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New rules on company cars

04/05/2017

Two new rules have been created to counter certain company car and van schemes that HMRC considers unfair tax avoidance. When will they take effect and what action should you be taking before then?

Changing the rules to suit

During the last couple of years tribunals have disagreed with HMRC’s interpretation of the rules on the taxation of company cars. This is specifically in situations where:

1. employees contribute to the running costs of their company car or van and are allowed a reduction in the amount of benefit in kind (BiK) on which they are taxed; or
2. an employer leases a car to an employee on terms that mean they escape the BiK charge.

HMRC’s response has been to get the Chancellor to change the rules to suit its way of thinking.

Change 1 – running costs

Where you require directors and employees to make a payment towards your company’s cost of providing a company car, the BiK on which they’ll be taxed is reduced. For example, if the annual car BiK for a director is £5,000 and they pay £100 per month for use of the car, they will be taxed on £3,800.

1. The rules say a contribution must be “required” by an employer otherwise it won’t reduce the BiK. So where you ask for contributions, include a suitable clause in the employees’ contracts or company car policy.

New contribution rules

Currently, the rules allow contributions by company car drivers made after the tax year has ended to be taken into account against the BiK. This means the tax charge can be reduced retrospectively. From 6 April contributions will only affect the tax charge for the year in which they are paid.

1. You might assume contributions that aren’t knocked off the BiK one year will come off the next. But the way the rule is now written we think there’s a risk HMRC can argue that if a contribution was intended to apply to a previous tax year no reduction in the BiK will be allowed at all.
2. Before 6 April amend employment contracts and company car policies to say that payments required toward running costs will be applied to the tax year in which they are paid

Change 2 – lease arrangements

The second change springs from HMRC’s loss in the Apollo Fuels tribunal. It was decided that where employers provide directors or employees with a car through a lease arrangement the BiK rules don’t apply. Instead the value of the lease counts as earnings and is taxed like salary. The net result is a lower tax and NI bill.

1. The new rule will apply to payments made on or after 6 April where an employer leases a car to an employee. It will apply to existing lease arrangements as well as new ones.
2. If the only purpose of a lease is to lower tax on a company car, agree with the employee that the arrangement is terminated on or before 5 April as it will no longer achieve this goal. At least by cancelling the lease you’ll avoid the extra admin involved.

The next step

For a sample revised contributions clause and for more information on the Apollo case, visit http://tipsandadvice-tax.co.uk/download (TX 14.07.02).

The new rules will take effect on 6 April. To ensure the director or employee contributing to company car running costs continues to be taxed on a reduced benefit in kind, amend your car policy so that it counts only against the tax year in which it’s paid.

For further information related to this blog or indeed broader topics surrounding accounting, please don’t hesitate to contact us.