The dark ages of company car taxation

Back in 2001, the system for taxing directors and employees for the private use of company cars was based simply upon the list price of the car multiplied by a percentage based upon business miles driven. It seems inconceivable now that the employee would pay less tax, the more they drove and hence polluted!

A new system introduced – the polluters pay

The replacement system is still in operation, and is based upon the list price of the car and a percentage based on its approved CO2 emissions. Over the past 15 years this new policy has had the effect of driving-down the attractiveness of gas guzzlers and high value luxury cars as company cars, in line with EU wide objectives, but the motor industry has responded with creating increasingly efficient car engines, and allegedly in some cases “clever” software that creates the illusion of such!

Ultra-Low Emission vehicles to the fore

Scandals aside, it’s fair to say that the motoring industry has responded positively and many manufacturers now offer Ultra-Low Emission electric or hybrid vehicles (“ULEVs”). For many years this was the domain of the Toyota Prius’ and the G-Wiz’s of this world but with Porsche having just released their Panamera e-Hybrid which boasts a CO2 emissions figure of 56g/km, 0-62mph acceleration of 4.6 seconds and a top speed of 172mph, the game has changed.

Tax breaks a plenty

So why is there such excitement about ULEVs and why is an accountant writing about it? Well firstly, compared to a traditional engine vehicle, there is a saving in the amount of Income Tax paid by directors and employees for whom such vehicles are made available for private use. This in addition leads to reduced Employer’s National Insurance for the company, not to mention reduced running costs that come from lower road tax/vehicle excise duties.

100% write off for Corporation Tax?

But the thing that might really put a £90,000 Porsche (or something similar) on a company director’s horizon is the fact that the company can potentially claim 100% of the purchase price against its Corporation Tax liability in the year of acquisition. That really is a tremendous saving, although there are a few caveats and a limited window in which one can take advantage of this.

A limited window of opportunity

The CO2 emissions threshold at which these tax breaks are available is continually being lowered and the Government have already announced the proposed percentages for the calculation of benefit-in-kind charges until 2019/20. For the £90k Porsche for example, the percentage rate of 11% of list price in 2016/17 will increase to 19% of list price in 2019/20. This means that the additional notional salary on which the driver will be taxed increases from £9,900 now to £17,100 in 2019/20. In addition, were the purchase to take place after 5 April 2018, the 100% first year allowance would not be available because the emissions threshold is being reduced to 50g/km from that point on.

So at some point in the future (and based on the legislation as it stands now) one would have to again consider private ownership as opposed to company ownership of these very same cars – or maybe switch to a fully electric vehicle (Tesla or BMW i8 anybody?)

A sting in the tail?

In some cases the company could see a Corporation Tax charge arising on the proceeds, when the vehicle is sold. This very much depends on individual circumstances and even though the tax charge could well be at a lower tax rate than the initial tax saving the reader is urged to take professional advice on this whole subject before rushing off to the showroom.

And finally the prudent accountant in me would counsel that the commercial dog should never wag the tax tail – but for many, the combination of a prestigious new car and significantly reduced tax liabilities will be difficult to resist!