Sustainability & Tax: An update on Cars and Vans

Tue 27 Oct 2020

Having use of a vehicle  was pretty much an expected perk or necessity for a large number of employees, to both reward and help them undertake their employment duties effectively.

However, Covid-19 has fundamentally changed the way we look at reward, how we meet people and work together and organise our lives. During the outbreak, there has been a real focus by businesses to ensure they can get through this challenging period and to help with this, employers have reviewed non-cash benefits, work locations and how to save money, Whilst maintaining a sustainable and environmentally friendly approach.

This article helps summarise some of the key aspects, covering the following:

• The changing world of car tax rates;
• Post Covid-19 considerations;
• I want to ride my (electric) bicycle; and
• The final word – key messages to consider.

The article is intended to share knowledge and help you consider your next steps in an area that is complex, has many moving parts and various different stakeholders within an organisation who all have different objectives (costs, safety, culture, environmental, reward etc).

The changing world of company car tax rates

The CO2 emission level and fuel type – where a supplement for diesel cars is applied (currently 4%) have governed the taxable benefit calculation for company cars for some time.

In basic terms the higher the CO2 emissions the higher the percentage (up to a maximum of 37%) which is used to calculate the amount that is subject to income tax and Class 1A NIC leading to greater tax and NIC costs for both employee and employer respectively. However, in recent times there are other variables to consider.

We highlight some of the “devil in the detail”, introduced from 6 April 2020, and what this could mean for your business:

• Background – Emission Testing Changes: Previously emissions were measured under the New European Driving Cycle (NDEC) However, following recent scandals and questions over accuracy, the Worldwide Harmonised Light Vehicle Test Procedure (WLTP) percentage measure has been introduced and should be used for all cars registered on or after 6 April 2020. It results in a 2% lower percentage charge than NDEC. However, the NDEC based charge should continue to be used for cars registered prior to 6 April 2020.

• New hybrid/petrol powered rates: From 2020/21 you may need some additional information to find the correct percentage band to calculate the taxable benefit.

If your hybrid car has CO2 emissions of 1 to 50g/km, the percentage charge of the car will be based on its zero emission mileage figure, or ‘electric mileage range’. This is the maximum distance the car can go on electric power before it needs recharging. The percentage can range from 0% to 14% depending on whether this falls into the NDEC or WLTP category.

• Electric cars: The charge for wholly electric company cars will drop to 0% for 2020-21 tax year and is expected to increase by 1% each year up to 2022/23.

• Euro Standard 6D Diesels: Diesel cars meeting the Euro Standard 6D Diesel standard are exempt from the diesel 4% supplement.

Based on the above, you can see the concern for employees and employers in choosing a company car for a 36 month period, if they are unfamiliar of the tax implications involved for all relevant tax years.

Therefore, there are both cost saving opportunities and pitfalls to avoid. Businesses can help meet a number of objectives by reviewing their strategy on cars including reducing carbon emissions, reducing employer costs while at the same time improving employee reward and working culture.

Post Covid-19 considerations

Since March 2020 it is fair to say the trend is generally to travel less. For some of us this may be a temporary change but for others it may be a more permanent as many of us get familiar with working from home.

This raises questions which we have been helping clients with, concerning planning for the future and assessing the short term impact/benefits of any changes.  The following questions may be relevant:

• Do your employees need a company car? Do they want one?
• What is your contractual obligation to provide a car/travel allowance in lieu of a car?
• Is providing a fuel benefit unnecessarily costing both the employer and its employees (due to a reduction in business miles undertaken)?
• Can you hire cars for short term need  or have a number of pool cars that can be delivered to your employees? Of course there are obvious hygiene and health and safety matters that may need to be considered here in this era.
• How should you use Taxi accounts?
• How are permanent and temporary workplace definitions impacted?
• What other support should/ can we provide tax efficiently to staff with the savings generated via reduced travel expenses (e.g. home working allowance, broadband, office equipment, solar panel salary sacrifice etc)?

In spite of this, many remain reliant on the convenience of our motor vehicles. Hence reviewing company cars is not straightforward given it is difficult to predict the future and that this is often a very emotive and valued benefit, despite the tax costs.  

Nonetheless the questions raised above should be considered by every boardroom, and be thought about as part of a wider cost effective travel policy and future reward/sustainability strategy.

I want to ride my (electric) bicycle

Bicycles in general are still well received in two of our historic cities, Oxford and Cambridge, where these creatures have thrived! They have also grown in popularity throughout London and in many other cities and towns across the UK.

The modern E-bike, with an integrated motor, makes cycling less exhausting and provides an interesting alternative to company cars, public transport etc.

Currently, employers may offer employees the opportunity of participating in a cycle to work arrangement. These can be tax efficient and are generally administered via a salary sacrifice arrangement. Therefore, could your cycle to work programme be extended to E-bikes and where it does, could your car/travel policies be updated to reflect this?

As Covid-19 changes our working lives and routines, cycling to work on an E-bike may become more regular, particularly for journeys of up to 20 miles.

E-bikes can also help strengthen mental health and wellbeing programmes, alongside the more obvious environmental objectives they can help achieve.

The final word – key messages to considers

• With all the added complexity it is important to be aware of the form P11D/P11D(b) end of year compliance reporting requirements. It could lead to under or overpayment of taxes/NIC along with penalties and interest for not doing it correctly!
• A well planned company car fleet and wider travel strategy can help reduce costs and enhance reward – we have undertaken a number of detailed design assessments and employee workshops to help communicate and review this for businesses – it requires a tailored approach.
• As car and bike technologies expand we can incorporate green, sustainable and well-being initiatives into the heart of our travel planning all whilst saving costs!
• Finally, if you have employees with a fuel benefit in kind, now is the time to re assess the cost to them and the Company of continuing to receive this benefit. With the changing working landscape, the tax and NIC on the benefit is often higher than the cost of private fuel at the pump. With one client, we recently identified savings in excess of £150,000 over three years where 17 employees gave up their private fuel benefit.  At the same time, it is possible to leave the employee in a cash neutral or slightly better position – a real win:win!

Please do let us know if you would like to discuss and we’d be happy to share our knowledge and support you with these elements in more detail. Please do contact Narinder.sohal@mazars.co.uk or Sharon.gilkes@mazars.co.uk for more information.