It’s not often that we get the chance to write about a great tax incentive from HMRC on company cars – like never!
For years, employees with a company car have been hammered for tax alongside their employers.
This is about to change in the pursuit of going green.
Following a 3-year delay from consultation (2017) to implementation, HMRC are due to radically overhaul their Benefit in Kind (BiK) rates for electric vehicles from April 2020.
Recognising that company purchases equate to approximately half of all new car sales, the Government have decided that amending the BiK rates will incentivise drivers of company cars and businesses who offer them, to adopt low emission vehicles.
Let’s assume:
- that you are a higher rate taxpayer (40% in the 2019/20 tax year)
- you would like to drive a BMW i3 94AH (0 g/km of CO2 emissions)
- with a list price of £34,075
How to save the most tax
The way for you to save most tax is for the company to buy the electric vehicle.
This is because under the new government incentive the company will get 100% corporation tax relief on the purchase price of the car.
It does mean spending to save, but using the BMW above this would mean a corporation tax saving of 19%*£34,075 = £6,474.
When you purchase the car will determine when you benefit from the tax saving, it’s a deduction from your next corporation tax bill so it all depends on when your company year-end is, and when your next tax payment is due.
If you are a March 2020 year-end, your next tax payment is due 1st January 2021, so if you buy the car before 31st March 2020 the benefit is realised in January 2021. If you don’t buy it until April 2021 then you must wait until January 2022!
What if cash flow doesn’t allow the company to buy the car?
There are several lease options available that would still allow you to drive your electric vehicle. You don’t get the 100% tax relief in the same way as if you bought it, but it’s not all bad news.
If you take a lease where you don’t own the car at the end, then your monthly lease instalments are accounted for as expenses, thus reducing your profit and therefore your tax bill. You also get half the VAT back on the instalment amounts.
What does it mean for the individual?
This is where HMRC are really making the changes that you or your employees can benefit from.
From April 2020 they are reducing the Benefit in Kind rate to 0% where the vehicle has 0g/kg emissions, this is compared to a rate of 16% in the 19/20 tax year.
That is a huge change and, in our scenario, would result in a £181.73 tax saving – each month!
In the 2019/20 tax year, the tax on the BiK would be:
BIK Value – £34,075 (list price) x 16% (g/kg rate for the year) = £5,452
Tax due – £5,452 x 40% (income tax rate) = £2,180.80 per year (£181.73 per month)
In contrast, when the new rates are implemented in 2020/21, the tax on the BiK will now be:
BIK Value – £34,075 (list price) x 0% (0g/kg rate for the year) = £0.
Tax due on a BIK value of 0 = £0!!
Are there any more benefits to the company?
In addition to the corporation tax savings if you buy or lease the car there are National Insurance savings on the BiK too.
Companies pay employers National Insurance at a current rate of 13.8% on the car’s BiK value. This means 13.8% multiplied by the BiK amount, which in this case is £0, therefore the associated National Insurance is also £0.
What to do next
If the above has tempted you and you are interested to know more about Benefits in Kind, whether you are an employee with a company car or a business that offers company cars to its staff, please get in touch.
If you’re not quite convinced and want to look at some options that might convince you, then have a look at the links below:
Jaguar – https://www.jaguar.co.uk/jaguar-range/i-pace/models/index.html
Tesla – https://www.tesla.com/en_gb
BMW – https://www.bmw.co.uk/en/all-models/bmw-i.html
Volkswagen – https://www.volkswagen.co.uk/electric/ev-cars/new-electric-cars
Other brands are available!
The small print
At the time of writing, the Revenue has published the rates for the 2021/22 and 2022/23 tax year where you will see the rates increase by 1% each year.
Currently we are unaware of how the rates will change going forward which is the only uncertainty around what is otherwise a fantastic way for employers and employees to save a lot of money whilst retaining the same benefit as before.
There are HMRC limits on the total value of assets that can receive tax relief in single tax years, so if you’re thinking about buying a fleet we should definitely have a conversation before you do!
Disclaimer
This document is intended as an information source only. The comments and references to legislation and other sources in this publication do not constitute legal advice and should not be relied upon as such. You should seek advice from a professional adviser regarding the application of any of the comments in this document to your fact scenario. Information in this publication does not take into account any person’s personal objectives, needs or financial situations. Accordingly, you should consider the appropriateness of any information, having regard to your own objectives, financial situation and needs and seek professional advice before acting on it. CST Tax Advisors exclude all liability (including liability for negligence) in relation to your reliance in this publication