Company cars for SME employees

Whilst the way in which we work has changed significantly over the last few years, there are still some occupations where significant business mileage is required in order to carry out the work.

In our previous article here, we considered the implications for an SME owner of having a company car.  In this article, we consider the provision of vehicles for employees within an SME. Not only are there different tax implications for a member of staff, but potentially a different mindset with the individual concerned, due to the provision of a company “perk”.

In this article we look at the following two main scenarios:

• An employee who has the need for a vehicle due to the nature of their work.
• An employee who does not need a vehicle for work, only occasionally accumulates business mileage, but would be interested in having a vehicle if tax beneficial.

Some general principles

• To begin with a reminder of some of the general principles that we previously identified, but applied to employees:
• For traditional fossil fuel vehicles, with the current benefit in kind regime, it is rare that a company car would be tax efficient. By now, many of those employees will have already switched to having privately owned vehicles in exchange for additional salary as a “car allowance”. These employees can then be  reimbursed at up to 45p per mile (for the first 10,000 miles, 25p per mile thereafter), income tax and NIC free for business mileage for their private vehicle, rather than the lower advisory fuel rates for company car drivers.
• In the rare case that an individual has significantly high personal mileage, which results in a rapid depreciation in the value of the vehicle, arrangements like this can be beneficial to the employee, as they are not burdened with the cost. As an employer, you would usually want to discourage this sort of use of a company car, rather than incur the cost in the business.
• If employees are required to have a high business mileage, the business will bear the cost in any case.  It will therefore be a matter of undertaking the calculations from the business’s perspective to ascertain the cost of paying the mileage rate for the business use versus providing a company vehicle to the employee.
• Where a company vehicle is provided, the benefit in kind charge for the additional provision of fuel for private mileage is so high that, even with the current increase in fuel costs, it is generally discouraged (except in the high personal mileage circumstances above). Therefore, the employee and business need to have an appropriate system in place such that the employee clearly has no private fuel benefit.
• VAT can only be recovered on the purchase of a car if the company is able to demonstrate that it is exclusively used for business purposes, i.e., it is effectively a “pool car”, used wholly for business journeys and is not available for the private use of employees. This is typically very difficult to prove, and therefore businesses typically do not recover VAT on the purchase of cars.
• The block on VAT recovery for leased cars is 50% of the lease costs.
• If fuel is paid for by the company and the vehicle is put to private use, the company will be required to use a scale charge to calculate VAT recovery. It will be able to recover the VAT on fuel costs, but an output tax charge will be required at a flat rate.
• Finally, vehicles classified as vans are usually beneficial to have as a company vehicle. This is due to there being no benefit in kind charge where the vehicle is only used for home to work commuting or for qualifying business travel. Where it is used personally, any benefit in kind P11D charge is currently restricted to a flat amount of £3,600 (2022/23 tax year) and £688 for associated fuel benefit. This has meant qualifying Double Cab Pick-Ups have proved popular given that a number are classified as vans due to their payload. However, this is an area HMRC is currently reviewing (post the Coca-Cola case) and one where it is important to tread carefully.  Where a vehicle is recategorized as a car for benefit in kind purposes (this is separate to any VAT, DVLA or insurance definitions too!), it can be an expensive tax/NIC liability to settle.

Following those general principles and recognising the few exceptions, most employees qualifying for a company car , would now rather be paid an additional company car allowance through the payroll so that they can source their own vehicle, rather than having to pay the tax on the benefit in kind for a company owned vehicle.

Electric car schemes

The clear exception to these rules is the increasing availability and affordability of electric vehicles (EVs), driven both by the low tax regime and the increase in price of fossil fuels. In our last article, we focused on the benefits to the SME owner of electric vehicles.  We will now look at the same issues  from the perspective of an employee, but of course still with an eye on the implications for the business.

Both tax and national insurance savings compared to alternatively powered vehicles, can be made if the company car choice is an electric vehicle (EV).  EVs currently have a 2% benefit in kind (expected to be in place until April 2025). Therefore, when an employee exchanges taxable pay for an EV they will benefit from higher net pay overall, compared to taking out a personal lease for the same car, personally given the sacrifice is taken before tax and NIC is calculated.

By way of example, taking a Tesla Model 3, for a higher rate tax-payer employee:

As you can see the overall take home pay for the employee is higher, on an annual basis the tax savings would be approximately £4,200, with an added benefit to the employer of £1,433 in employer’s NIC savings. This is a relatively simple example, and individual’s circumstances will differ comparing vehicle use and charging costs.

Other factors to consider

Whenever an employer is considering implementing a company car scheme there are a number of factors that should be considered for the employer and employee:

• The establishment of a Car Scheme Handbook for employees to properly understand their responsibilities for the vehicle:
• Period of leasing the vehicle, and the implications of an early termination and the associated fees then incurred. Usually, you would need to get the employees to commit to a minimum of a two-year contract, but early termination protection can be available.
• Agreement of the use of the vehicle, permitted drivers and an annual mileage limit.
• What is and isn’t included in the package; for example, car tax, servicing and maintenance, wear and tear replacements, insurance, all subject to conditions being agreed with the lease company. Problem areas usually include, excess mileage, unrepaired damage, unreasonable wear and tear, driver abuse, insurance excesses.
• For EVs agreement of responsibility for charging costs, at home and/or at place of work.
• Rules for parental leave and long-term sickness need to be established.
• There are complex evolving rules regarding the VAT recovery on the cost of charging EV vehicles. The employer will need to consider if the vehicles will be charged at work, home or at a public charging point and how this will impact the VAT position.

When implementing a salary sacrifice car scheme an employer also needs to consider a few other areas that could impact their employees:

• The interactions with any entitlements to pay and benefits (company and statutory) upon agreeing to a salary sacrifice, reducing base salary.
• Are there any death-in-service/life assurance benefits affected where calculations are determined  upon base salary?
• National Minimum Wage compliance;
• Any impact of a lower base salary on loan and mortgage applications (typically, net affordability is considered now so there is no impact).
• Student loan repayment deductions may be reduced with a lower base salary.

Thank you for reading

For many years, the employee has shied away from being a company car driver because of the increasing benefit in kind charges. The tax rules, rates and allowances, brought in to cover electric vehicles have changed that. With the recent increase in fossil fuel costs, the option of moving to an EV as a company car is now one that is much more attractive. While these benefits may not be there for ever, there are features of the tax system currently available that are likely be beneficial for a number of employers and employees.

Please get in touch if you would like any further thoughts or advice on this matter. We have helped a number of employers and employees review their reward and travel strategy, assess cost analysis comparisons and bespoke aspects (including mileage costs, electricity costs etc).  We can also help the business assess how their company car choices affect their carbon footprint.

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