The company car used to be a wonderful perk for executives. Essentially, the tax was based on the car’s engine size, together with the number of business miles driven in the year. The key figures were under 2000cc for the engine, and over 2,500 miles of business use in each tax year. All the big car manufacturers produced luxury 1999cc “executive” models. Executives in London, who hardly used their cars for work at all, were careful to set up a couple of meetings or conferences in Scotland, just to get those vital 2,500 miles in. We used to joke that the M25 should be avoided in March, because of all the company cars driving round it to “meetings”, to get their 2,500 in before 5 April.
I remember a beautiful company car I had about 15 years ago – it was a turbocharged 1998cc monster that did 0 to 60 in about 7 seconds, and was packed with what were then regarded as “luxuries” like heated seats and cruise control – no SatNav in those primitive times. I called it “The Beast”. Like a lot of “executive” models, it was carefully designed to be tax efficient, which meant that, as a 40% taxpayer, that car cost me £880 in tax for 1990/91. I didn’t get free petrol for private mileage, but if I had, that would only have added £240 to my tax bill. All the running costs, insurance, and so on, were paid by my employers. In other words, a typical executive’s total motoring costs were around £20 per week – and we are talking about the latest BMW, Volvo, Saab, or whatever corporate chariot took your fancy.
It was too good to last. The opportunity for raising serious amounts of revenue while at the same time polishing his “green” credentials was too much for any Chancellor to resist. Over the last ten years or so, the way company cars are taxed has changed beyond recognition, and a company car is no longer a tax-efficient “perk”.
Taxation of company cars today
The tax charged on a company car now depends on its CO2 emissions. These are measured in “grams per kilometre”. A percentage is applied to the list price of the car, depending on these emissions, and also on whether it is a petrol or a diesel model ; diesels attract a 3% surcharge. If you get free fuel as well, there is a similar charge, also based on the CO2 emissions.
If I had the nearest modern equivalent of my beautiful corporate Beast today, my tax bill would be about £3,334, and if I had free petrol as well, that would cost me another £1,786 in tax – running costs of £100 per week, instead of £20.
Of course, it would cost me a lot more than that to run The Beast as my own car.
If instead of The Beast, I had a really “green” company car like a Toyota Prius, the tax on the car and the free fuel would work out at about £30 per week. A compromise between a Prius and the outrageous Beast would come in somewhere between the two.
Company cars for the family company
Of course, when I had The Beast, I was working for an international firm of accountants, and I neither knew nor cared what it cost them to provide me with it– a company car was an accepted part of the remuneration package.
For a family company, we also need to consider the cost of running the car for the company. It is also logical to consider the cost of providing the director with enough pay to cover the tax he will be paying – if he didn’t have the company car, he wouldn’t have to pay the tax, so he wouldn’t need to draw as much from the company.
If we do that, the total cost of The Beast works out at about £20,000 per year, and even the goody-goody Prius comes in at nearly £9,000.
An aside here – did you know that all Government Ministers are offered the choice of a Prius as their official car (on which, incidentally, they pay no tax)? How many have you seen arriving at No 10 in one?
The alternative – use your own car
If you use your own car on company business, the company can pay you 40p per mile tax free for the first 10,000 business miles in the tax year and 25p per mile thereafter. If you do around 10,000 business miles in the tax year, that £4,000 will almost certainly mean that you are better off having your own car and charging the company for your business miles.
If you do very little business mileage in the year, and you can do without a Beast – type car, it may still be better to have a company car.
You do the math!
There is no general rule to help you to decide between a company car or a private car, because everyone’s car use is different, though it is fair to say that it is less likely under the present tax rules that a company car will be the best option, unless (ironically) it is a pure “perk” and you do not use it for business!
To work out the tax cost of a company car, visit HMRC’s website, where there is a “ready reckoner” for the tax on company cars and fuel. Add the cost to the company of running the car (bearing in mind that it can claim a deduction from its taxable profits for this cost), and the cost of paying the director enough salary to cover the tax he will have to pay. Compare this with the cost of paying the director enough salary so that he can afford to run the car himself (bearing in mind that some of this can paid to him tax free, as the 40p/25p payments for business mileage).
The “Pool Car”
Where the company has a real need for a car to be used only for business purposes, you may think that there will be no tax due because it is not being used for private purposes.
This may be true in theory, but the tax charge on a company car is an “all or nothing” charge – it applies in full if there is ANY private use of a company car by an employee, and this could be interpreted to include a detour of ½ a mile on a business journey to visit the supermarket. Taking the car home would certainly be private use. I have seen the director of a family company confronted by a tax inspector with a photograph of his “business use only” car parked in a cinema car park – he ended up having to pay tax on the benefit of a company car!
The only kind of company car that does not produce a tax bill for any employee who uses it is a “pool car”.
This is a car that is owned by the company, and is used only for business purposes. In these circumstances, it will still make sense for the company to buy the car, as there is no tax on the employees who use it, but beware – the conditions for a Pool Car are very strict. In the investigations into companies I have dealt with, the usage of any Pool Cars has usually been very closely scrutinised by the inspector, and often he has found the rules have been broken and imposed tax charges on the employees who had been using the cars.
A Pool Car must be:
- Used for business journeys by more than one employee
- Not normally used by one employee to the exclusion of the others
- Only used for private purposes that are “merely incidental” to business use – for example, taken home overnight by an employee who has to make an early start on a business trip in the morning
- Not “normally” (HMRC take this to be 60% of the time or more) kept overnight near any employee’s home, unless the employee happens to live near the employer and the car is on the employer’s premises for the night
Unless you can justify a Pool Car, don’t assume that a company car is the best thing for your family company – DO THE MATH!!