Fleet News

United Kingdom car tax

With one of the largest company car fleets in Europe, the United Kingdom is a major player in the fleet industry.
A report by the European Commission has found that the UK remains one of the most expensive car market in the European Union, despite the introduction of the EU rules on Block Exemption, which aim to lower price differentials across Europe.
Perhaps as a result of this, in Britain it is companies, rather than individuals, which are the major purchasers of cars.
The purchase and use of company cars is subject to both corporate and indirect tax charges. Fuel duty and VAT makes up around 75% of the cost of a litre of fuel.

Direct taxation
Corporation tax and its impact on
a) outright purchase (& hire purchase),
b) operating lease,
c) finance lease.

Where a car is purchased outright, the purchaser will be entitled to writing-down allowances by reference to the capital expenditure.
These are limited to the lesser of £3,000 per year or 25% on a reducing balance basis by chapter 8 of the Capital Allowances Act 2001, penalising 'expensive' cars (costing over £12,000).
However, on sale a balancing allowance should be available, so that the actual depreciation during the period of ownership is fully relieved.
A business can claim 100% first year allowances on expenditure on a car provided that:

  • The car is unused and not second hand and is first registered on or after 17 April 2002; and
  • Either, the car has CO2 emissions of not more than 120gm/km driven; or
  • The car is an electric car

    If the purchaser borrows funds to finance the purchase, the interest payable will be deductible as a revenue expense.
    Where there is an element of private (as opposed to solely business) use, only the business proportion of the expenditure on the car is allowed.
    This is also the case where a car is acquired on hire purchase. A writing-down allowance is given on the full purchase price of the car as soon as it comes into use in the business, despite the fact that payment of the instalments will only begin at about that time.
    Again, the interest element of the instalment payments will be deductible as a revenue expense.
    Under an operating lease there is a restriction on the availability of a tax deduction for the rental payments. Where the retail price of the car when new exceeds £12,000, the lessee is only allowed to deduct part of the rentals.
    Unlike the capital allowance restriction for purchased cars, the rental restriction does not unwind at the end of the lease, but is a permanent loss of relief. A finance lease is treated in the same way as an operating lease, unless certain detailed provisions apply. A finance lessor buying a car for leasing may only claim the proportion of the writing-down allowances in the year in which the car is bought which corresponds to the lessor's period of ownership of the car in that accounting period.
    If rental payments are rear-end loaded, a finance lessor is taxed on the rentals according to the accounting treatment rather than the contractual entitlement to the payments, so that the tax charge is accelerated and tax will be payable in respect of payments not yet received.
    There may also be restrictions on the lessor's entitlement to capital allowances where there is a sale and finance leaseback of a car.

    Indirect taxation
    Car registration
    In the United Kingdom, a car needs to be registered in the name of the legal keeper, who may or may not be the owner of the car. For example, a car owned by a German leasing company and leased to a United Kingdom company would be registered in the name of the UK company.

    Car taxes
    Car tax
    Cars that are registered in the United Kingdom are subject to a tax known as Vehicle Excise Duty (VED). There are International agreements which provide for the temporary use of a vehicle in a foreign country for a limited time, usually six months in a 12 month period.
    A visitor to the UK may use a vehicle displaying foreign plates, provided that all taxes (including vehicle excise duty) are paid in their country of origin.

    Current rates
    From July 1, 2001, the reduced rate of VED that previously applied to cars with engine sizes up to 1200cc was extended to include engines up to (and including) 1549cc. This only applies to cars registered before 1 March 2001. The revised rate will be £110.00 for 12 months.
    New cars, of all engine sizes, registered from 1 March 2001 will be taxed in a different way. VED will be charged according to a cars carbon dioxide (CO2) emission figure and fuel type.
    Cars have been allocated into bands for this purpose with annual charges ranging from £55.00 (for a car using “Alternative Fuel”) to £165.00 (for a diesel car).

    VAT
    The UK Standard rate of VAT is 17.5%.
    The VAT provisions relating to cars are largely contained within the Value Added Tax (Cars) Order 1992 and the Value Added Tax (Input Tax Order) 1992, as amended.

    Qualifying Cars
    From 1 August 1995, VAT on the purchase, import or acquisition of a car from another EU Member State can be recovered provided;

  • The car is intended to be used 'exclusively for the purpose of the business', or
  • The car is intended to be used 'primarily for a relevant purpose'

    Cars falling into the first category are 'qualifying cars' and include new or used cars bought for resale, cars bought for leasing to other users and genuine pool cars that are never used for private purposes. VAT is due on the full value of the disposal of such cars at the time the cars are sold.
    From December 1, 1999, qualifying cars include 'stock in trade' cars of motor manufacturers and dealers.
    Stock in trade cars include demonstrator cars where the intention is to sell the car within 12 months. However, where such cars are used privately, VAT is due on the private use, as well as on their ultimate disposal.
    Trade agreements with Customs for simplified arrangements for calculating the private use may be used. Otherwise VAT is due on the cost of providing the deemed service at the end of the VAT return period where free private use has occurred.
    Cars falling into the second category include those to be used as driving school cars, taxis or for short term rental.
    From 1 December 1999 the definition of car excludes vehicles which are capable of carrying twelve or more seated passengers and which meet the requirements of Schedule 6 to the Road Vehicles (Construction and Use) Regulations 1986. Vehicles constructed to carry a payload of one tonne or more are also excluded from that date.

    Non qualifying cars
    Non qualifying cars include;

  • Those where there was no VAT on their purchase; or
  • Those where the VAT was shown on the invoice but it was blocked because of intended private use.

    Cars in the first category would fall within the used car margin scheme such that the subsequent sale would not be subject to VAT on an invoice, but the seller would have to treat any positive margin as VAT inclusive and pay this VAT over to Customs.
    Cars in the second category became exempt with effect from 1 March 2000. The partial exemption implications of this need to be considered by taxable persons making such disposals.
    If a business provides fuel, for free or for a charge less than cost, to its employees for non-business use there are additional rules regarding VAT recovery.
    If the business recovers all of the input VAT incurred on the fuel, it must account for output tax due on the private use by applying a scale charge, based on engine capacity and fuel type. Alternatively, the business can opt to not recover the input VAT on the fuel and does not then need to apply the fuel scale charge.
    If a business applies a charge, at least equal to the cost of the fuel, to the private use of its vehicles, there should be no need to apply the scale charge and the input tax should be fully recoverable. Instead output tax based on the charge should be accounted for to Customs.

    Vehicle Financing Methods
    In the UK, vehicles are acquired in a number of ways.
    The VAT treatment is determined by whether the transaction is of goods or of services which may be summarised as follows;

  • Hire purchase(HP)/conditional sale/credit sale- a supply of goods for VAT purposes because title is expressly contemplated to pass, notwithstanding any nominal option to purchase in the HP agreement. Here the finance house would account for VAT on the full value of the goods at the time of their delivery to the customer. Where there is to be private use the VAT would be blocked
  • Operating lease, finance lease and daily rental- a supply of services for VAT purposes because, in general, it is not expected that title will pass. However, contracts should be checked as Customs may take the view that if there is an option to purchase at market/fair market value, which the buyer typically exercises, the supply is of goods.
    Where the supply is services VAT is charged on each instalment. Where there is private use the lessee can recover up to 50% only of the VAT. Where additional services of fleet management are available to the lessee on an optional basis, the lessee can recover up to 100% of the VAT on those elements provided they are described and quantified separately.
    Business customers may also recover up to 100% of the VAT on daily car rental charges for business journeys of not more than ten days. After that the 50% blocking applies.

    Accounting treatment
    In the United Kingdom the 1985 Companies Act requires companies to prepare accounts which reflect the true composition of the business. Statements of Standard Accounting Practice (SSAP) and Financial Reporting Standards (FRS) amplify the Act.
    Two have relevance to the acquisition of cars. They are SSAP 21 'Accounting for leases and hire purchase contracts' and FRS 5 'Substance of transactions'

    Purchase
    Where a car is purchased outright then its cost, and any associated financing will be shown on the company balance sheet. Depreciation will normally be charged in the profit and loss account at 25%, but the allowance for tax purposes will be restricted to £3,000 per annum until the written down value of the car is below £12,000.
    Where a car is leased, a distinction needs to be made between a finance lease and an operating lease.

    Financial lease
    For a finance lease, the car is capitalised in the accounts to reflect the economic substance of the transaction that is as if the car had been bought by the company. The presentation of the transaction in the accounts will not, therefore, match its legal form.
    The SSAP 21 definition is that a finance lease substantially transfers all the risks and rewards of the car ownership to the lessee. The key test is the 90% test. If the present value of the minimum lease payments in an agreement amount to 90% or more of the fair value of the car then the lease should be presumed to be a finance lease.
    Although this test gives a good indication as to whether a car should be capitalised, its results are no longer binding. FRS 5 states that the party having the benefits and risks relating to the underlying property should show the car on its balance sheet even though it does not have legal title.
    One of the deciding factors is to consider if it is the lessor or lessee who bears the risks on the residual value at the end of the lease.
    If it is accepted that the lease is a finance lease, this will involve the setting up of an asset and finance lease liability.
    The car is included on the balance sheet at the present value of the minimum lease payments. As an asset it needs to be depreciated to indicate the amount of wear and tear. The depreciation should be spread over the shorter of the lease term or the car's useful economic life.
    As the car is included as an asset, a liability must be included to reflect the value of the minimum lease payments. The lease is treated as a loan used to buy the car and repayments of the lease are set against this as if they were loan repayments.
    However, the interest element of the repayment should be removed and included in the profit and loss account.

    Operational lease
    Here, rentals are shown in the profit and loss account over the period of the lease. The rentals should be spread equally over the lease agreement.
    The balance sheet will not normally be affected except for accruals and prepayments. An accrual will arise if the actual payments are less than the figure in the profit and loss account.
    There will be a prepayment if the payments are more than the profit and loss figure.

    Driver's personal tax
    The private use of a company car gives rise to a taxable benefit in the UK. The current tax charge on a company car is based on a graduated scale according to its level of carbon dioxide (CO2) emissions, based on grams per kilometre (gm/km).
    The majority of cars registered after 1 January 1998 have an approved CO2 rating. There is no reduction to the benefit charge for business mileage or for the age of the car.
    The charge builds up from 15% of the car's price, for cars emitting CO2 at or below a qualifying level. This level is 155 gm/km for the tax year commencing on April 6, 2003, reducing to 145 gm/km for the tax year commencing on 6 April 2004, and then to 140 gm/km for the 2005/06 tax year.
    The charge increases in 1% steps for every additional 5 gm/km over the qualifying level. The maximum charge is 35 % of the car price. Diesel cars are subject to a 3% surcharge but the maximum charge is still limited to 35%.
    This surcharge does not apply to clean diesel cars meeting Euro IV emissions standards.
    Reductions in the tax charge are available for alternative fuel vehicles. Electrically propelled cars registered after January 1, 1998 are subject to an income tax charge of 9% of the list price of the vehicle.
    Hybrid cars, which can be powered by both electric and gas, registered after January 1, 1998 are subject to a reduction in the percentage charge of 2%, plus 1% for each 20grams per kilometre by which the CO2 emissions figure is less than the 15% threshold (i.e. 155gm/km for 2003/04.
    In a similar way, bi-fuel cars (fuelled by petrol and gas) registered after January 1, 1998 are subject to a reduction of 1%, plus an additional 1% for each 20grams per kilometre by which the CO2 emissions figure is less than the 15% threshold.

    Example 1
    Car with a petrol engine registered on March 1, 2002 with a list price of £15,000 and an approved CO2 emission level of 197gm/km (rounded to 195 gm/km).
    Car benefit charge for 2003/04 is List price £15,000 x 23%= £3,450.

    Example 2
    Car with a diesel engine registered on 1 September 2002 with a list price of £15,000 and an approved CO2 emission level of 240 gm/km.
    Car benefit charge for 2002/03 is: List price £15,000 x 35% = £5,250 (including diesel surcharge) Cars registered after 1 January 1998 or not having an approved CO2 figure are taxed as follows:

    Engine size; Percentage of car's list price
    0-1400cc; 15%
    1401-2000; 25%
    2000cc+ ; 35%

    Fuel
    Where fuel is provided for private use, company car drivers are taxed on a fixed charge based upon the CO2 emissions for the car.
    To calculate the benefit charge, a percentage figure is multiplied by a figure set for the year. For 2003/2004 this figure has been set at £14,400.
    The percentage figure is the same as that used for the calculation of the company car benefit, with the 3% supplement for diesel vehicles not meeting the Euro IV emissions standard applying.
    Also like car benefit, the percentages for petrol and diesel range from a minimum of 15 to a maximum of 35 per cent and the percentage for alternative fuels and hybrid cars can be below 15 per cent with reductions.

    Example
    A petrol car that has CO2 emissions of 205g/km
    The percentage used to calculate the company car benefit for 2003/2004 is 25%.
    The fuel scale charge will therefore be £14,400 x 25% = £3,600.

    Additionally, where fuel is only provided to an employee for part of the tax year, from 2003/2004, proportioning of the benefit is allowed provided the employee is not again provided with the benefit later in the year.

    Social Security
    In addition to the charges on the individual, the employer also has to pay a National Insurance charge.
    This is currently 12.8% (2003/2004) of the total of the car and the fuel charge and is payable in July following the end of the tax year.

    Liability in the case of accidents
    In December 2002, the owner of a delivery company was fined £2,500 for breaching health and safety regulations, after a driver suffering from exhaustion was killed in an accident, even though he was not working at the time of the crash.
    Under the Health and Safety Act 1974, employers are required to assess and control all areas of risk under their duty of care to ensure the 'health, safety and welfare at work of all their employees'.
    A report prepared by the Work-related Road Safety Task Group for the Health and Safety Executive (HSE), recommended that health and safety law should be more rigorously applied to on-the-road work, and the case cited above indicates that the Courts are extending this duty further still.

    It is proposed that the inclusion of company vehicles in health and safety rules will initially be used as guidance to employers.
    But if there is no clear reduction in accident statistics, the Government will produce a code of practice for fleets by 2004, which will be used to prosecute companies who fail in their duties of care to at-work drivers.
    The Government is currently considering the recommendations in its attempt to reduce the level of work-related road traffic incidents as part of its road safety strategy.

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