What is the background?
Company cars continue to be an attractive option for many employees, despite potentially significant tax liabilities. The introduction of electric and hybrid vehicles has resulted in reductions in tax costs, but that is unlikely to last beyond April 2025, when the rates of tax are due to be reviewed. The subject of company cars remains an emotive one for not only employees, but also HMRC, as employer reporting errors could result in a significant loss of tax and NI. Indeed, HMRC have recently successfully won a tax case where they reclassified a company van as a company car.
If an employer makes a mistake with reporting a car to HMRC on a P11D they could face a significant tax and Ni liability. HMRC could approach the employee for the tax liability, but typically seek recovery from the employer. For example, if a fuel benefit is omitted from a P11D for one car with a 25% CO2 emission, the liability could be around £35,000 plus interest and penalties as HMRC will look back six tax years.
What is the issue?
There are lots of potential pitfalls for employers. Some of the current hot topics and danger areas include:
As the use of a pool car by employees means that there will be no tax or NIC liability, HMRC will look very closely at any vehicle that is treated as a pool vehicle and not reported as a taxable benefit. There are many conditions that an employer needs to demonstrate apply before the exemption is available.
Provision of private fuel
If any fuel is provided to an employee for any private journeys then a taxable benefit will arise. Some employees “make good” (i.e. pay back their employer) all private fuel costs (usually when they have the use of the company fuel card) as by doing so there will be no taxable benefit. However, HMRC will look closely at this and expect detailed mileage records to be used to justify the amount made good.
Some company vans, depending on their purpose, can have the same characteristics as cars for tax purposes. The key question is whether the vehicle is constructed with the primary purpose of carrying goods. If the vehicle has a mixture of purposes (i.e. its construction was suitable for carrying both goods and people) then HMRC are likely to treat it as a car, although HMRC currently still consider double-cab pick-ups as being vans for the time being, despite them having a mixed use purpose.
List price and accessories
A car benefit is calculated based on the list price of the vehicle when first registered and the cost of any accessories added to the vehicle. Some employers have used the price they have paid for the car as market value or book value which is incorrect and could lead to additional tax and NIC liabilities.
In some situations, a hire car can also be a classed as a company car; for example, it is provided over a weekend, and used privately.
If any mistakes are made, the employer liability, which includes interest and potential penalties of up to 100%, is often substantial as HMRC may go back six tax years.
What do employers need to consider?
Employers need to:
- Identify all vehicles used by employees in their business, including hire cars;
- Consider which vehicles should be regarded as taxable benefits;
- Check to ensure P11Ds have been completed correctly or whether they need to approach HMRC to disclose any errors; and
- Ensure they are able to explain to HMRC (if they were to be challenged in the future) why they have adopted a particular approach.
How can UNW help?
Employers need to ensure they are dealing with their company cars correctly. Our employment tax specialists have expertise in the tax and NI treatment of company cars. They regularly undertake reviews for clients to ensure they are compliant and are not facing an unexpected liability.
Our reviews typically proceed as follows:
- On-site meeting to understand any issues;
- Identification of all vehicles (not just cars);
- Establishing the tax and NI treatment for each;
- Clarification of points and quantification of potential liabilities;
- Feedback report; and
- Disclosure to HMRC if necessary.
If you would like more information about this, or any other employment tax related matter, please contact:
Employment Taxes Partner
T: 07810 852 362
Employment Taxes Senior Manager
T: 07392 870 199
Employment Taxes Senior Manager
T: 07793 325 690