p01_DL_TOY TAX_Apr'11:Layout 1
5/4/11
18:48
Page 1
TAX, FINANCE AND COMPANY CARS ALL YOU NEED TO KNOW 2011/12
Toyota & Lexus Fleet Services
toyotalexusfleet.co.uk
p02-11_DL_INTRO_Capital_TOY TAX_Mar'11:Layout 1
Disclaimer All rights reserved. Material contained in this publication is protected by copyrights and may not be produced in whole or in part, without prior permission from Toyota/Lexus Fleet. Views expressed within this Tax, Finance and Company Cars guide are not necessarily those of Toyota/Lexus Fleet which accepts no responsibility for them. All details correct at time of going to press, April 2011. The information contained within Tax, Finance and Company Cars is for guidance only. Companies and individuals should always consult their accountants on their individual situation.
7/4/11
10:56
Pag
p02-11_DL_INTRO_Capital_TOY TAX_Mar'11:Layout 1
Toyota & Lexus Fleet Services
CONTENTS ( 2011 Budget Summary )))))) 05 ( Tax Relief )))))) 06 ( Fuel Management )))))) 12 ( Cash or Car? )))))) 14 ( Approved Mileage Allowance Payments (AMAPs) )))))) 15 ( Salary Sacrifice )))))) 18 ( Driver Taxation )))))) 20 ( Rules of Thumb )))))) 26 ( Finance )))))) 28 ( GLOSSARY )))))) 32
6/4/11
09:41
Pag
p02-11_DL_INTRO_Capital_TOY TAX_Mar'11:Layout 1
TAX, FINANCE AND COMPANY CARS A good company car scheme continues to play a major role in the recruitment and retention of the very best employees. But what defines a good company car scheme and what considerations should an employer or employee take into account when choosing the right vehicle? Vehicles must meet the needs of the business, satisfy individual aspirations of the drivers and comply with financial and environmental objectives. Why is understanding tax so important? It’s because getting it wrong can be frighteningly expensive. In 2002 the Government successfully demonstrated how it can use tax as a way of influencing the choices of the company car driver by changing the benefit-in-kind rules. In 2009 the Government again used tax to influence decisions. This two-pronged approach has continued and these changes have forced car manufacturers to respond by producing greener and cleaner vehicles to remain attractive to businesses and their drivers. As both a carrot and stick successful car manufacturers will continue to develop cars that are environmentally friendly and good company car schemes will include tax as a key part of their decision process. Most (normal) people will not have tax calculations high on their list of favourite pastimes so this booklet is written to help those (normal) people. Where possible we have used plain English and used real working examples.
Why is Toyota and Lexus Fleet Services producing this booklet? Business customers need to balance the aspirations of the driver against the needs of the company; this is where Toyota and Lexus products have a distinct advantage. Not only are the cars attractive to employees, the low emissions (especially on the hybrid range) make the after-tax whole life costs appealing to even the most hardened of accountants.
04
5/4/11
20:27
Pag
5/4/11
In 2002 when the CO2 based tax structure was introduced the lowest tax rates were only available on a few non-mainstream vehicles; nine years later the story is very different. For example, the new Lexus CT 200h has CO2 emissions of only 94g/km (10% benefit in kind charge and 100% first year capital allowances) and achieves 68.9mpg. In a time of austerity it proves that choosing the right car can keep accountants, drivers and the environment happy. Main announcements • The car benefit rates for 2013/14 were confirmed with a new lower threshold of 95g/km for the 10% rate introduced from that year with CO2 emissions between 95g/km and 220g/km increased by 1% per year; • Fuel benefit charge increased to £18,800; • AMAPs to rise to 45p per mile for the first 10,000 miles for cars and vans; • Changes to the VAT fuel scale charge; • The freezing of the van benefit charge and van fuel benefit charge for 2011/12; • VED to rise in line with inflation, and increases to the ‘showroom tax’; and • The introduction of a fuel stabiliser. In addition, it should be noted that with effect from April 2012 the rate of capital allowances for the main and special rate pools will fall to 18% and 8% respectively. Furthermore the main rate of corporation tax will fall by 1% for each of the next 3 years, so that the main corporation tax rate will be 23% from April 2014. Notwithstanding these changes, the company car benefit charge for the Lexus CT 200h will be 10% of list price until at least April 2014 and it continues to qualify for 100% first year allowances in the first year of purchase.
)))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))
Budget 2011 For several years the way business cars have been taxed has rewarded both businesses and drivers who choose low emission vehicles; Budget 2011 continues this strategy.
Budget 2011
)))))))))
p02-11_DL_INTRO_Capital_TOY TAX_Mar'11:Layout 1
05
20:29
Pag
)))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))) Tax Relief )))))))))
p02-11_DL_INTRO_Capital_TOY TAX_Mar'11:Layout 1
06
What does tax relief mean? Limited companies pay tax on the profit they make (Corporation Tax). Very broadly, as profit is the difference between revenue and costs, when a company incurs costs, its profits, and hence its tax bill is reduced. So when we talk about tax relief we simply mean a company will pay less tax. Just to complicate things not all costs reduce profits in the same way; for example buying a car or other capital equipment has special rules that affect when and how tax relief is given. In this booklet, reference is made to companies and the application of corporation tax. Other organisations, such as sole traders and partnerships (including Limited Liability Partnerships), will pay income tax, rather than corporation tax, but the tax relief available for business cars will be calculated in the same way. Meanwhile, charities and public sector organisations, such as councils, should not be subject to income or corporation tax. However, this booklet should still provide a valuable reference for the application of National Insurance and how their employees will be taxed on company car and private fuel benefits.
A) How does a business get tax relief if it buys its cars? Before we look at tax relief it’s important to understand what we mean by buying a car. For tax purposes a company could buy a car using any one of the following methods:
• Outright Purchase This is simply where a car is bought outright using either cash or bank borrowings such as an overdraft.
• Hire Purchase and Conditional Sale Hire Purchase, or HP as it’s often called, is where a car is bought over an agreed period of time. Normally you would expect to see a deposit followed by a number of equal monthly payments. Although ownership does not pass until all the payments are made, for tax purposes it’s treated as if it has.
• Lease Purchase Despite the name Lease Purchase is still a way of buying a car. Unlike Hire Purchase a Lease Purchase agreement has a final, larger (balloon) payment that has the effect of reducing the size of the monthly payments.
Calculating tax relief... So, now we know what can be classed as buying a car how does a company work out how much tax relief it can get? You could be excused for thinking that if a company spends £10,000 on a car it could immediately have
5/4/11
20:28
Pag
£10,000 of tax relief. Or, you may think that if that car depreciates by £3,000 in a year that you could have £3,000 of tax relief in that year. Usually tax is never that straight forward. For cars, and other plant and machinery, tax relief is calculated via a system known as capital allowances. The amount of the allowance and when you get it depends on the type of asset. Luckily for cars we only have three categories to think about.
Table A Tax Relief Rules • Cars with CO2 emissions of 110g/km and below will attract a 100% writing down allowance (best position)
• Cars with CO2 emissions of 111g/km to 160g/km will attract a 20% writing down allowance • Cars with CO2 emissions above 160g/km will attract a 10% writing down allowance (worst position) Don’t worry about all the jargon creeping in here, it will become clear a little further on. But to put it simply the lower the emissions the quicker the company gets its tax relief.
What is a Writing Down Allowance (WDA)? A writing down allowance is the amount of tax relief you may claim in a year. To show this in real terms let’s look at a typical business that buys a car costing £10,000 with CO2 emissions of 136g/km. Example • Year 1 The company can claim a Writing Down Allowance (WDA) of 20% for a car emitting 136g/km (see the rules in table A above); that’s £2,000 it can use to reduce its taxable profits. So if it has a tax rate of 26% it will actually save £520 in real money. • Year 2 The company has already claimed WDAs of £2,000 so we say it starts the year with a Tax Written Down Value (TWDV) of £8,000. This year it can still claim 20% in capital allowances so it has a WDA of £1,600, a real tax saving of £416, and a TWDV of £6,400 to carry into year three.
What if the company buys another car? To save the company having to handle lots of individual calculations all of its cars are lumped together in what is called a tax pool (you may have heard this referred to as an asset pool). If a company has cars with CO2 emissions in each of the three groups shown above it will need to have three separate asset pools. All the company needs to do is add any new additions to the previous year’s TWDV and it has the new year’s pool value.
11/4/11
)))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))) Tax Relief )))))))))
p02-11_DL_INTRO_Capital_TOY TAX_Mar'11:Layout 1
07
15:02
Pa
)))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))) Tax Relief )))))))))
p02-11_DL_INTRO_Capital_TOY TAX_Mar'11:Layout 1
08
Example A company buys one car every year, each having CO2 emissions of between 111g/km and 160g/km which attract 20% tax relief, its car pool would look like this;
Year 1 A Purchases
£20,000
B TWDV
£20,000
C Capital Allowances (B X 20%)
£4,000
D Tax Relief (C X 26% *)
£1,040
E
£16,000
TWDV c/f
Year 2 F
Purchases
£20,000
G TWDV b/f (E+F)
£36,000
H Capital Allowances (G X 20%)
£7,200
I
Tax Relief (H X 26%)
£1,872
J
TWDV c/f (G-H)
£28,800
Year 3 K Purchases
£12,000
L
£40,800
TWDV b/f (J+K)
M Capital Allowances (L X 20%)
£8,160
N Tax Relief (M X 26%)
£2,122
O TWDV c/f (L-M)
£32,640
* Assumes tax rates and allowances for 2011/12 apply throughout the whole term
What happens when the car is sold? When the company sells the car the proceeds are added back into the pool. Example In year four the company sells one of its cars for £7,000
Year 4 P
Purchases / Sale proceeds
-£7,000
Q TWDV b/f (O-P)
£25,640
R Capital Allowances (Q X 20%)
£5,128
S
Tax Relief (R X 26%)
£1,333
T
TWDV c/f (Q-R)
£20,512
What about a low emission car. Does a company really get 100% of its tax relief in the first year if it has CO2 emissions of less that 110g/km? Yes it does. The Government wants to encourage companies to buy greener and cleaner vehicles, such as hybrids, so it gives incentives to companies that do. For example, a company buys a Toyota Hybrid with CO2 emissions of 89g/km for £20,000. The company can claim a WDA of 100% (see the rules above); that’s £20,000 it can use to reduce its taxable
5/4/11
20:30
Pag
profits. So if it has a tax rate of 26% it will actually recover £5,200 in real money in year one compared to only £1,040 if the car had emissions of between 111 and 160g/km. The Toyota Hybrid significantly enhances cash flow by £4,160 in one year!
Can a company get tax relief on any interest charges? Under normal circumstances any interest charges incurred during the year can be offset against the company’s taxable profits. For some finance agreements where a large option to purchase fee is charged, specialist advice should be sought. (Usually this would be if the option to purchase fee exceeds 1% of the car’s retail price).
Can a company recover the VAT on cars it buys? Unfortunately VAT is not recoverable if the car is available for any private use. This doesn’t mean that the car is used privately, rather it means it has the potential of being privately used. Over the years many companies have tried to argue this point, but very few have succeeded. VAT can be recovered on any maintenance or service agreements that the company may take out.
B) How does a business get tax relief if it leases its cars? Leasing usually falls into two main types where cars are concerned.
• Operating Leases (Contract Hire) In the car market Operating Leases are usually referred to as Contract Hire. For a set monthly rental the leasing company (the Lessor) provides a full package normally covering everything except fuel and insurance. At the end of the agreement the car is simply handed back to the leasing company. Provided the car has completed no more miles than the agreement stated and is in a reasonable condition, no more money is due.
• Finance Leases With a Finance Lease the monthly rentals are normally calculated to meet the cash flow needs of the business. At the end of the lease the customer (the Lessee) usually receives the major share of the sales proceeds. With leases the rentals the company pays during the year are normally fully offset against its taxable profits, therefore it can’t claim capital allowances as well. But rentals may not be fully offset against profits if; • The car has CO2 emissions over 160g/km, • The rentals aren’t evenly spread over the life of the lease, or • The lease has clauses that may allow the company to eventually own the car.
5/4/11
)))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))) Tax Relief )))))))))
p02-11_DL_INTRO_Capital_TOY TAX_Mar'11:Layout 1
09
20:30
Pag
)))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))) Tax Relief )))))))))
p02-11_DL_INTRO_Capital_TOY TAX_Mar'11:Layout 1
10
Can the company (lessee) still get capital allowances for cars it leases? With leases the rentals the company pays during the year are normally fully offset against its taxable profits, therefore it can’t claim capital allowances as well. Rentals may not be fully offset against profits if; • The car has CO2 emissions over 160g/km, • The rentals aren’t evenly spread over the life of the lease, or • The lease has clauses that may allow the company to eventually own the car. Example A company takes out a Contract Hire agreement for a car with CO2 emissions of 135g/km over three years (we will assume it does it in the first month of its financial year). The terms say it pays 3 rentals of £250 in advance followed by 33 further monthly rentals (36 X £250 in total). • Year 1 The company pays 14 rentals (3 plus 11) 14 X £250 = £3,500 which can be offset against taxable profits. Assuming the company has a 26% tax rate this means it gets tax relief of £910 (£3,500 X 26%). • Year 2 The company pays 12 rentals 12 X £250 = £3,000 which can be offset against taxable profits. It gets tax relief of £780 (£3,000 X 26%). • Year 3 The company pays the remaining 10 rentals 10 X £250 = £2,500 which can be offset against taxable profits. It gets tax relief of £650 (£2,500 X 26%).
What happens if the car has CO2 emissions over 160g/km? To encourage companies to run more environmentally friendly vehicles if a car has emissions of 161g/km or over, 15% of the rental will not get any tax reliefw (i.e. only 85% relief on the rental is available). Example A company takes out a Contract Hire agreement for a car with CO2 emissions of 185g/km over three years (we will assume it does it in the first month of its financial year). The terms say it pays 3 rentals of £250 in advance followed by 33 further monthly rentals (36 X £250 in total). • Year 1 The company pays 14 rentals (3 plus 11) = £3,500, of which 85% can be offset against taxable profits. Assuming the company has a 26% tax rate this means it gets tax relief of £774 (£3,500 X 85% X 26%).
5/4/11
20:31
Pag
• Year 2 The company pays 12 rentals 12 X £250 = £3,000 of which 85% can be offset against taxable profits. It gets tax relief of £663 (£3,000 X 85% X 26%). • Year 3 The company pays the remaining 10 rentals 10 X £250 = £2,500 which can be offset against taxable profits. It gets tax relief of £553 (£2,500 X 85% X 26%).
Can a company recover the VAT on its lease rentals? For reasons we will discuss later in “Is it better to buy or lease cars?”, a company can normally only recover the VAT on 50% of its lease rentals. It can recover 100% of the VAT on any maintenance or service payments.
Is it better to buy or lease cars? In August 1995 the VAT rules changed so that businesses that acquire cars wholly for business use may recover the VAT. This change meant that leasing companies (who, in reality, never actually use the car at all) can use the extra savings to reduce their lease rentals. Despite the rule restricting the VAT recovery available to the user of leased cars to 50%, the overall effect was a massive increase in the amount of leased cars. This doesn’t mean that leasing is always the cheapest or most suitable form of finance for every company. Many other factors, such as corporation tax rates, cash flow, CO2 emissions and even the vehicle’s use should be considered. If in any doubt a business should always seek some form of professional help before committing to any long term contract.
5/4/11
)))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))) Tax Relief )))))))))
p02-11_DL_INTRO_Capital_TOY TAX_Mar'11:Layout 1
11
20:31
Pag
)))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))) Fuel Management )))))))))
p12-13_DL_Fuel MGT_TOY TAX_Mar'11:_Layout 1
12
5/4/11
Is offering fuel for private use a good idea? The driver’s position In 1997, when Gordon Brown became Chancellor he stated that the provision of free fuel to company car drivers encouraged unnecessary miles to be driven. He decided to tax it until it became an uneconomic benefit and many years of tax increases followed. From April 2011 the ‘fixed sum’ used when calculating the fuel benefit charge rose to £18,800! This means that a 40% tax payer, driving a typical diesel company car with CO2 emissions of 155g/km will pay £150.40 per month in tax for having free private fuel regardless of how many miles he actually drives. Example
The driver’s calculation Find the car’s appropriate tax percentage for its CO2 emissions from the table on page 22, adding 3% if the car is a diesel. For the example above this is 24% (a diesel car with emissions of 155g/km attracting the 3% diesel surcharge). Then multiply this number by the fixed sum of £18,800. £18,800 X 24% = £4,512 Now multiply this number by the driver’s tax rate. £4,512 X 40% = £1,805. This is the amount of tax actually paid per year, which is £150.40 per month. If we assume the driver’s car has fuel consumption of 50mpg and diesel costs £1.30 a litre we can calculate how many miles he needs to drive before taking free private fuel from his employer becomes worthwhile. For £150.40 the driver can buy 116 litres of fuel (£150.40 ÷ £1.30). Dividing 116 by 4.54609 gives 25.5, that is how many gallons of fuel are used. As the car does 50 miles to the gallon multiplying this by 25.5 tells us that the driver is paying the equivalent of 1,275 private miles each month (50 X 25.5 = 1,275); so the driver must cover 15,300 private miles a year before breaking even. If he does less than this mileage he should stop paying the tax and buy his own private fuel.
The company’s position Let’s assume that the employee above actually drove 16,000 private miles in the year. He works out that buying this fuel would cost him £1,891 which is £86 more than his tax charge of £1,805. He thinks “thanks very much, I will keep taking the employer provided private fuel”. But is this a good idea from the company’s view?
20:23
Page 1
5/4/11
The company’s calculation The company has to buy the driver 16,000 miles worth of fuel. That costs the company the same as the driver, which is £1,891 The company can recover the VAT which would be £315, but to do so it has to pay a VAT scale charge of £220.83 (see Fuel Scale Charges table below) It also has to pay Class 1A National Insurance of 13.8% on the fuel benefit charge. Class 1A NIC therefore costs an additional £623 (£4,512 X 13.8%) So the company’s cost of providing the driver with a benefit worth £86 is: • • • • • • •
Fuel VAT recovered VAT scale charge (12 months) Class 1A NIC Total Less 26% tax relief Cost of proving fuel
£1,891 £(315) £221 £623 £2,420 £(629) £1,791
Or, more simply it costs the company £1,791 to give the driver £86! It doesn’t take the world’s greatest financial genius to work out that for most drivers and companies, giving free fuel for private use is a complete waste of money, especially when the average driver will drive less than 1,000 private miles a month.
Fuel scale charges from 1st May 2011 CO2 (g/km) 120 or below 125 130 135 140 145 150 155 160 165 170 175 180 185 190 195 200 205 210 215 220 225 or above Correct at April 2011
VAT due per vehicle 3 months 26.17 39.33 42.00 44.67 47.17 49.83 52.50 55.17 57.67 60.33 63.00 65.67 68.17 70.83 73.50 76.17 78.67 81.33 84.00 86.67 89.33 91.83
VAT due per vehicle 12 months 105.00 157.50 168.33 178.33 189.17 200.00 210.00 220.83 230.83 241.67 252.50 262.50 273.33 284.17 294.17 305.00 315.00 325.83 336.67 346.67 357.50 367.50
20:23
)))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))) Fuel Management )))))))))
p12-13_DL_Fuel MGT_TOY TAX_Mar'11:_Layout 1
13
Page 2
)))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))) Cash or Car? ))))))))
p14_DL_Cash Alt_TOY TAX_Mar'11:_Layout 1
14
5/4/11
Should a company offer cash alternatives to company cars? Calculating the amount of cash to give drivers as an alternative to a company car is not a straightforward exercise. Unfortunately many keen number crunchers faced with this task are quick to rush for their calculators, only to find that their results are not well received. Before any calculations are started, it is essential that all stakeholders within the organisation agree exactly what the company is trying to achieve. A good starting point would be to ask the following questions:
Questions to ask • Why are we offering a cash alternative? • If we are trying to save costs is cash the only option? • What message do we want to give to our company car drivers? • Can we accept that there will be winners and losers amongst our drivers? • Do we understand the non-financial implications in terms of risk? • Should we have a contingency for error or changing circumstances? • Will our administration systems be able to cope? When this is completed you should be in a position to start looking at the numbers, but again important decisions have to be made. Should the company: • Offer drivers an amount that leaves the company in the same financial position? • Try to find a situation where the employees and the company are no worse off? • Get rid of company cars at any cost? • Offer each driver an individually calculated allowance considering his or her private mileage? • Calculate one allowance for each grade? • Calculate a cash allowance assuming the employee will not run a car for business purposes. • Calculate the allowance making maximum use of Approved Mileage Allowance Payments (see facing page for AMAP rates). Now imagine doing these calculations for 500 drivers. Each driver has a different car and vastly different private mileage, some still get free fuel and others are very high insurance risks. It is totally impractical to start number crunching without specialist software or at least a very good knowledge of spreadsheets and a large jar of aspirin.
20:22
Page 1
5/4/11
What are Approved Mileage Allowance Payments? Paying a car allowance based on Approved Mileage Allowance Payments (AMAPs) is often very attractive as the driver receives these payments free of income tax, as opposed to receiving a monthly cash payment, which would be taxed as if it were salary. In other words, the company can give the same amount to the driver for less total cost. From 6 April 2011 the Approved Mileage Allowance Payments rates are: Engine capacity Up to Over All cars 10,000 miles 10,000 miles Pence per mile 45p 25p If the company makes mileage allowance payments that are greater than the AMAPs the payments will be taxable. However, if the employee is paid a rate that is less, the employee can get income tax relief based on the difference. The equivalent payments for National Insurance purposes, are Relevant Motoring Expenses. The NI free qualifying amount is 45 pence per mile regardless of mileage. Example Phil uses his own car for business travel. In 2011/2012 he drives a total of 12,000 business miles. The tax-free amount Phil can be paid would be: 10,000 miles at 45p 2,000 miles at 25p Tax-free amount
£4,500 £500 £5,000
Scenario 1: The Company pays 50p per business mile. Phil has additional taxable income of £1,000 (12,000 X 50p = £6,000 - £5,000 AMP = £1,000). Scenario 2: The Company pays 30p per business mile and Phil receives £3,600 (12,000 X 30p). Phil can also claim tax relief on £1,400 (£5,000 - £3,600). While paying AMAPs may seem like a great idea the company should consider; • What it will do if the employee only drives a few business miles a year; • Employees seeing what a great deal they are getting and driving unnecessary miles; • If it’s practical to pay a blended rate of cash and AMAPs.
Cash allowances and free private fuel If an employer provides free private fuel to an employee who drives a company car, the fuel benefit calculation is shown in the fuel management section. If an employee doesn’t have a company car, fuel benefit rules don’t apply and it’s necessary to calculate the tax based on the actual cost of the fuel.
19:55
)))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))) AMAPs )))))))))
p15-17_DL_AMAPs_TOY TAX_Mar'11:Layout 1
15
Page 1
)))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))) AMAPs )))))))))
p15-17_DL_AMAPs_TOY TAX_Mar'11:Layout 1
16
6/4/11
Interestingly when many companies originally established cash allowance schemes the tax cost of free fuel was factored into the total calculations. As free fuel generates a relatively high tax charge for the employee, and the employer still has to pay for the fuel, this has resulted in many cash allowances being completely inefficient.
Case Study Ben is a higher rate tax payer who drives 500 business miles a month. His employer gives him a cash allowance of £500 a month and pays 12p a mile for business fuel. Ben’s brother, Chris, receives a cash allowance of £215 a month and his company pays him full AMAP rates. Just like his older brother, Chris drives 500 business miles a month and is a higher rate tax payer.
Questions 1. Who has the best deal Ben or Chris? 2. Who works for the smartest employer? (We can trust you not to look at the answers below before giving it some thought.)
Answers 1. Both brothers would receive the same net payment. 2. Chris, as his employer, would be nearly £1,908 better off every year.
How does it work? If we take Ben’s cash allowance of £500 and add his fuel reimbursement of £60 (500 x 12p) his car payments total £560. Being a higher rate taxpayer Ben pays a total of 42% tax and employee’s National Insurance (“NI”) on his cash allowance; this totals £210 (500 X 42%). As a result, Ben actually receives £350 per month to buy and run his car. If we were to give Ben a cut down salary slip it would look like this: A
Cash allowance
£500
B
500 business miles @12ppm
£60
C
=A+B
£560
Less E
National Insurance (2%)
£10
F
Income tax (40%)
£200
G
Total deductions (E + F)
£210
H
Net pay (C - G)
£350
09:57
Page 2
5/4/11
Chris, as we know receives the same net payment of £350. We know his company pays him full AMAP rates, which can be paid tax and NI-free. That means Chris’s mileage reimbursement is £225 (500 miles x 45p). Using a very sharp pencil, I can work out that a gross cash allowance of only £215 is needed to achieve the magic, net car payment of £350. If we were to give Chris a cut down salary slip it would look like this: A
Cash allowance
£215
B
500 business miles @45ppm
£225
C
=A+B
£440
Less E
National Insurance (2%)
£4
F
Income tax (40%)
£86
G
Total deductions (E + F)
£90
H
Net pay (C - H)
£350
Finally here’s where Chris’ employer’s savings come from: A
Reduced salary
£285
B
Reduced employer’s NI
£39 (£285 x 13.8%)
C
Plus increased mileage rates
£(165)
Total saved (A + B) - C
£159 per month
This represents an equivalent cash saving of £1,908 each year for the company. • While the savings may look great the administration and non financial implications mean these schemes are usually only operated by either vary large fleets or those with a very specific requirement.
20:21
)))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))) AMAPs )))))))))
p15-17_DL_AMAPs_TOY TAX_Mar'11:Layout 1
17
Page 3
)))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))) Salary Sacrifice ))))))))
p18-19_DL_Salary Sacrifice_TOY TAX_Mar'11:Layout 1
18
What’s a Salary Sacrifice scheme? Any smart employer will understand the logic behind offering staff the most attractive and flexible salary package possible. With company cars still being one of the most attractive and sought after benefits, a great car scheme is usually a real winner. 30 years ago employees with a taxable income of £30,000 suffered a marginal tax rate of 65%. On the other hand the tax on company cars was very low, which explains the UK anomaly of perk and second cars; it was simply more tax efficient to reward staff with cars. Today the highest employee’s tax rate is 50% while the benefit in kind on a petrol company (or even a second) car with emissions of 120g/km or less, is only 10% of its list price. Or, in the case of a Lexus CT 200h with a list price of £23,430 it will only cost the driver £78.10 in tax per month for a 40% tax payer. What a fantastic deal! On top of the tax saving the employee also benefits from the company’s volume discounts, while the business will have the ability to recover VAT, and save National Insurance. Once again paying employees in cars rather than cash makes good financial sense as the tables below show. The following table shows a real example using a Lexus CT 200h to show the employee’s monthly saving where the employer sets the salary sacrifice at the amount needed to ensure that all the savings are retained by the employee and the employer is kept cost neutral. Basic Higher Additional rate (20%) rate (40%) rate (50%) Monthly rental including service, maintenance and repairs, (inc VAT)
£440.40
£440.40
£440.40
Salary sacrifice
£376.35
£376.35
£376.35
Income tax and NI savings
£81.38
£79.97
£98.08
Net cost to employee
£294.97
£296.38
£278.27
Total savings for employee
£145.43
£144.02
£162.13
Rather than paying £440 a month in rental direct from net salary, by using a salary sacrifice scheme an employee paying higher rate tax could have the same vehicle for just £296.38 a month, saving £144. In reality, the employer is likely to incur administration costs. Therefore the scheme can be adjusted so the employee and company can share the savings so both are better off.
5/4/11
20:19
What does the taxman think? In very simple terms the decision regarding the salary and perks an employee receives is between themselves and their employer (as long as the tax and National Insurance is correctly paid). We would caution employers entering into such a scheme to remember that HMRC could decide to amend the rules, as it did with home computing schemes in 2006. Or, if the tax man feels that the arrangements are not correctly established and documented he might make life very difficult for all concerned. One thing he will look for is the employee’s ability to give up the company car and return to the being paid the cash in this case the employee may be liable for tax on the higher amount. This should be seriously considered in any scheme design and documentation.
Is it right for every company? Salary sacrifice certainly has considerable benefits but unless you understand the needs and motivations of your employees it could be a non starter. For example, how many of your employees would actually want to run a new car even if it was considerably cheaper. Or, if your average employee is only with you for 18 months how would you cope with all the early terminations? On the other hand if your employee base is well established, reasonably well paid, and has a need to commute fairly long distances, or has a need for a second family car it could be very well received. Therefore before any scheme is launched proper staff consultation needs to be carried out with input from as many business functions such as HR and finance as possible. In summary if a salary sacrifice scheme is entered into without a full understanding of the needs and aspirations of employees it could be a very expensive red herring. However for the right employer with the right staff profile it can be a real winner.
Could salary sacrifice work on a second car? Absolutely. Second cars are taxed in the same way as a first car, so a driver paying tax at 40% who chooses a Toyota Hybrid costing £20,000 will only pay £66.66 a month in tax. That’s great tax planning.
5/4/11
)))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))) Salary Sacrifice ))))))))
p18-19_DL_Salary Sacrifice_TOY TAX_Mar'11:Layout 1
19
20:20
)))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))) Driver Taxation )))))))))
p20-25_DL_Driver Tax_TOY TAX_Mar'11:Layout 1
20
5/4/11
How does a driver work out the tax on a company car? (Benefit in Kind - BiK) Calculating the income tax a driver will pay for use of a company car is relatively straightforward, although certain rules apply for accessories, driver contributions and any periods when the car is unavailable. If we want to calculate the tax a driver will pay on a company car the table (consult pages 22-23) provides the appropriate percentage that is applied to the car’s CO2 emissions. Example
Petrol Olivia has a petrol company car which has CO2 emissions of 135g/km and a P11D* price of £20,000. She is a 40% tax payer. Petrol P11D* price
2011-12 £20,000
2012-13 £20,000
Percentage charge for 135g/km
17%
18%
Car benefit charge Tax payable per annum
£3,400 £1,360
£3,600 £1,440
*The P11D value of a car comprises the list price, including VAT, plus any delivery charges, but does not include the car's first registration fee or its annual road tax.
Example
Diesel Victoria has a diesel company car which has CO2 emissions of 135g/km and a P11D* price of £20,000. She is a 40% tax payer. As it is a diesel car it attracts a 3% benefit supplement due to the relatively high levels of NOx and particulate emissions from diesel engines. Diesel P11D* price
2011-12 £20,000
2012-13 £20,000
Percentage charge for 135g/km (inc 3% supplement)
20%
21%
Car benefit charge £4,000 Tax payable per annum £1,600
£4,200 £1,680
What happens with ultra-low emissions cars? Although no mainstream cars currently fall into the ultra low emission range, i.e. those with emissions of 75g/km or less, several manufacturers are working hard to meet this goal. However, vehicles do exist that attract the 10% rate of tax such as the Toyota Auris Hybrid (pictured right) which produces only 89g/km of CO2.
20:16
Page 1
“
Vehicles do exist that attract the 100% WDA and the 10% BiK rate of tax such as the Toyota Auris Hybrid, which produces only 89g/km of CO2
5/4/11
20:16
)))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))) Driver Taxation )))))))))
p20-25_DL_Driver Tax_TOY TAX_Mar'11:Layout 1
21
Page 2
)))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))) Driver Taxation )))))))))
p20-25_DL_Driver Tax_TOY TAX_Mar'11:Layout 1
22
5/4/11
Company car tax benefit rates 2011-14
Taxable percentage of list price CO2 (g/km)
2011/12 1,4
2012/13 2, 4 2013/14 3, 4
05
0
0
0
1-756
5
5
5
76 – 94
10
10
10
95 – 99
10
10
11
up to 100
10
11
12
up to 105
10
12
13
up to 110
10
13
14
up to 115
10
14
15
up to 1207
10
15
16
up to 125
15
16
17
up to 130
16
17
18
up to 135
17
18
19
up to 140
18
19
20
up to 145
19
20
21
up to 150
20
21
22
up to 155
21
22
23
up to 160
22
23
24
up to 165
23
24
25
up to 170
24
25
26
up to 175
25
26
27
up to 180
26
27
28
up to 185
27
28
29
up to 190
28
29
30
up to 195
29
30
31
up to 200
30
31
32
up to 205
31
32
33
up to 210
32
33
34
up to 215
33
34
35
up to 220
34
35
35
up to 225
35
35
35
up to 230
35
35
35
20:17
Page 3
Understanding the Company car tax benefit rates 2011-14 table opposite 1. The actual emissions figure, if not a multiple of five, should be rounded down to the nearest multiple of five before applying this table, except that rounding down does not apply to cars with emissions between 121 and 124g/km. For cars with emissions within that range the appropriate percentage is 15% until 5 April 2013, after which it will rise to 16%. 2. The actual emissions figure, if not a multiple of five, should be rounded down to the nearest multiple of five before applying this table, except that rounding does not apply to cars with emissions below 100g/km. 3. The actual emissions figure, if not a multiple of five, should be rounded down to the nearest multiple of five before applying this table, except that rounding does not apply to cars with emissions below 95g/km. 4. All diesel powered cars are subject to a 3% loading, but not to take the maximum figure above 35%. 5. Applies for 5 years from 2010/11 to cars emitting zero CO2 emissions when driven. 6. A reduced appropriate percentage of 5% applies for 5 years from 2010/11 for company cars with an approved CO2 emissions figure not exceeding 75g/km. 7. From 6 April 2008 to 5 April 2012 a lower tax charge applies if the vehicle is a “qualifying low emissions car’ (‘QUALEC’) for the tax year in which it is provided as a company car. A car is a QUALEC if its CO2 emissions figure does not exceed the limit of 120g/km. However, with effect from 6 April 2010 a lower percentage applies for ultra low emission cars as noted at points (5) and (6). • In the case of Diesel cars a 3% supplement is applied to the percentage shown due to the relatively high levels of NOx and particulate emissions from diesel engines. • For cars registered before 1 January 1998 or those without an approved CO2 value separate rules apply see HMRC 480 (2011). • The £80,000 cap used to determine the cash equivalent of the car benefit charge is abolished with effect from 6 April 2011.
5/4/11
20:17
)))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))) Driver Taxation )))))))))
p20-25_DL_Driver Tax_TOY TAX_Mar'11:Layout 1
23
Page 4
)))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))) Driver Taxation )))))))))
p20-25_DL_Driver Tax_TOY TAX_Mar'11:Layout 1
24
5/4/11
Example
Toyota Auris (Hybrid) Sarah has a hybrid company car which has CO2 emissions of 89g/km and a P11D price of £20,000. She is a 40% tax payer. Add to the very low tax cost the exemption from the London congestion charge, low fuel consumption (Prius is up to 72mpg), no vehicle excise duty or showroom tax and the financial argument for employees choosing low emission cars makes very good economic sense. Hybrid P11D price
2011-12 £20,000
2012-13 £20,000
Percentage charge for 89g/km
10%
10%
Car benefit charge Tax payable per month
£2,000 £66.66
£2,000 £66.66
Accessories Normally any accessories fitted to the car either before or after its registration will simply be added to the car’s list price. An exception to this is accessories that cost less than £100 and are fitted after its registration. Example Rachel selects a car with a list price of £15,000. She chooses to have metallic paint and satellite navigation which costs a further £2,200. After the car is delivered she has a tow bar fitted with cost £94. Rachel’s car’s list price that benefit in kind is calculated on will be £17,200.
Contributions for private use If an employee makes a contribution so the car is available for private use, relief is given when calculating the car’s benefit charge for the year that the payments were made. It is important that the contribution is definitely for private use. If the payments are for a better car or relate to reimbursement of fuel or any other costs (such as insurance) they do not qualify. If the contributions exceed the taxable benefit for the year, the car benefit charge is nil.
Capital contributions If an employee contributes towards the capital cost of the car or accessories, the contribution, up to a maximum of £5,000, is deducted from the list price. If the employee is entitled to some of the contribution back when the car is sold (proportionate to the total cost of the car or accessories) there is no further income tax due. If, the employee is entitled to full
20:17
Page 5
reimbursement on the sale of the car, HMRC will not accept that any capital contribution has been made. This can become quite complicated and professional advice should be sought.
What if the car is only available for part of the year? If a company car is not available to the employee for a continuous period of 30 days or more, the benefit charge is reduced by the proportion of the year that the car was unavailable for. Example Victoria’s (who we saw in the diesel example above) car was unavailable for 50 days during the tax year so her benefit in kind is reduced by 50/365 i.e. by £548 (£4,000 X (50/365)). If a company car is unavailable for less than 30 consecutive days and a replacement car is made available, no benefit in kind arises on the replacement car provided that it is of a similar quality to the car that it replaces.
When is tax not payable on a company car? Generally there are only two exceptions: 1) If the employee’s total earnings are less than £8,500 a year. 2) The car in question is a pool car. This can be defined as: • Available to more than one employee • Not usually used by any one employee • Not used for private mileage • Not usually kept at the employee’s home.
So which is best, a cash alternative or a company car? In the last 10 years cars’ CO2 emissions have fallen dramatically. This means that a company car with low emissions is very tax effective. Drivers who want either older cars or those with higher emissions may find that a cash alternative is a wise move. But it’s not just the driver who makes decisions. The business has to balance its needs against many employees’ individual aspirations, so finding the right cars for the right drivers at the best cost has to be the solution. This is a winning point for the Toyota range of cars. Fleets who have failed to review their policies for some time will find the introduction of low emission hybrid vehicles to their fleet can represent significant opportunities for savings.
5/4/11
20:18
)))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))) Driver Taxation )))))))))
p20-25_DL_Driver Tax_TOY TAX_Mar'11:Layout 1
25
Page 6
)))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))) Rules of Thumb ))))))))
p26-27_DL_Rules of Thumb_TOY TAX_Mar'11:Layout 1
26
It is difficult to generalise about the merits and considerations that should be made with regards to a company car but the basic rules of thumb below give a good summary of the main areas to consider.
Leasing A typical tax paying business which recovers all of its VAT will usually find leasing to be financially advantageous. If the car has CO2 emissions above 160g/km only 85% of the rentals can be offset against tax (15% disallowance). The company should try to find vehicles that have lower emissions or consider another acquisition method such as a cash allowance. If the car has CO2 emissions below 110g/km the lessor (leasing company) can take advantage of the 100% writing down allowance, which, when reflected in the rentals, makes these cars especially attractive.
Buying cars Companies who buy their cars must take tax into account when choosing the vehicle. Cars with CO2 emissions below 110g/km will attract a 100% writing down allowance (this is the best position). Cars with CO2 emissions of 111g/km to 160g/km will attract a 20% writing down allowance in the main pool. Not a bad position but considering sub 120g/km cars will benefit both the company and its drivers. Cars with CO2 emissions above 160g/km will attract a 10% writing down allowance in the special rate pool. These cars are often expensive and the delay in obtaining tax relief will have a negative effect on the company’s cash flow. The rates of capital allowances for the main and special rate pools will fall to 18% and 8% respectively from April 2012.
5/4/11
20:13
Pa
Drivers Drivers should be encouraged to choose cars with low CO2 emissions. Cars with CO2 emissions below 120g/km have a benefit in kind rate of only 10% with income tax rates at 20%, 40% and 50% these cars are real tax beaters. As the company pays NIC based on the drivers benefit in kind, sub 120g/km cars can dramatically reduce the NIC bill. If a driver has a business need for a high emission vehicle, it will be expensive for both him and the company. If his needs are based around his lifestyle the company should consider offering a cash alternative.
Fuel Employers providing private fuel are on average wasting about ÂŁ1,000 per car per year. A typical employee will need to be driving over 15,000 private miles before he sees a benefit, but due to the cost of the fuel the employer is even more disadvantaged. Based on the May 2011 VAT scale charges, cars with CO2 emissions below 120g/km attract a VAT charge of only ÂŁ105 per year, less than half of a car emitting 160g/km.
Whole life costs Many companies use whole life costs to select their company cars. Without taking tax into consideration they run the risk of making some serious mistakes. Low CO2 cars generally have the lowest true whole life costs.
5/4/11
)))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))) Rules of Thumb ))))))))
p26-27_DL_Rules of Thumb_TOY TAX_Mar'11:Layout 1
27
20:14
Pa
)))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))) Finance )))))))))
p28-31_DL_Finance_TOY TAX_Mar'11:Layout 1
28
5/4/11
Funding Options Contract Hire A non-ownership product where the customer pays a fixed monthly rental, which may also include optional maintenance for an agreed period and then hands the car back subject to excess mileage and condition charges if applicable. The rentals are calculated on the ex-VAT on-the-road price of the vehicle. All rentals are subject to VAT. Available to both business users and private customers, but predominantly beneficial to businesses. Customer benefits & Business benefits • Fixed cost motoring making budgeting easy for a customer • Low initial outlay • Use without risks of ownership • No depreciation or residual value risk • VAT saving for VAT registered business customer • If VAT registered 50% of the VAT on the finance rental is normally reclaimable (100% if the vehicle is used for 100% business use) • If VAT registered 100% of the VAT on the maintenance rental can be re-claimed • A proportion of the rental can be offset against taxable profit (see page 10) • Subject to the proposed introduction of a new lease accounting standard, due to come into effect in 2015, vehicles funded on Contract Hire are “off balance sheet”, i.e. they do not appear as assets on the balance sheet which may be important to some businesses This information is for guidance only. Companies and individuals should always consult their accountants on their individual situation.
Finance Lease (Full Payout Lease and Balloon Lease) A non-ownership product where the customer pays a fixed monthly rental over a fixed period. There are two main forms of Finance Lease; Full Payout Lease and Balloon Lease. A. Full Payout Lease On a Full Payout lease the customer spreads the cost of the vehicle over the period chosen and at the end of the agreement must sell to a third party. The customer then receives a proportion of the sale proceeds as determined at the start of the agreement.
20:11
Page 1
5/4/11
Alternatively at the end of the period, the agreement can continue into a secondary period for which the customer pays a nominal secondary rental, often known as a ‘peppercorn’ rental. B. Balloon Lease With a Balloon Lease the customer offsets an amount to the end of the agreement (the balloon), to lower the payments or shorten the period. At the end of the agreement the customer has to sell the vehicle to a third party and can keep any sale proceeds over the amount of the balloon. If the sale does not cover the balloon value the customer is responsible for the shortfall. Customer benefits • The rentals are calculated on the ex VAT on the road price of the vehicle • VAT saving to VAT registered customers • If VAT registered 50% of the VAT on the rental can normally be re-claimed, but 100% is reclaimable if the vehicle is used for 100% business use • A proportion of the rental can be offset against taxable profit • Vehicles funded on Finance Lease are regarded as on balance sheet, i.e. they should be shown as assets in the customer’s balance sheet This information is for guidance only. Companies and individuals should always consult their accountants on their individual situation.
Hire Purchase The traditional method of funding a vehicle. With fixed rate Hire Purchase, a deposit is paid and the balance plus charges is spread in equal payments over an agreed period. The interest rate is fixed for the whole period. Customer benefits & Business benefits • Enables customers to spread the cost with affordable monthly payments rather than paying the full value on delivery • Vehicles out of reach in cash terms become affordable • Protects the customers savings • Enables the customer to budget more easily with fixed monthly payments • Ownership at the end of the agreement. • Reduced capital outlay • Writing Down Allowances claimed in usual way as if paying by cash • Finance charges and fees can be offset against taxable profit
20:11
)))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))) Finance )))))))))
p28-31_DL_Finance_TOY TAX_Mar'11:Layout 1
29
Page 2
)))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))) Finance )))))))))
p28-31_DL_Finance_TOY TAX_Mar'11:Layout 1
30
5/4/11
Lease Purchase A product for business users where a proportion of the capital cost can be deferred to the end of the agreement, known as a balloon payment or residual value. This has the effect of lowering the payments and / or shortening the agreement. The balloon payment is the customers responsibility and must be made in full when due. There is no guaranteed future value. Customer benefits & Business benefits • Low initial outlay • Lower monthly payments • Eventual ownership of the vehicle. • Writing Down Allowances claimed in usual way as if paying by cash • Finance charges and fees can be offset against taxable profit
“
Personal Contract Purchase schemes enable customers to afford vehicles they maybe otherwise couldn’t and to change their cars more regularly
20:12
Page 3
5/4/11
Personal Contract Purchase (AccessToyota & Lexus Connect) A finance plan, where a proportion of the purchase cost of the car is deferred to the end of the agreement. This large final payment equals the Guaranteed Future Value (GFV) removing future depreciation worries, making the monthly repayments more affordable than traditional finance and allowing a shorter repayment period. At the end of the agreement the customer has 3 choices. 1. Part exchange the car using any amount over the GFV as deposit towards a new vehicle 2. Keep the car by simply paying the GFV (plus purchase fee) 3. Hand the car back. If the car is worth less than the GFV it can be returned to TFS with nothing further to pay, subject to mileage and condition clauses in the agreement being adhered to. Usual special conditions • A mileage limit is set at the start of the agreement • Vehicle must be serviced and maintained as per the manufacturers recommendations Customer benefits & Business benefits • Enables customers to change their cars more regularly • Enables customers to afford vehicles they maybe couldn’t otherwise consider as monthly payments are reduced compared to traditional finance • Removes the risk of unexpected depreciation – guaranteed minimum future value for the car • Enables the customer to budget more easily • Avoids expensive maintenance bills as the car gets older • Offers a method of acquisition for those opting out of company car schemes • WDAs claimed in usual way as if paying by cash • Finance charges and fees can be offset against taxable profit
20:13
)))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))) Finance )))))))))
p28-31_DL_Finance_TOY TAX_Mar'11:Layout 1
31
Page 4
))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))) Glossary )))))))))
p32-35_DL_Glossary_TOY TAX_Mar'11:Layout 1
32
5/4/11
Accessories – Items added to a car, also known as ‘extras’, e.g. a sunroof. For income tax and National Insurance purposes, an accessory added after registration is only taken into account if the price is at least £100. Annual contributions – The amount an employee is required to pay as a condition of the car being available for private use. This will be deducted from the taxable benefit for the year in which the payments were made (often referred to as contributions for private use). Anticipated residual value (ARV) – The predicted sale proceeds of the car at the start of the contract. Balloon – A large final payment under a financing agreement normally in line with the predicted value of the car. Business mileage – Any journey which the employee is necessarily obliged to undertake in the performance of his duties. HMRC has successfully argued that travel from home to a permanent place of work does not constitute business mileage. Capital allowance – For cars and other plant and machinery tax relief is calculated by a system known as capital allowances (sometimes referred to as tax depreciation). The amount of the allowance and the timing of its receipt depend on the type of asset. Cars only have three categories; • Cars with CO2 emissions not exceeding 110g/km receive a 100% writing down allowance (best position) • Cars with CO2 emissions of 111g/km to 160g/km receive a 20% writing down allowance • Cars with CO2 emissions above 160g/km will receive a 10% writing down allowance (worst position). Capital contribution – A capital sum an employee contributes towards the cost of a car or any qualifying accessory. When calculating the income tax due on the benefit in kind, the contribution is deducted from the list price for the year in which the capital sum is contributed and each subsequent year that the employee is assessed to a benefit in kind on that car up to a maximum of £5,000. Car benefit charge – The amount chargeable to tax on an individual for a company car in a tax year. CO2 – Carbon dioxide. Company car – For employee benefit purposes, any mechanically propelled road vehicle that meets the following criteria: • Commonly used as a private vehicle and is not suited for the conveyance of goods;
20:35
Page 1
5/4/11
• Not a motor cycle or invalid carriage; • Made available for private use (without the transfer of property in it) to an employee earning £8,500 or more per annum, or to a director, by reason of his employment, or to a member of his family or household. Conditional sale agreement – A purchase agreement where the parties have to perform specific conditions before title passes. Contract hire – The leasing of a car for a fixed monthly cost for a pre-agreed period and mileage. The car is returned to the owner (lessor) at the end of the period. The agreement may include the provision of services such as maintenance. Contract purchase – A deferred purchase agreement normally requiring a balloon payment to be made before transfer of ownership at the end of the agreement. The rental profile is structured in many cases to satisfy the buyer’s cash flow requirements. The agreement may include the provision of services such as maintenance, and/or may include a guaranteed minimum resale value offered by the provider of funds, normally a specialist leasing company. Contributions for private use – See annual contributions. Employer’s Class 1A National Insurance contributions – A charge applied to the taxable benefit of a company car and private fuel. The rate is 13.8% in 2011/12. Extras – See accessories. Finance lease – Generally a lease that transfers substantially all the risks and rewards of ownership of an asset to the lessee. As an indication, the net present value of the total payments should be at least 90% of the fair value of the leased asset. If in doubt, seek professional advice. Fuel benefit charge – The taxable benefit where an employee is provided with free fuel for private use. Guaranteed minimum future value (GMFV) – The value of a car at the end of a contract which is guaranteed by a third party, thus allowing the customer to avoid any unpredicted losses on disposal. Sometimes referred to as Guaranteed Minimum End Value (GMEV). Hire purchase – A purchase agreement where title (ownership) does not pass until an option to purchase has been satisfied. This is normally a nominal payment. HMRC – Her Majesty’s Revenue & Customs Lease – An agreement where the customer has the use of goods but does not own them.
20:35
))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))) Glossary )))))))))
p32-35_DL_Glossary_TOY TAX_Mar'11:Layout 1
33
Page 2
))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))) Glossary )))))))))
p32-35_DL_Glossary_TOY TAX_Mar'11:Layout 1
34
5/4/11
Lease purchase – See contract purchase. Lessee – The customer in a lease agreement. List price – The manufacturer’s, importer’s or distributor’s published price, inclusive of all ‘on-the road’ costs, appropriate for a car of that kind if sold singly in the UK in a retail sale in the open market on the day before first registration. Accessories fitted before registration are generally included as are those costing £100 or more fitted after registration. Mileage Allowance Payments – An employee who undertakes business mileage in his own car may receive a Mileage Allowance Payment (MAP) from the employer. This is designed to cover all the costs of owning and running the car, including depreciation and any interest paid on a loan to buy the car. The allowance will be expressed as a rate per business mile. National Insurance contributions (NIC) – Class 1 contributions are payable by employees and employers in respect of earnings from an employment or office. If a company car is made available for private use by an employee and tax is payable on a car benefit charge for that particular car, a Class 1A contribution needs to be paid. Class 1A is also payable on a fuel benefit charge where free private fuel is provided to employees. It is the person who was liable to pay the Class 1 secondary contributions on the employee’s most recent earnings in the tax year (the employer’s contribution) who pays Class 1A. This means that if a third party provides a car to an employee, his employer may still need to pay the Class 1A contributions for that car even though it was not the provider. Class 1A NIC is never paid by the employee. The employer pays Class 1A contributions at the main employer’s rate for Class 1 secondary contributions (the top rate is 13.8% for 2011/2012). Operating lease – A lease where the risks and rewards of ownership are borne by the lessor. Normally defined as a lease other than a finance lease. P11d price – The price on which a company car drivers tax is based is the P11D value. This comprises the list price, including VAT, plus any delivery charges, but does not include the car's first registration fee or its annual road tax. Partly exempt business – A business which makes both taxable and exempt supplies so that it cannot recover all its input VAT. Personal contract hire (PCH) – A personal agreement for the use of a car without the lessee ever obtaining ownership of it.
20:36
Page 3
5/4/11
Personal contract purchase (PCP) – A personal agreement for the purchase of a car by instalments through a finance company. Normally payments will be of equal amounts over the life of the contract except for a larger final payment (often referred to as a balloon payment). Typically this type of finance is arranged by the dealer or manufacturer who sells the car. In practice, there are usually three alternatives at the end of the contract term: • Keep the car by paying the balloon payment; • Return the car and do not pay the balloon payment; • Or part exchange the car. If the value of the car is more than the balloon payment, the driver may be able to part exchange the car using any surplus towards the next car. Pool car for taxable benefit purposes – In order to be a pool car for taxable benefit purposes, a car must: • Be available and actually used by more than one employee; • Not be used by one employee to the exclusion of the other employees; • Not normally be kept overnight in the vicinity of any employee’s home; • And not be used privately by any of the employees except when this is incidental to business use. Primary period – The part of a lease agreement where the capital and interest are repaid. Private mileage – Any mileage that does not constitute business mileage. Private use – Use by a director, partner, soleproprietor or employee for any purpose other than that of the business. It also includes use by any other person for non-business purposes. Rental – The payment under a lease agreement. Residual value – The VAT inclusive amount for which the car can be sold at the end of the contract. Secondary period – The final part of a lease agreement where, for a nominal payment, the lessee is allowed to retain use of the goods. Writing down allowance – See capital allowance. Written down value – The original market value of a car less any capital allowances given since acquisition.
20:36
))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))) Glossary )))))))))
p32-35_DL_Glossary_TOY TAX_Mar'11:Layout 1
35
Page 4
p36_DL_OBC_TOY TAX_Mar'11:Layout 1
5/4/11
20:37
Page 1
Vehicles must meet the needs of both the business and individuals and no other manufacturer offers such a wide range of tax efficient models as Toyota and Lexus. To support your needs we have a team of specialist field staff and a Business Centre network dedicated to Business to Business Sales. To find out more visit
toyotalexusfleet.co.uk or call our dedicated support centre on
0844 7016186
Please recycle
Toyota (GB) PLC Great Burgh, Burgh Heath, Epsom, Surrey KT18 5UX T 01737 367 009 F 01737 367 716 www.toyotalexusfleet.co.uk Toyota (GB) PLC is registered in England as company number 916634. Its registered office is Great Burgh, Burgh Heath, Epsom, Surrey KT18 5UX
TFCC 04/11