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How company cars are taxed

October 6, 2011

In the old days, one of the perks of running your own business was the ability to run a decent car by getting your company to lease it, and take it as a company car.

That perk doesn’t really exist any more. Over a number of years the tax rules have changed, to the extent that many accountants now say it is more tax efficient for many business owners to run their own private car and claim mileage expenses.

This is the same reason that managers of big companies with so-called “perk” cars (they don’t really need it for their job) are opting out of the company car scheme.

Company car tax used to be worked out based on the age of the car and the amount of business mileage you did. If you’re environmentally conscious, you’d be horrified to know the old tax rules encouraged you to drive more to lower your tax liability!

Company car tax is based on carbon dioxide emissions

Now the tax you pay on your company car is calculated on carbon dioxide emissions (CO2) encouraging businesses to use cleaner more fuel efficient cars. Much greener.

But that also makes working out the tax liability much more complicated. There is a very helpful calculator on the HMRC website. To be able to use it, you first need to work out the vehicle’s CO2 figure.

If your company car was registered before 1998, it doesn’t have an emissions figure. There is a ‘no emissions’ box to tick in the calculator. You also tick this if you have a car without an approved emissions figure.

If it was registered after 1st January, you can get the CO2 figure here. Vehicles registered after 1st March 2001 also show the CO2 figure on the vehicle’s V5 registration certificate.

Company vans are covered by similar rules as cars. Employees don’t generally pay tax unless they use the van for private journeys. Unusually, HMRC counts a van trip between home and work to be a work trip, not a personal one. That’s not usually the case with cars.

Where employees do use a van for private journeys and share the van between two or more of them, the taxable benefit is also shared.

A company ‘pool’ car is exempt from company car tax

If you have a car that lots of people share for use in their work only and it is parked at work premises overnight, then it is a pool car and exempt from company car tax. You can get more guidance on this and check if you really are running a pool car here.

Looking at fuel for company vehicles, this is not taxable as long as employees pay for their private fuel usage. They can either buy their own fuel and claim mileage expenses, or if the fuel is bought by the company they must repay or replace the fuel used for private use. There is guidance from HMRC on fuel rates for company cars here.

If you do have a company car or provide one for your employees, you will of course need to fill out a series of forms. The first is a P46 (car), which you should use for someone getting a company car, changing it, or giving it back. You can download the form (pdf) from the HMRC website here.

You also need to fill out the P46 form if you start providing free fuel to your employee. Whatever the change, it needs to be submitted to HMRC within 28 days of the end of quarter in which the change happened (5th July, 5th October, 5th January or 5th April).

Company car information must be declared on employees’ P11D

You’ll also need to put the company car information on the employee’s P11D. This is the form you use to declare any taxable benefits the employee has received during the year and can be downloaded along with help documents here.

Remember, if you are a director of a limited company you are an employee, and will need these forms filled out as well.

The final form needed for company cars is so your business can pay the class 1A National Insurance contributions due on any taxable perks provided. To declare this you use the P11D (b) form, available to download (pdf) here.

VAT cannot be reclaimed on a company car but can on a ‘pool’ car

And lastly, it’s worth noting that your business can’t reclaim the VAT paid on a company car purchase, unless you drive a taxi, hire out cars, are a driving instructor or do one of a number of other commercial car-related activities.

VAT paid on purchasing a genuine pool car or a commercial vehicle such as a van can be reclaimed. VAT can also be reclaimed by businesses on fuel used for business purposes.

Remember to get professional advice from a qualified person before taking any action. Don’t rely purely on information contained in this article.