Drivers of change

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KEY POINTS

• Has the car been made available and recent decided cases.
• The importance of correctly structured employee contributions.
• Failed attempts at ‘pooled car’ status.
• Examples of tax charges and the effect of changing rates.
• Car fuel charges are now prohibitive.
• Capital allowances for company cars.

The current regime for taxing company cars will be ten years old in April 2012. Back in 2002, all incentives for extra business mileage and for driving inefficient older vehicles were withdrawn.

For nearly a decade, the tax charge has been determined largely by the level of carbon dioxide (CO2) emissions notionally produced by the vehicle, measured in grams per kilometre (g/km).

Over that period of time, the details of the company car tax rules for employees and directors have not stood still, and further changes take effect in April 2012. Collectively, these changes have tended to increase the tax charge for the employee as well as the employer’s Class 1A National Insurance contributions cost.

Alterations have been made both to the primary legislation (in ITEPA 2003) and to the associated tax regulations (especially the Income Tax (Car Benefits) (Reduction of Value of Appropriate Percentage) Regulations SI 2001 No 1123). We have also witnessed, in the past year or two, a rash of company car tax cases.

Made available

As a reminder of first principles, a tax charge arises if a company car is made available ‘without any transfer of the property in it’ to an employee or to a member of his or her family or household.

The car must be made available by reason of the employment and must be available for private use (ITEPA 2003, s 114 (1)). The wording seems straightforward enough, but virtually every phrase has been the subject of debate in the courts.

Three fairly recent cases have addressed the particular question of whether a company car was in fact ‘made available’ to an employee.

In A Whitby v HMRC (and related appeal) FTT [2009] UKFTT 311, various cars were held to give rise to a taxable benefit, even though the vehicles were subject to an arm’s length lease between the employer and certain directors.

The case of Stanford Management Services Ltd v HMRC (and related appeals) FTT [2010] UKFTT 98 involved a different type of leasing arrangement, this time between a third party and the employer. The full cost of the lease payments was charged to the directors’ loan accounts, but the contract was in the name of the company and again it was held that there was still a taxable benefit.

Finally, a very different conclusion was reached in Michael Golding v HMRC [2011] UKFTT 232, which concerned a Ferrari owned by an antiques company.

The tribunal was persuaded that there was no private use of the car. The judge held that ‘even if a director or employee does drive or use a vehicle owned by a company, that is not determinative of whether or not that vehicle has been “made available” to him by reason of his employment or directorship’.

Accepting that the car was at all material times either up for sale or being used as a marketing tool, the tribunal concluded that ‘it would be artificial to regard the car, in those circumstances, as “made available” to the appellant in his capacity as an employee for his use and benefit (whether or not he chose to use it)’.

This was a novel interpretation and it remains to be seen how HMRC will react.

Employee contributions

In principle, the taxable benefit of a company car may be reduced if the employee makes either a one-off capital contribution or a payment for private use of the car.

The latter arrangement, in particular, can cause difficulties if the agreement is poorly worded. The essential point is that the employee must be required to make a payment as a condition of the car being available for his or her private use, and the payment must be made for that use.

Earlier case law has shown that these requirements are tightly interpreted. In Brown v Ware (HMIT) [1995] SSCD 155, for example, no tax relief was allowed where an employee made a contribution so that he could drive a better car, as that was not a payment for private use.

It is not difficult to word an agreement to ensure that tax relief will be granted, but this is a potential trap if care is not taken. Just to confuse the issue, the benefit in kind was reduced, in both Whitby and Stanford Management, by payments made by the directors, even though the strict conditions for giving relief were apparently not met.

Pooled cars

A company car is treated as not available for private use (and so there is no tax charge at all) if it is a ‘pooled car’ (ITEPA 2003, s 167).

The vehicle must be made available to two or more employees, and must not ordinarily be used by one to the exclusion of the others. Any private use must be merely incidental to business use and the vehicle must not normally be kept overnight at or near the home of any of the employees in question.

There were failed attempts to claim pooled car status in Yum Yum Ltd v HMRC [2010] UKFTT 331, in Ryan-Munden [2011] UKFTT 12, and in McKenna Demolition Ltd [2011] UKFTT 344.

In each case, there was simply not enough evidence to demonstrate that the conditions were met. Proper records should obviously be kept if the (very valuable) pooled car exemption is to be claimed, and none of these cases came near to convincing the tribunal.

Nevertheless, written evidence is not a statutory requirement, and in Industrial Doors (Scotland) Ltd [2010] UKFTT 282, the tribunal found the evidence given by the employee to be credible and understandable.

The HMRC case was poorly presented and the tribunal confirmed the status of the vehicles in question as pooled cars.

Calculating the tax charge

The rest of this article addresses the recent and proposed changes to the way any company car tax charge is calculated. Collectively, such changes have represented a significant increase in the tax cost for most company car drivers.

As a basic principle, but subject to various complicating factors, the tax charge is calculated by applying an ‘appropriate percentage’ to the ‘price of the car’.

The percentage is based on CO2 emissions, with a penalty loading for diesel cars, while the price is broadly the list price, but again subject to a few potential complications. This can have some paradoxical tax consequences, as illustrated in Bill and Bella.

Subject only to the overriding 35% cap on the appropriate percentage, all diesel cars now suffer a 3% weighting of the appropriate percentage (as they emit more particulates and oxides of nitrogen).

Certain cars meeting the ‘Euro IV’ emissions standard were formerly spared the weighting, but the exemption was curtailed from 2006 and abolished completely from April 2011.

Pity, if you will, the driver of the luxury car. The price of any car was until last April capped at £80,000 for these tax purposes, but the sky is now the limit.

So if the company managing director is driving around in a car with a list price of £500,000, with an emissions figure off the top of the scale, the annual taxable benefit rose from £28,000 to an eye-watering £175,000 from April 2011 (ITEPA 2003, s 121).

Meanwhile, for those driving more modest company cars, there has been a steadily rising annual tax cost, mostly achieved by shifting down the CO2 emission thresholds. In another oddity of the tax rules, the driver of the more fuel-efficient car has been hardest hit, as shown in Jack and Jill.

Somewhat more complex changes are due to apply from next April (revised ITEPA 2003, s 139, as inserted by FA 2010, s 59(2)).

At present, the appropriate percentage is set at 15% (18% for diesel) for a car with emissions not exceeding the ‘lower threshold’, which for 2011/12 is 125g/km. Each additional 5g/km then increases the appropriate percentage by one point, up to a maximum figure of 35%.

Emissions are first rounded down to the nearest figure divisible by five. A lower percentage currently applies if the vehicle is a qualifying low-emissions car (or ‘QUALEC’), i.e. if it has emissions not exceeding 120g/km (with no rounding for this purpose).

For such a car, the appropriate percentage figure is just 10% (or 13% for a diesel car).

In April next year, the concept of the QUALEC will disappear and the ‘lower threshold’ will be replaced by a differently defined ‘relevant threshold’, initially set at 100g/km. The appropriate percentage will be 10% (petrol) or 13% (diesel) if the emissions are below that figure of 100g/km.

Both now and from next April there is an even lower figure of just 5% if the car’s emissions do not exceed 75g/km, although that is more theoretical than real at this stage.

This all produces some quirky-looking figures for cars at the lower end of the emissions scale, as set out in Emission percentages.

Once more, this creates a harsh result for certain drivers. Take, for example, an employee driving a petrol car with a list price of £10,000 and an emissions figure of 118g/km: not unrealistic for a small company car.

The taxable benefit will rise from £1,000 to £1,400 from this tax year to next – a huge leap in percentage terms.

For good measure, there is to be a further tightening of the screw from April 2013, with an addition of 1% for cars with emissions above 95g/km.

The cap of 35% for the most polluting cars is, as far as we know, to be retained.

The rules have also changed for those driving cars that do not run solely on petrol or diesel. If the car ‘cannot in any circumstances emit CO2 by being driven’ (typically, all-electric cars) then there is no tax charge at all until 5 April 2015.

Other reductions, formerly giving lower tax charges for hybrid (petrol and electric) or bi-fuel (petrol and gas) cars, and for cars running on road fuel gas or on bioethanol, were abolished from 6 April 2011 (see SI 2001 No 1123, as now largely revoked).

The theory is that such cars should in any case have lower emission figures and that they will therefore already benefit from a reduced tax charge without the need for special rules.

The categories of ‘fuel types’ needed for reporting car benefits are simplified accordingly, reducing from eight to just three (E for electric and other zero-emission cars, D for diesel, and A for all other cars (HMRC booklet 480: Expenses and benefits – A tax guide at paragraph 12.30)).

Car fuel

Every alteration to the appropriate percentage has a knock-on effect for those paying the fuel scale charge (or, all too often, those who discover at PAYE review time that they have not taken adequate steps to avoid the charge).

The tax cost where the employer pays the cost of fuel for private journeys has rocketed in recent years.

The additional taxable benefit for a petrol car with emissions of 150g/km, for example, rose from £2,448 (£14,400 @ 17%) in 2007/08 to £3,760 (£18,800 @ 20%) for 2011/12, an increase of more than 50% in just four years.

There are now virtually no circumstances in which it makes good tax sense for an employer to meet the cost of fuel for private mileage.

The safest way to avoid the charge is for employees to pay for all fuel initially and then to reclaim genuine business mileage from the employer using HMRC’s advisory fuel rates. These rates, now published four times per year, were most recently updated from 1 September 2011.

Drivers who do use their own cars for work purposes may now be reimbursed at 45p per mile (for up to 10,000 business miles per year), the rate having increased in April 2011 for the first time since 2002.

Capital allowances

Although not strictly a company car issue, it is worth ending with a brief reminder of the current rules for capital allowances for cars. Once more, these have been subject to change in recent years, with the abolition in 2009 (but subject to transitional arrangements) of the former £12,000 ‘expensive car’ limit. Here, too, the tax rules are now driven by CO2 emission levels.

For capital allowances purposes, the cut-off point is 160g/km (CAA 2001, s 104AA). Cars with emissions not exceeding that level go into the main plant and machinery pool and attract allowances at the standard rate (currently 20%, but set to reduce to 18% from April 2012).

Cars above that threshold are condemned to the ‘special rate’ pool, with allowances at just 10% (falling to 8% in 2012/13), lagging well behind the true rate of depreciation.

For expenditure on new cars with emissions not exceeding 110g/km, and for fully electric cars, 100% first-year allowances remain available until April 2013 (CAA 2001, s 45D). Those allowances now seem generous against the background of all the other changes described above.

Ray Chidell is author of Company Cars and Employment Tax Tables, both published this month by Claritax Books. They can by purchased by email, or call 01244 342179 or order online.

Issue: 4320 / Categories: Comment & Analysis , Employees , Income Tax