Company cars - higher CO2 emissions mean higher tax liabilities

On 7^th March 2023, the government approved the publication of the Finance Bill 2023. The Bill will give legislative effect to the taxation measures recently announced by the government to continue to assist families and businesses deal with high energy prices and cost of living challenges.

In addition, in a surprise move, the Minister for Finance Michael McGrath announced a temporary change in the Benefit-in-Kind regime for company provided vehicles in response to the reaction by individuals who have been significantly impacted by the changes that were introduced with effect from 1^st January 2023 (as outlined below).

Finance Bill 2023 proposes to introduce the following temporary changes for the 2023 tax year:

to introduce a relief of €10,000 to be applied to the Original Market Value (OMV) of cars in Category A-D in order to reduce the amount of Benefit-in-Kind payable (this is not applicable to cars in Category E).

This means that, for the purposes of calculating BIK liability, employers may reduce the OMV by €10,000. This treatment will apply to all company provided vehicles including vans and electric vehicles.

For electric vehicles, the OMV deduction of €10,000 will be in addition to the existing relief of €35,000 that is currently available for EVs, meaning that the total relief for 2023 will be €45,000.
The upper limit in the highest mileage band is amended by way of a 4,000km reduction, so that the highest mileage band is now entered into at 48,001km.

Once Finance Bill 2023 has been enacted, these temporary measures will be retrospectively applied from 1 January 2023 and will remain in place until 31 December 2023.

Changes introduced by Finance Act 2019 in relation to the calculation of Benefit in Kind (BIK) charges on company-provided vehicles only came into effect from 1 January 2023.

This was to give as much notice as possible and to allow employers and employees to plan for same.

The changes were introduced as part of the government’s overall plan to address climate change with the intention being to incentivise employers to provide employees with low-emission cars.

These changes are having significant impacts on the net take-home pay for employees/directors who have the use of company vehicles, with the impact now being felt at a time when living costs have also risen significantly.

Finance Act 2021 further extended relief on a tapered basis from a BIK charge arising on electric vehicles provided to employees/directors in the period 1 January 2023 to 31 December 2025.

The overall impact of the changes that came into effect from 1 January 2023 is:

Vehicles with higher CO2 emissions will result in a higher tax liability under revised BIK rules
Electric vehicles which were previously exempt from a BIK charge may now be liable
BIK charge on company vans has increased

What is the charge to BIK on an Employer-Provided Vehicle and what does it mean for the employee?

An employee/director is chargeable to tax on the BIK arising where, by reason of their employment, a vehicle is made available (without a transfer of ownership) to them, and the vehicle is available for their private use.

The BIK charge is equal to the cash equivalent of the use of the vehicle less any contributions made by the employee/director.

Exemptions and Reductions in amount liable to BIK

The following may reduce the amount liable to BIK:

Reduction of cash equivalent of a car if employee does not qualify for tapering relief for business mileage
Limited private use of a van
Car or van pool treatment

Changes effective 1 January 2023

With effect from 1 January 2023, how the cash equivalent of the use of employer-provided vehicles is calculated has changed as outlined below.

Company cars

Prior to 1 January 2023
The cash equivalent of the use of a car was equal to 30% of the original market value (OMV) of the car reduced accordingly for business mileage travelled.

From 1 January 2023

The cash equivalent is determined by multiplying the OMV by the applicable percentage.

To determine the applicable percentage, the employer must:

Establish the vehicle’s category based on CO2 emissions from a table provided by Revenue and
Compare the annual business mileage travelled from a table provided by Revenue

Electric vehicles

Prior to 1 January 2023

An electric vehicle made available for an employee’s private use during the years 2019–2022 was fully exempt from BIK if the OMV was less than €50,000.

Where a full exemption did not apply, partial relief was granted by reducing the OMV by €50,000 when calculating the cash equivalent of the vehicle, and then reduced accordingly for annual business mileage travelled.

From 1 January 2023

For an electric vehicle made available for an employee’s private use during the years 2023 to 2025, the cash equivalent will be calculated based on the actual OMV of the vehicle reduced by:

€35,000 in respect of vehicles made available in the 2023 year of assessment
€20,000 in respect of vehicles made available in the 2024 year of assessment
€10,000 in respect of vehicles made available in the 2025 year of assessment

This reduction applies irrespective of the actual OMV of the vehicle or when the vehicle was first provided to the employee.

If the reduction reduces the OMV to nil, a BIK charge will not arise. Any portion of OMV remaining after the reduction is applied is chargeable to BIK at the prescribed rates, taking into consideration CO2 emissions of the vehicle and annual business mileage.

Company vans

From 1 January 2023 the cash equivalent of the use of a van increased from 5% to 8% of the OMV of the van.

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