How will April's tax changes affect company cars?
17 January 2017
Author: Jack Carfrae
Tucked away in the Autumn Statement was a fairly significant piece of legislation dictating the way in which business cars are offered. From April 2017, employees with the choice of a conventional company car or a cash allowance will be taxed not on the option they choose, as is currently the case, but on whichever is the greater value.
For example, a driver might opt for a low-emitting company car to reduce their benefit-in-kind costs; however, if the driver is offered a cash allowance with a higher taxable value, they will pay tax on the latter. Ultra-low emission vehicles, currently defined by the Government as anything emitting 75g/km of CO2 or less, are the exception to the rule; they're exempt from the change as part of efforts to coax drivers into the cleanest types of transport, so those who choose one will pay benefit-in-kind on the car, as they do now.
"We've been told the mechanism is going to be through the P11D form and process," said Chris Chandler, principal consultant at leasing giant Lex Autolease. "That's where the Revenue will do the calculation, and the cash allowance piece will be included in that declaration. The onus will be on the employee and the business to declare on that P11D form what the cash allowance level is."
Vehicles ordered prior to April 2017 will continue to be taxed under current legislation for a further four years. "If you're still in a vehicle that's under 'grandfather rights' [an exemption also known as 'acquired rights'], then everything will flip to the new scheme in April 2021. Although it's unlikely [that a typical company car will still be in operation by that point], that is the absolute cut-off date," says Chandler.
The Government published additional information on the plans in its 5 December Finance Bill, but there are still a lot of unanswered questions, many of which crop up in day-to-day fleet management, and the industry is appealing for transparency.
"It's not really a lot more clarity than what we had in the Autumn Statement and there's a lot of information that wasn't covered," said Chandler. "What happens if somebody makes a private use or capital contribution? What if somebody inherits a car from an ex-employee of a different grade or they're promoted but they have to retain their current car until it's up for renewal? What if somebody [initially] has a rental vehicle when they join the company?
"It's all the complications that arise in an everyday fleet scenario where it's not as simple as 'a person joins the company' or 'your car's up for renewal'. There are still grey areas, and there will be until we have absolute clarity."
The move is unlikely to affect job-need drivers, as many will not be offered a cash allowance, and those that are will likely have the option removed. Perk fleet drivers, who have the option of a generous cash allowance alternative, are of greater concern though, as the new ruling could provoke a rise in grey fleet among this segment.
"The fear is that companies might say 'this is too much hassle, let's just give [user-choosers] cash', and we know that cash takers tend to drive older, higher-emitting vehicles," said Chandler. "If there is a greater uptake in cash allowances and grey fleet, [the company] has a massive responsibility to ensure that those vehicles and drivers are legal and fit for purpose.
One fleet manager said to me 'our grey fleet drivers don't do many business miles; they take the cash because they don't really need a car. If we start getting people who need a car taking the cash, our duty-of-care exposure and the admin to make sure we know what they're driving, that it's road legal etc, is significant.'"
Companies that use electronic P11D reporting systems may have to alter their reporting and data collection practices from April, too. "Businesses may have to change their P11D reporting systems and processes," added Chandler. "The P11D forms don't have to be in until July of 2018 for the relevant tax year, but people have got to make sure they're collecting the right data and they've got the right information for the beginning of the financial year."