Contractors considering whether it is worth it financially to have a company car have numerous benefit in kind calculations to make and other considerations and options to consider, in addition to those discussed in Part 1 of our contractor guide to company cars.
According to James Abbott, owner and head of tax at contractor accountant Abbott Moore LLP, these include areas like HMRC rules, which can change the basic benefit in kind calculation, and other options that may make a company car more or less appealing to a contractor.
“Contractors frequently ask if benefit in kind rules can be circumvented or mitigated, and that brings in HMRC rules additional to the basic calculations,” explains Abbott. “Furthermore, there are some other options that might better meet contractors’ personal circumstances, such as leasing rather than buying, or choosing a van.”
Benefit in kind – rules on top of the basic calculation
The basic benefit in kind calculation is explained in Part 1. In addition to those, contractors may also wish to consider the following:
- The benefit in kind calculation is the same regardless of the ratio of business to private miles. This means a company car may actually be quite attractive to a contractor who does few business miles, so would claim little at 45p a mile.
- The benefit in kind calculation is not affected by the running costs of the car. Abbott says that some contractors find it cost effective to have a low emission company car which is shared by a member of the family who uses the car for private use but has very high insurance costs.
- A Benefit in kind charge automatically arises if the car is available for private use by a contractor, their family and household. There is the subtle point here that this is different than the car actually being used for private use. A contractor may never use their company car for private use, but if it is ‘available’, benefit in kind still applies.
- Contractors looking at higher cost models may find that leasing rather than buying outright works in their favour because of the way their company will save corporation tax on the purchase price, particularly if the vehicles emissions are over 160 g/km.
- Because of the way benefit in kind is calculated based on each car’s emissions, choosing a lower emission car will lower the benefit in kind charge. Contractors can find low emission models across most major brands, including the ‘premium’ ones.
- The benefit in kind calculation changes for cars with really low emissions. Between 120 and 75 g/km, the benefit in kind percentage of the list price falls to 10% for petrol and 13% for diesel cars (that’s compared to 15% and 18% plus the multiplier for higher emission cars). Below 75 g/km, the percentage falls to 5% for petrol and 8% for diesel. A zero emissions car has no benefit in kind. Note these thresholds are subject to rapid change.
- There is no upper limit on the list price. Abbott says this is important to note, because some contractors may remember the days when very expensive cars could be run quite cheaply with a low tax bill through a company. That’s no longer the case.
- Contractors looking at cars that don’t have an official CO2 emissions rating or list price must use HMRC guidelines based on engine size and market value. All cars over 15 years old can still be based on list price unless their market value exceeds £15,000.
Benefit in kind – can it be reduced?
“Most contractors will at some point ask the question, ‘How can I reduce my benefit in kind payments?’,” says Abbott. “The answer in most cases, with the exception of buying a car with lower emissions, is ‘you can’t’.” But there are some options that can mitigate the impact in some cases:
- HMRC rules say benefit in kind can be reduced by ‘employees’, or contractors who are directors and employees of their own business, making contributions towards the cost of their company car. To qualify, the personal contribution must be because of the private use element and not because a contractor wants to subsidise the purchase of a very expensive car by their company.
- Pool cars don’t attract benefit in kind. But to qualify as a pool car, the vehicle must be used by two or more employees, not normally kept at or near the home of the employees and any private use must be incidental to business use. Abbott confirms this is almost impossible for contractors to justify to HMRC.
- If the car is not available for private use, then there is no benefit in kind. As with pool cars, this is extremely difficult to prove and Abbott warns contractors that HMRC are incredibly strict. To be unavailable for private use, there must be no private use, the insurance must be only for business use, a detailed mileage log must be kept and a board minute signed to the effect that private use by directors and family is forbidden.
VAT and company cars
The rules here are a little simpler than those surrounding benefit it kind:
- Contractors can’t normally reclaim the VAT on the purchase of a company car
- Contractors can reclaim VAT on its running costs, so running a company car can be cheaper than running a personal car
- Contractors can reclaim VAT on business mileage, paid according to HMRC’s ‘advisory fuel rates’.
According to Abbott, contractors looking for basic business transport with no frills could find a company van is the best option: “The benefit in kind charge for a van is fixed at £3,000 for the vehicle and £550 for the fuel. This is significantly less than the benefit in kind charged on even basic models of car brands.
“In addition, commuting to a workplace that no longer qualifies as temporary is not counted as private use for vans, and benefit in kind can be avoided altogether if the contractor can prove insignificant private use.”
A Landrover Defender with seats in the back is a car. With a flatbed, it becomes a van. The difference in benefit in kind is huge
James Abbott, Abbott Moore LLP
A van is a commercial vehicle with at least a 1 tonne payload and can include 4-seater pick-ups with a flatbed. Abbott urges caution with choosing vehicles that qualify as vans: “A Landrover Defender with seats in the back is a car. With a flatbed, it becomes a van. The difference in benefit in kind is huge.”
Abbott warns that contractors also need to keep on top of ever-changing rules: “The government is expected to reduce emissions thresholds on an ongoing basis, which means holding on to older, higher emission cars will become increasingly expensive. But, equally, newer and more fuel efficient models are launched each year, meaning a contractor could find a new model with a higher list price is less expensive from a tax perspective than an older one with a lower list price!”