Company Cars – going ‘green’ with low emissions

One of the major factors in the emission of Green House Gases is the global use of diesel and petrol across society – particularly when it comes to business.  As such, many businesses now include 'green' aspects within their company policies, values and objectives with the aim of becoming more environmentally friendly.  One added benefit to being 'greener' is the tax deductions available for low emission company cars.

Company Cars – going ‘green’ with low emissions

In most cases, the cost-benefit position when considering having a company car is:

1. If you own the company (and by that I mean a limited company), the company and personal tax costs typically outweigh the benefit of you having a company car
2. If you are an employee or self-employed, typically the personal tax cost arising from a company car is less the cost of owning and operating a car privately

But then ‘green’ cars came along – i.e. cars with very low or no CO2 emissions – and this somewhat changed the dynamic. We therefore need to go ‘back to basics’ and look at the tax issues surrounding motor cars.

Personal tax

If you have a company car, there are essentially two possible tax charges:

1. A tax charge for having a company car; and
2. (if the employer also provides you with fuel for private use) a tax charge for the private fuel

Both charges are based upon the CO2 emission level of the car – the greater the emissions, the greater the tax charge [with diesel engine cars suffering a surcharge compared to petrol engines].  The emission level is equated to a fixed percentage that ranges from 0% to 37%. The car benefit is calculated from the original list price (from new) of the vehicle multiplied by the fixed percentage. The car fuel benefit, if applicable, uses the same percentage multiplied by £24,500.

Business Tax

Where a business operates a company car, it may claim a tax deduction against the cost of owning and operating the vehicle. Where a business owns a car, it can claim a tax deduction of 18% per annum against the cost of the vehicle, however that is reduced to 6% for higher emission cars.  The rules operate in a way that means that, typically, the business will take a long time to fully recover the cost of the vehicle against its tax. The business also pays National Insurance on the value of any car and fuel benefits in kind provided to employees.

VAT

Although there is no difference in treatment between standard motor cars and ‘green’ cars, it is worth noting that, in general, a business cannot claim back VAT on the purchase of a motor car but can claim back part of the VAT on a vehicle rental and can claim VAT back on the running costs and fuel.

So where do ‘green’ cars fit in to this?

The personal tax charge for a zero emission motor car is currently £nil.  In addition, there is no ‘fuel’ benefit in kind if the vehicle is charged using business electricity.  This is a huge personal tax saving compared to a standard vehicle. For other green cars (cars with some electric motor capacity) the benefit in kind is based on the range of the electric element with the benefit in kind ranging from 0% - 12%.  Again there is no benefit in kind for charging the vehicle, however the fuel benefit in kind will apply if private petrol or diesel is paid for by the business. In addition, if a motor car has an engine emission of up to 50g CO2/km, the business can claim an immediate tax deduction of 100% of the purchase price.  

Conclusion

Electric and hybrid vehicles are relatively expensive compared to standard petrol/diesel engines.  For me personally there are two fundamental questions:

1. Is there a strong business case for investing in a low emission vehicle; but if not
2. Is there evidence to suggest that the overall carbon footprint of the vehicle (from construction, to operation and end of life) is actually lower than a standard vehicle

Ultimately there are significant tax advantages to low emission vehicles and therefore it is certainly worthwhile considering these as an option.   For more government guidance on low emission and electric vehicles, grants and research, please visit the government website. If you would like more advice on this, please contact us or speak to your usual Haines Watts contact.