HMRC have published guidance for employers on the tax treatment of various expenses and benefits provided to employees during the coronavirus pandemic in which they specifically address the extent to which a company car remains available for an employee’s private use. We explain what it means in practice in today’s blog.

Company car ‘availability’ during the Covid-19 pandemic

For many, their working patterns changed as a result of the Covid-19 pandemic. Some employees were required to work from home, some were furloughed, while those with certain health conditions were required to shield.

If the employee has a company car, is a deduction available for periods during the pandemic when it was not used?

Legislative test

Under the legislation, a benefit-in-kind tax charge arises where the car is available for the employee’s private use. The legislation deems a car to be available for private use, unless that use is specifically prohibited and there is in fact no actual use.

Deduction for periods of unavailability

When calculating the amount charged to tax in respect of the private use of a company car, a deduction is given:

  • where the car is made available during the tax year, the period from the start of the tax year to the date on which the car was first made available to the employee;
  • where the car ceases to be available to the employee throughout the whole tax year, from the date that the car ceases to be available to the end of the tax year; and
  • periods of 30 days or more throughout which the car was not available to the employee.

Unavailability during Covid-19: HMRC’s stance

HMRC have published guidance for employers on the tax treatment of various expenses and benefits provided to employees during the coronavirus pandemic in which they specifically address the extent to which a company car remains available for an employee’s private use.

In the guidance, HMRC state that where an employee has been furloughed or is working from home because of Coronavirus and the employee has been provided with a company car that they still have, the car should be “treated as being ‘available’” for private use during this period even if the employee is:

  • instructed to not use the car
  • asked to take and keep a photographic image of the mileage both before and after a period of furlough
  • unable to physically return the car or the car cannot be collected from the employee

Where restrictions on the freedom of movement prevent a car from being handed back or collected, HMRC accept that the car is unavailable where the contract has terminated from the date that the keys, including the fobs, are returned to the employer or to a relevant third party. Where the contract has not terminated, HMRC only regard the car as being unavailable from the date 30 days after the keys are returned.

Worth a challenge

The unavailability tests set by HMRC are stricter than those posed by the legislation, which require only that private use is prohibited and not take place; there is no requirement in the legislation that they keys are returned. Where and employee is instructed not to use the car and evidence can be provided that it was not indeed used, there a goods grounds for a deduction where the period of unavailability exceeds 30 days, even if the keys are not returned.

Partner note: ITEPA 2003, s. 114, 118, 143; www.gov.uk/guidance/how-to-treat-certain-expenses-and-benefits-provided-to-employees-during-coronavirus-covid-19

 

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Here’s the latest information on mileage rates for company cars, including the new coronavirus measures and what’s happening with the Advisory Electricity Rate for electric cars.

Company car mileage rates update

The company car benefit tax charge does not cover fuel provided for a company vehicle. This means that where an employer pays for all fuel (business and private), a statutory fuel scale benefit charge will be payable, based on the cash equivalent of the benefit each tax year (£24,500 for 2020/21) multiplied by a percentage depending on the car’s CO2 emissions.

If the company pays for all fuel, but the employee reimburses the company for private use, as long as the amount paid back is equal to, or more than, the amount for personal fuel in the same tax year, the employer will not have to pay anything to HMRC or report on such transactions.

Where the employer does not directly meet the cost of fuel used for business in a company car, but pays the employee a business mileage allowance, no fuel benefit charge will arise if the mileage allowance does no more than meet the cost of fuel used for business travel. If the mileage allowance is excessive, but it’s only paid for genuine business travel, the ‘profit element’ will be chargeable to tax in the normal way. However, a car fuel benefit charge will arise where, for instance, the payments to the employee cover travel between home and work.

HMRC publish rates that can be used by employers wishing to pay their employees the cost of fuel for business journeys in company cars (or, where the employer initially pays for all fuel, for reimbursement of private mileage by company car drivers to their employers). Hybrid cars are treated as petrol or diesel cars for this purpose.

Rates applying from 1 June 2020 are as follows:

Engine sizePetrolDieselLPG
1400cc or less10p6p
1600cc or less8p
1401cc to 2000cc12p8p
1601cc to 2000cc9p
Over 2000cc17p12p11p

 

HMRC’s guidance on fuel-only mileage rates for company cars confirms that employers are not obliged to use advisory fuel rates. Where an employer wishes to use them, they only apply where the employer:

  • reimburses employees for business travel in their company cars; or
  • requires employees to repay the cost of fuel used for private travel in those company cars.

If the employer pays more than the relevant advisory fuels rates and the payments are not an actual reimbursement, the excess is taxed (and subject to employees’ and employers’ National Insurance Contributions).

Coronavirus measures

For employees using company cars, an employer may agree to refund the fuel costs using the advisory fuel rates, of employees carrying out volunteer work related to coronavirus, for example, delivering medical supplies including PPE. These refunds are a benefit and the employer may settle any tax and National Insurance contributions on the employee’s behalf by reporting through a PAYE Settlement Agreement.

The employer may also agree to fund the cost of fuel for volunteer mileage related to coronavirus. HMRC have advised that volunteer mileage should not be taken into account for the purposes of the car fuel benefit charge for company cars.

Any tax and National Insurance contributions due should be reported through a PAYE Settlement Agreement as a coronavirus related benefit based on the appropriate advisory fuel rate for the volunteer mileage.

Electric cars

An Advisory Electricity Rate has been introduced for electric cars. The current rate is 4p per mile, though it should be noted that electricity is not a fuel for car fuel benefit purposes.

Where an individual is provided with workplace facilities for charging a battery of a vehicle used by them (including as a passenger), no taxable benefit arises for costs relating to the provision of electricity at those facilities if the following conditions are met:

  • the charging facilities must be provided at or near an employee’s workplace
  • charging must be available to either all the employer’s employees generally, or all the employer’s employees generally at the employee’s workplace
  • charging facilities must be for a battery of a vehicle in which the employee is either the driver or a passenger.

The benefit will remain taxable if it’s offered in conjunction with an optional remuneration arrangement.

Partner Note: ITEPA 2003, ss 150 – 152, 237A; FA 2019, s 8(1)

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From 6 April 2020, the way in which carbon dioxide emissions for cars are measured is changing – read more here.

Zero charge for zero emission cars

From 6 April 2020, the way in which carbon dioxide emissions for cars are measured is changing – moving from the New European Driving Cycle (NEDC) (used for cars registered prior to 6 April 2020) to the Worldwide Light Testing Procedure (WLTP) for cars registered on or after 6 April 2020.

For an introductory period, the appropriate percentages for cars registered on or after 6 April 2020 are reduced – being two percentage points lower than cars with the same CO2 emissions registered prior to 6 April 2020 for 2020/21 and one percentage point lower for 2021/22. From 2022/23 the appropriate percentages are aligned regardless of which method is used to determine the emissions.

Zero emission cars

As part of the transition, the appropriate percentage for zero emission cars is reduced to 0% for 2020/21 and to 1% for 2021/22. This applies regardless of when the car was registered.

The charge was originally set at 2% for 2020/21 and 2021/22, and will revert to this level from 2022/23.

Impact

Electric company car drivers were already set to enjoy a tax reduction. The appropriate percentage for 2019/20 is 16% and was due to fall to 2% from 6 April 2020. However, the further reduction to 0% means that those who have opted for an electric company car can enjoy the benefit tax-free in 2020/21. Their employers will also be relieved of the associated Class 1A National Insurance charge.

Case study

Kim has an electric company car throughout 2019/20, 2020/21 and 2021/22. The car has a list price of £32,000. Kim is a higher rate taxpayer.

In 2019/20, Kim is taxed on 16% of the list price – a taxable benefit of £5,120. As a higher rate taxpayer, the tax hit is £2,048 (40% of £5,120). Her employer must also pay Class 1 National Insurance of 13.8% on the taxable amount (£706.56).

In 2020/21, the appropriate percentage is 0% so there is no tax or Class 1A National Insurance to pay. This is a significant reduction compared to 2019/20.

In 2021/22, the charge is 1% of the list price, equal to £320, on which the tax is £128 (assuming a 40% tax rate) and the Class 1A National Insurance is £44.16.

From 2021/22 the charge is 2% of the list price – equal to £640.

Not quite zero emissions

It is also possible to enjoy a company car tax-free in 2020/21 if it is registered on or after 6 April 2020, has emissions of between 1 and 50g/km (measured under the WLTP) and an electric range of at least 130 miles.

Go electric

The benefits of choosing electric cars from a tax perspective, as well as from an environmental one, are significant.

Partner note: ITEPA 2003, s. 139, 139A (as to be amended/inserted in accordance with draft Finance Bill 2019 clauses (see https://www.gov.uk/government/publications/taxable-benefits-and-rules-for-measuring-carbon-dioxide-emissions)).

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It can pay off to keep track of your business mileage you incur for your rental properties – here’s why.

Using your car in your property rental business

Landlords will often use their car for the purposes of their property rental business. Where they do so, they are able to claim a deduction for the costs that they incur.

Using mileage rates

Where a landlord uses their car for business purposes, the easiest way to work out the amount that can be deducted is to make use of the simplified expenses system and use the relevant mileage rates to claim a deduction based on the business mileage undertaken.

For cars (and also vans) the rate is set at 45p per mile for the first 10,000 business miles in the tax year and at 25p per mile for any subsequent business mileage.

Example

Karen is an unincorporated landlord and has three properties that she lets out. During the tax year, she undertakes 712 business miles in her own car in respect of her property business.

She claims a deduction of 45p per mile, a total deduction for the year of £320.40.

Deduction based on actual costs

The use of simplified expenses, while generally easier from an administration perspective, is not compulsory. The landlord can instead claim a deduction based on the actual costs. However, in practice this will be time consuming. Further, where the car is used for both business and private travel, a deduction is only permitted for the business element. Separating actual costs between business and private travel can be very time consuming and will only be worthwhile where it gives rise to a significantly higher deduction than that obtained by using the mileage rates.

Capital allowances

Capital allowances cannot be claimed where mileage allowances are claimed. Where a deduction is based on actual costs, capital allowances can be claimed in respect of the car. However, the claim must be adjusted to reflect any private use. So, for example, if a car is used for the purposes of the property business 20% of the time and for private use 80% of the claim, any capital allowance claim must be restricted to 20%.

Other travel

The costs of travel on public transport or by taxi can be deducted in computing the profits of the property rental business to the extent that it constitutes business travel for the purposes of that business.

Partner note: ITTOIA 2005, s. 94D

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There are five conditions that need to be met to get the tax benefits of a pool car.

When is a car a pool car?

Rather than allocating specific cars to particular employees, some employers find it preferable to operate a carpool and have a number of cars available for use by employees when they need to undertake a business journey. From a tax perspective, provided that certain conditions are met, no benefit in kind tax charge will arise where an employee makes use of a pool car.

The conditions

There are five conditions that must be met for a car to be treated as a pool car for tax purposes.

  1. The car is made available to, and actually is used by, more than one employee.
  2. In each case, it is made available by reason of the employee’s employment.
  3. The car is not ordinarily used by one employee to the exclusion of the others.
  4. In each case, any private use by the employee is merely incidental to the employee’s business use of the car.
  5. The car is not normally kept overnight on or in the vicinity of any of the residential premises where any of the employees was residing (subject to an exception if kept overnight on premises occupied by the person making the cars available).

The tax exemption only applies if all five conditions are met.

When private use is ‘merely incidental’

To meet the definition of a pool car, the car should only be available for genuine business use. However, in deciding whether this test is met, private use is disregarded as long as that private use is ‘merely incidental’ to the employee’s business use of the car.

HMRC regard the test as being a qualitative rather than a quantitative test. It does not refer to the actual private mileage, rather the private element in the context of the journey as a whole. For example, if an employee is required to make a long business journey and takes the car home the previous evening in order to get an early start, the private use comprising the journey from work to home the previous evening would be regarded as ‘merely incidental’. The car is taken home to facilitate the business journey the following day.

Kept overnight at employee’s homes – the 60% test

For a car to meet the definition of a pool car, it must not normally be kept overnight at employees’ homes. In deciding whether this test is met, HMRC apply a rule of thumb – as long as the total number of nights on which a car is taken home by employees, for whatever reason, is less than 60% of the total number of nights in the period, HMRC accept that the condition is met.

When a benefit in kind tax charge arises

If the car does not meet the definition of a pool car and is made available for the employee’s private use, a tax charge will arise under the company car tax rules.

Partner note: ITEPA 2003, s. 167.

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If you’re an employer, make sure you’re up to date on the latest Employer Bulletin on diesel supplements.

Employees with a company car are taxed – often quite heavily – for the privilege. The charge is on the benefit which the employee derives from being able to use their company car for private journeys.

The amount charged to tax is a percentage of the ‘list price’ of the car – known as the ‘appropriate percentage’. The percentage depends on the level of the car’s CO2 emissions. A supplement applies to diesel cars. For 2019/20, as for 2018/19, the supplement is set at 4%. However, the application of the diesel supplement cannot take the percentage of the price charged to tax above the maximum charge of 37%. Consequently, the diesel supplement has no practical effect where emissions are 170g/km or above as the maximum charge already applies.

The nature of the diesel supplement was reformed from 6 April 2018. From that date it applies to cars propelled solely by diesel (not hybrids) which do not meet the Real Driving Emissions 2 (RDE2) standard. The supplement is levied both on diesel cars which are registered on or after 1 January 1998 which do not have a registered Nitrogen Oxide (NOx) emissions value, and also on diesel cars registered on or after that date which have a NOx level that exceeds that permitted by the RDE2 standard.

Checking whether the supplement applies

So, how can employers tell whether the diesel supplement applies?

Diesel cars which meet the level of NOx emissions permitted by Euro standard 6d meet the RDE2 standard. Consequently, they are exempt from the entire diesel supplement. For cars that are manufactured after September 2018, employers can use the Vehicle Enquiry Service (see https://vehicleenquiry.service.gov.uk/) to identify whether a particular car meets the Euro 6d standard – the employer simply needs to enter the registration number of the car into the tool to find information on the vehicle, including its Euro status. Cars that are shown as meeting Euro status 6AJ, 6AL, 6AM, 6AN, 6AO, 6AP, 6AQ or 6AR meet Euro standard 6d and are therefore exempt from the diesel supplement. Where the car was registered on or after 1 September 2018, this information is also shown on the vehicle registration document, V5C.

From 6 April 2019 onwards, employers should use fuel type F (rather than A as previously) when reporting the allocation of a diesel car meeting the Euro 6d standard to HMRC on Form P46(Car) or when payrolling the benefit.

Cars that do not meet the Euro 6d standard are subject to the diesel supplement. HMRC advise that very few, if any, diesel cars were exempt from the diesel supplement in 2018/19.

Example 1

Alan is allocated a company car registered in 2015. The car has CO2 emissions of 120g/km. It does not meet the Euro 6d standard. The diesel supplement applies and the appropriate percentage is increased by 4% from 28% (the percentage applying for 2019/20 to petrol cars with CO2 emissions of 120g/km) to 32%.

Example 2 Louise is allocated a new diesel company car on 6 April 2019. The V5C shows that the car has CO2 emissions of 120g/km and that it meets Euro Status 6d. The diesel supplement does not apply and the tax charge for 2019/20 is based on the appropriate percentage of 28% for cars with CO2 emissions of 120g/km.

Partner note: ITEPA 2003, s. 141; Employer Bulletin, April 2019.

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