'Green' measures have been
heavily promoted in recent Budget
statements and Finance Acts.
In some cases, this has resulted in
tax increases, but it’s not all bad
news, as some green measures
offer opportunities to save tax.
Here we look at how much a
company and its employees can
save by choosing a company car
with a low CO2 emission rating, instead
of an otherwise comparable higheremission
car.
We will compare two almost identicallypriced
5-door hatchbacks: the Renault
Megane 1.4 16v 100 Tech Run (list
price £13,495) and the Volkswagen
Polo 1.4TDi BlueMotion 2 (list price
£13,565). The petrol-engined Renault’s
CO2 emission rating is 165g/km, but the
diesel Volkswagen has a very low rating
of 99g/km.
For the sake of space, and to simplify
matters, we’re concentrating here
on companies only. Sole traders and
partnerships can make similar, if not
greater, savings, under Income Tax and
the national insurance rates appropriate
to them. Adjustments would also be
required for cars used privately by sole
traders or partners.
SAVINGS FOR COMPANIES
Capital allowances
The first tax consequence of buying a
company car is that tax relief is available
on the cost. This relief is given through
capital allowances. For cars purchased
on or after 1 April 2008, an annual 20
per cent writing down allowance (WDA)
is available, normally on a maximum
cost of £12,000. The WDA for our
Renault in the first tax year is £2,400
(£12,000 x 20 per cent.)
- Our Volkswagen, however, enjoys two
significant advantages due to the fact that
Di - a DPS please, with car pic large and man pic v small.
Green motoring:
how much can you its CO2 emission rating does not exceed
110g/km:
- a 100 per cent first year allowance
(FYA) is available, and the FYA is available on the full cost
(£13,565).
The FYA of £13,565 that is available
for the Volkswagen is therefore almost 6
times higher than the £2,400 WDA for
the Renault. Of course, this is just (excuse
the pun) an acceleration of the tax relief
that is ultimately due in either case, as a
balancing allowance would be available
on the eventual disposal of the Renault.
Nonetheless, the cash flow benefit in
year 1 is very substantial – an extra tax
saving of £3,126 for a company paying
corporation tax at the 28 per cent main
rate, or £2,344 for a small company
paying corporation tax at 21 per cent.
Hire costs
Many companies hire, rather than buy,
cars. Here, there is a tax deduction for the
hire charges, but this is normally restricted
for cars with a retail price of over £12,000
when new. There is, however, no restriction
for low-emission cars. In either case, if the
car is available for an employee’s private
use, only 50 per cent of the VAT input tax
is recoverable.
For comparison purposes we will assume
a similar contract hire cost of £9,678
over 3 years (including an initial payment
and 50% of the VAT), and large/small
company corporation tax rates of 28/21
per cent The total tax relief amounts to
£2,560/£1,920 for the Renault, but
£2,710/£2,032 for the Volkswagen –
a modest saving of £150/£112 for
one car, but potentially more
significant for even a small
fleet.
National
insurance
National insurance
Companies pay
national insurance on employees’ car
and fuel benefit in kind charges which
are based on CO2 emission ratings. For
2008/09 and 2009/10 the car benefit in
kind charge for the Renault is 21 per cent
of list price, increasing to 22 per cent in
2010/11, giving a total charge of £8,634
for those 3 years.
The same percentages are applied to
a fixed amount of £16,900 to arrive at
the fuel benefit in kind charge. The total
fuel charge for the Renault for the 3 years
would be £10,816. The combined car
and fuel benefit charge for the Renault is
therefore £19,450.
The applicable emissions-based
percentage for the Volkswagen is just 13
per cent, giving a total car benefit charge
of £5,289 and a total fuel benefit charge
of £6,591 for the 3 years – an overall
amount of £11,880.
Employers’ national insurance is payable
at 12.8 per cent so the saving on the
difference between the two cars of £7,570
would be £968, worth £697/£765 to a
large/small company after tax relief.
VAT fuel scale charge
Where fuel is provided for private use,
the business must account for VAT on the
value of the private fuel supplied, by way
of a CO2 emission based scale charge.
The charge varies slightly, depending on
whether the business chooses to account
for the VAT monthly, quarterly or annually. As most businesses
use quarterly accounting, we will use
the quarterly scale figures.
For the Renault, the quarterly charge
is £43.19 per quarter (£518 over 3
years at the current rate), but for the
Volkswagen it’s much lower: £20.55
per quarter (£247 over 3 years at the
current rate), a saving of £271.
Vehicle excise duty costs
The road tax, or VED, is also now
based on CO2 emission ratings.
Once again, this is a straightforward
calculation: the Renault falls into Band
D, with an annual charge of £145,
whilst the Volkswagen falls into Band
A, for which there is no charge! At
current levels, there is therefore a total
saving of £435 over 3 years for the
Volkswagen. The net saving after tax
relief is £313/£343 for a large/small
company.
Savings for employees
Benefit in kind charges
Employees pay both income tax and
national insurance on car and fuel
benefits in kind. We will base our
comparison on an employee with a
marginal income tax rate of 40 per
cent and a marginal national insurance
rate of 1 per cent.
As we’ve seen earlier, the difference
in the combined car and fuel benefit
charge for the 3-year period from
6 April 2008 is £7,570. For the
Volkswagen there would be a very
substantial income tax saving of
£3,028 and a national insurance
saving of £76.
Conclusion
It can be seen that significant
savings can be achieved
simply by keeping an eye
on CO2 emission ratings
when choosing a car.
Businesses should therefore choose
company cars very carefully – and where
employees are given a choice of car, they
should be made aware that their tax bill
will be directly related to the CO2 emission
rating.
One thing to watch is that the emissions
limit for 100 per cent capital allowances
purposes is 110g/km, but the limit to
qualify for the lowest benefit in kind
charges is 120g/km, so a car within the
lower limit should be chosen to maximise
the benefits for both the company and the
employee.
Additional savings may be possible in
future. It is currently proposed that from
2009/10 the capital allowances rules
will become entirely emission-based. The
£12,000 cost limit will no longer apply,
and all cars will be pooled. The annual
writing down allowance for cars with
emissions of over 160g/km will be halved,
from 20 per cent to 10 per cent. This will
increase the cash flow disadvantage of
purchasing higher-emission cars.
It is also proposed that the restriction on
tax relief for leased cars with a list price
of over £12,000 will be replaced by a
15 per cent disallowance for cars with
emissions of over 160g/km.
It is likely that the 160g/km limit will be
progressively reduced in future years.
The proposal to make the London
congestion charge emission-based has
been dropped, but road pricing is another
hot topic, and if introduced, it would not
be surprising if the trend towards emissionbased
charges were followed.
Paul Howard is Associate Director of
Chiltern Tax Support for Professionals –
Paul.Howard@chilterntsp.co.uk
