Bright Sparks

electric cars 

For many years now we have seen a decline in the number of company cars. During this period the legislative changes have more frequently resulted in calculations that show it to be more tax efficient for individuals to purchase cars when compared to businesses purchasing the vehicle and providing it as a taxable benefit.

Now with the development of a wider range of electric cars, both at the lower end and the luxury ranges, combined with the tax incentives for these vehicles, we are once again finding these can be a tax efficient part of remuneration strategies.

 

The position can be easily considered for an employee of a large corporate who is only interested in his after tax income, he can easily compare the tax cost of a company car with the cost of a personal contract plan delivering him a new care every three to four years.

The position is however more complex for an owner manager where providing a company car may give corporation tax savings, but his will be of little interest if this just transfers the liability into an income tax charge on the individual. 

 

A company can “buy” a car in three ways:

  • Outright purchase

  • HP, or

  • Lease

And each are treated differently both in the accounts and for tax purposes.

 

Example

Lets consider an outright purchase of an electric car, something like a Phev (Mitsubishi Outlander).  If purchased outright the company would receive an immediate tax deduction for the full cost of the car.

So if the car cost £30,000, and if it is retained for 4 years after which it is worth £10,000 the actual cost to the company of the car would be:

                                                                                                                                  £

Price                                                                                      30,000

Tax effect of tax deduction when purchased                (6,000)

Proceeds on sale                                                              (10,000)

Total costs                                                                           14,000

 

From the personal tax point of view the benefit in kind for an electric car would be:

Year                     Rate         Taxable benefit

2016/17                7%              2,100

2017/18                9%              2,700

2018/19                13%            3,900

2019/20                16%            4,800

 

Assuming a 40% tax rate for the four years a total personal tax cost of £5,400 or averaged over the four years £1,350 per year.

So, the car has cost the company £3,500 per annum and the individual £1,350 per annum.

The alternative is for the company to pay a dividend of £3,500 per annum to the individual, which would cost the company the same as providing the car.

If we make the assumption that this dividend is taxed at 32.5% in the hands of the individual, this leaves them £2,362 to fund a car themselves plus the saving of £1,350 per annum payable on a company car, so £3,712 per annum or £309 per month.

 

Conclusion

So if they can find a contract hire deal for less than £309 per month, they are better providing the car out of after tax income, if however the monthly contract hire is more than this, then the company funded car is the better option.

 

It’s not a “slam dunk” either way. With some doubt over the residuals of electric cars purchased now (and how will the technology move on in four years) and as you can see above, the company car rates are also increasing the decision on numbers alone does need careful thought.

It is however becoming a more interesting decision to make, especially when you bear in mind that in the view of HMRC electricity is not a fuel, therefore no fuel benefit charge arises if you plug your car in at work!

 

For more information on company car legislation or the tax issues raised in this article, please e-mail mary.tierney@bennettbrooks.co.uk or call us on 01606 721300 today for more advice ?