC on or before 22 July following the end of the tax year.

Relief for Unincorporated Businesses

Sole-traders and partnerships are also able to claim Capital Allowances on the purchase of cars as detailed above.

The only difference is that the Super Deductions Allowance is only available to companies. If new vans and commercial vehicles are purchased by sole-traders and partnerships, they will need to make use of their Annual Investment Allowance (AIA) in order to claim Capital Allowances at 100%.

Leasing of motor vehicles

If instead of purchasing a vehicle, a leasing arrangement is entered into, the costs incurred in leasing it are treated as allowable revenue expenditure and therefore no Capital Allowances can be claimed on these vehicles.

The type of lease entered into will determine the expenses that are tax deductible. There are two ways in which you can lease an asset: an operating lease or a finance lease.

• If the lease is an operating lease, then the total expense will be the lease rentals that are shown in the profit and loss account.
• If the lease is a finance lease, then the total expense will be the finance lease interest and the finance lease depreciation figures that are shown in the profit and loss account.

Where a car is leased with CO2 emissions exceeding 50g/km, a lease rental restriction applies. This means that 15% of the expenses are disallowed for tax purposes as the lease relates to a high emission car.

The treatments of lease arrangements are the same for companies, sole-traders, and partnerships.

Planning for the Future – Electricity and Hydrogen

• Freeport East Hydrogen Hub is located at Harwich and is part of the Government’s decarbonisation scheme strategy.
• At the anticipated peak by 2030 the aim is to produce 1GW of hydrogen at Freeport East.
• To encourage use of low carbon fuels, Enhanced Capital Allowances have been introduced.

Enhanced Capital Allowances (ECA)

Enhanced Capital Allowances (ECA) are available on these items:

• New and unused zero-emission cars
• New and unused zero-emission goods vehicles
• New electric vehicle charging points
• Gas refuelling stations

In respect of these items, allowances are available at 100% tax relief with no annual limit where the expenditure qualifies for ECA.

To qualify for ECA, the expenditure must be incurred on or before 31 March 2025 except for expenditure in respect of new electric vehicle charging points, where the expenditure must be incurred on or before 31 March 2023 (or 5 April 2023 for unincorporated businesses).

‘Gas refuelling stations’ are classified as storage tanks, compressors, pumps and any equipment for dispensing natural gas, biogas or hydrogen fuel for the refuelling of vehicles. However it is important to note that ECA cannot create a repayable tax credit for gas refuelling stations.

ECAs are also available for qualifying expenditure on plant and machinery for use primarily within a tax Freeport site, but are only available to companies and not for unincorporated businesses.

ECAs are available for relevant qualifying expenditure incurred until 30 September 2026 and a claim for the enhanced allowances will need to be made via a business’s Corporation Tax Return.

However, where the plant or machinery needs to be used primarily outside a designated Freeport tax site within five years from when it was acquired, the ECAs tax relief that has been claimed will be withdrawn.