It's the perennial question for businesses when it comes to employee benefits, and we are often asked for the financial perspective; is it more cost-effective to offer employees company cars, or are pool cars a more practical alternative?
We have written about this subject before here, but as legislation changes regularly we felt it was time for an update, particularly as HMRC has just released new advisory fuel rates which came into effect on 1 June.
If you provide a car and fuel for an employee, and they use that vehicle for personal transport outside work, then it's considered a company car. It's seen as a taxable perk, known as a 'BIK' or Benefit in Kind, and comes with specific National Insurance and reporting obligations.
BIK is determined by taking a percentage of the sale value of a car when new (known as the P11D value). That percentage is ascertained by the car's CO2 emissions, and it increases as the emissions get higher. The resulting BIK is then taxed via PAYE at the employee's specific tax rate. BIK tax is subject to annual changes in the Chancellor's budget and inevitably increases each year.
CO2 emissions are also used to calculate any potential private fuel benefit, which based on 2019/2020 prices is currently BIK% x £24,100, so employees are potentially hit by a double whammy.
There are 35 tax bands for the current year 2019/2020, and the highest BIK rate of 37% applies to all vehicles with emissions above 165g/km. For 2020/21, this rate will apply from 160g/km. However, vehicles with emissions of 51–69g/km will receive a reduction in rates.
You can review the full list of taxable BIK for company cars on the government's website here.
From 2018 all diesel models unable to meet the new WLTP efficiency assessments had an extra 4% surcharge added to their BIK tax up to the 37% maximum. WLTP (World Harmonised Light Vehicle Testing Protocol) criteria have majorly affected the new car market, as they involve much more rigorous testing.
Electric cars were previously tax-exempt, but as numbers are rapidly increasing, HMRC has included them on the BIK list, although at a substantially lower rate.
There are also large reductions to some electric cars for 2020/21 (particularly ones with a higher range), which is worth noting given the increases over recent years. As an example, the percentage charge for an electric car with 130+ miles of range has gone from 7% in 2016/7, to 9% in 2017/18, to 13% in 2018/19, to 16% in 2019/20, but in 2020/21 this will drop to just 2%. So whilst it may be expensive currently, it could be worth taking the hit when planning for the future.
These are cars which are usually kept at your business premises and used by employees on an as-needs basis. They are not treated as an employment 'perk', and therefore employees using them are not liable for BIK payments. However, there are strict rules to which businesses need to adhere to ensure pool cars aren't actually being used as company cars, such as:
Falling foul of these can mean heavy financial penalties, running into tens of thousands, so it's vital that employees are aware of the possible consequences.
Here at Perrys Chartered Accountants we pride ourselves on our practical, professional approach. Get in touch if you'd like to discuss whether company cars or pool cars would best suit your business, or if you need any other advice on employee benefits.