Is it a good idea to offer employees a company vehicle?

 

Employee perks tax and accounting considerations

 

A company vehicle was in the past a fairly popular and common business perk for employees and in particular executives. However, running a company vehicle scheme has several administrative burdens and tax implications and they just might make small business owners to reconsider their position before handing over the keys.

If you are in need of advice on any types of employee benefits or incentives or accounts, tax, VAT, payroll, or business strategy, you should definitely talk to us.

 

Reclaiming VAT

 

The first thing you should keep in mind is that VAT-registered businesses are only able to reclaim 50 percent of the VAT paid on vehicles leased for employees and cannot reclaim VAT on vehicles purchased outright by the company for use by individual members of staff.

The reason is that company vehicles offered as perks to employees are used for both business travel and personal travel. In theory, companies are free to reclaim all (100 percent) of the VAT on company vehicles if they prove beyond reasonable doubt that the vehicle is used for business use only, but this is in reality quite hard to do, which is why most businesses don’t even bother to try.

 

Car Pool

 

‘Pool cars’ are the only exception, where cars are not allocated to a single employee but are rather pooled for exclusive business use by all members of staff.  100 percent of the VAT can be reclaimed in such cases (assuming that the company is actually VAT-registered), but only as long as the vehicle is not used for personal use including driving to and from work and that the vehicle is never parked overnight either at or close to the personal residence of an employee.

 

Capital Allowances

 

The cost of acquisition of most company vehicles cannot be immediately offset as a capital allowance. The reason is because vehicles don’t qualify for the Annual Investment Allowance, which means that they have to be written down through the Writing Down Allowance instead.

The percentage of the cost that can be written down in the first year as well as subsequent years depends on the CO2 emissions of the vehicle and whether it is a second hand or a new vehicle.

If the vehicle has CO2 emissions of 75g/km or less, the total price of the vehicle can be written down (i.e. deducted from profit before computing the corporate tax) in the first year, as long as it is a new vehicle.  This means that currently, only some smaller hybrids and new electric vehicles qualify for the first-year allowances.

If the vehicle has CO2 emissions ranging from 76g/km to 130g/km, the rate at which the vehicle can be written down as capital allowance is 18 percent annually. If the vehicle has CO2 emissions greater than 130g/km then the writing down allowance rate will be just 8 percent.

A second-hand vehicle that has a CO2 emission of 130g/km or less is usually written down at 18 percent annually, while the tax deduction for second hand vehicles whose emission levels are higher than 130gkm is 8 percent annually.

 

Tax for Employers

 

If your small business offers company vehicles to employees you will be required to pay Class 1A National Insurance Contributions on their taxable value, whose tax rate is about 13.8 percent. The Class 1A National Insurance Contribution is also paid on any fuel that employees receive for personal use. Insurance is treated differently but you can also save if you compare car insurance quotes.

The tax due on private fuel and company vehicles is collected via PAYE through an adjustment to the PAYE code and employer will have an extra administrative burden because they are required to complete form P46 each quarter to provide the government with a regular update on company vehicle usage.

 

A more tax-efficient option for company vehicles?

 

From a business perspective, a better strategy would be to offer an annual vehicle allowance to employees, which effectively translates to pay increments in lieu of a company vehicle.

This approach helps employers avoid the administrative and tax burden associated with buying or leasing company vehicles for staff, while the employees get to avoid additional taxation and enjoy more flexibility to choose whether to buy a new CO2-efficient vehicle, use their existing vehicle for business travel, or buy a second-hand vehicle.

 

Advertising Your Business Using a Company Vehicle

 

Businesses still opt to offer company vehicles to key employees in spite of the obvious tax inefficiencies. Data from the Department of Transport reveals that 55 percent of all new vehicles registered in 2015 were actually company vehicles. In some instances, it was due to the status and apparent financial benefit a company vehicle can help a business attract and retain the right staff, but in other instances company vehicles can be effective marketing tools.

For instance, courier companies, driving instructors, and estate agencies can decide to brand their company vehicles with their web addresses, phone numbers, slogans, and logos, which helps promote their business while staff members get to use this increasingly costly business benefit.