Company car tax in the COVID-19 world

It can pay not to drive

Andy Hamman, Director, Employment Tax

It can be expensive to have a company car for private use, with a taxable benefit of up to 37% of the car’s list price charged every tax year, depending on its CO2 emissions. Further taxable benefits can also arise if any private fuel is provided.

On top of tax for the employee, employer’s national insurance at 13.8% on the benefit is payable.

Although these costs have pushed many employers away from company cars and towards a cash-based car allowance, there are still many employees who have company cars. During the COVID-19 lockdown, these cars are likely to be gathering dust on their driveways, with tax costs continuing to accrue to both employee and employer.

If the car is not needed for any private use at the moment, there may be an opportunity to save tax. The benefit is not charged for periods where a car is not available to the employee for private use. As long as the period lasts for 30 or more consecutive days, the car benefit is reduced in proportion to the number of days when the car is unavailable.

As an example, a vehicle with a list price of £49,000 could give rise to a taxable benefit of £1,500 per month, resulting in monthly tax and national insurance costs of up to £675 and £207 for the employee and employer respectively. Where a business has a number of vehicles the savings could be significant.

HMRC strictly apply the availability condition, and will only allow a reduction where they are satisfied that the vehicle is not available for private use. There has been a great deal of commentary about what might constitute making a car unavailable for private use and HMRC have confirmed what they will accept unavailability during this period of lockdown.

An HMRC spokesman has stated:

"A car kept on an employee’s driveway during a period of furlough would still be considered to be made available. Neither would we accept a SORN declaration as proof of unavailability.

Ordinarily, we would expect that the car is handed back to the employer so that it cannot be used. However, we recognise that under the current circumstances it may not be possible to hand the car itself back, we would accept that where all the keys (or tabs) are in possession of the employer, and the employee does not have the authority to request the keys are returned to them, the car would be unavailable."

In practice HMRC will typically look through any agreement stating that the car is not available for private use but if it is not possible for the keys/tabs to be returned and an agreement is the only way forward, then this should be supported by a robust audit trail demonstrating no private use. This might involve tracker outputs or similar technology.

Depending on the individual employee’s circumstances, action now could see significant tax savings. The key administrative points are:

  • if you request the return of the vehicle, or all keys/tabs, consider where these should be delivered to. In most cases it will be most appropriate to return the vehicle or keys to the employer
  • where keys/tabs are returned, this should be done by recorded delivery and details of the vehicle and employee should be enclosed with the keys to aid identification at the end of the period of unavailability
  • document the process so that evidence is kept should the need arise for any HMRC enquiry or PAYE audit
  • it may also be possible to demonstrate that the vehicle has not been used for private use by using tracking data but this should only be done if it is not possible to return the vehicle or keys
  • if the vehicle remains available for business use then it is very unlikely that HMRC would accept that it is unavailable for private use
  • a short document prohibiting the use of the vehicle for a period of time would also support the process but in our experience would be unlikely to be considered sufficient on its own.

It should not be overlooked that the same principles apply to vans made available for private use, although the amounts involved are generally less due to the fixed benefit in kind rules for vans.

Finally, while reviewing the provision of company cars during this period, employers should also consider revising their policies around private fuel benefit. If it is accepted that the car is unavailable for private use, then the benefit charge for private fuel follows suit.

A private fuel benefit can be withdrawn whether or not the car is unavailable.  It should be noted that if private fuel is withdrawn but subsequently reinstated at any point in the same tax year, then the full benefit in kind charge will apply. In circumstances where a fuel card is provided and private fuel provision ceases, it is recommended that the card should be returned to the employer or destroyed.

Across a car and/or van fleet, the total tax and National Insurance Contributions (NICs) savings could be substantial, but this should be balanced with the administration needed to effectively (and safely) put employees’ cars beyond their reach for private use for at least the minimum 30-day period required by the legislation.

Where a car benefit cannot be withdrawn, employers may wish to consider the new rates for calculating the tax due on the provision of a company car or van. From 6 April 2020 and 6 April 2021, the rates for zero-emission cars and van, respectively, can reduce the amount of the benefit to nil, which could result in a significant saving for both employers and employees.

For any advice or support please speak to your usual Crowe contact.

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Andy Hamman
Andy Hamman
Director, Employment Tax