Update on changes to tax rules on company cars

HMRC recently announced two new rules to counter some car and van schemes that they consider to be unfair tax avoidance. Read our article to find out when they will take effect and what you need to do.

HMRC keen to change the rules

In the past couple of years some tribunals have disagreed with HMRC’s interpretation of the rules on the taxation of company cars.  For example, where:

  • 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
  • An employer leases a car to an employee on terms that mean they escape the BiK charge.
  • HMRC’s response has been to change the rules to suit its way of thinking.

Change 1 – lease arrangements

Following HMRC’s loss in the Apollo Fuels tribunal it was decided that where employers provided 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.

Watch out! 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.

Advice!  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.

Change 2 – running costs

Tax on the BiK can be reduced when you require directors and employees to make a payment towards your company’s cost of providing a company car.  An example is; if the annual car BiK for a director is £6,000 and they pay £100 per month for the use of the car, they will be taxed on £4,800.

Watch out!.  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’ contract of employment or company car policy.

New contribution rules

Currently, contributions made by company car drivers after the tax year has ended can 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.

Watch out!  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 there could be a risk that 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.

Advice!  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.

The new rules will take effect on 6 April 2014. 

Advice! To ensure the director or employee contributing to company car running costs continue 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.