This article is relevant to those of you sitting the TX-UK exam in the period 1 June 2024 to 31 March 2025, and is based on tax legislation as it applies to the tax year 2023-24 (Finance Act 2023).
The Finance (No. 2) Act 2023 did not receive Royal Assent by the exam cut-off date of 31 May 2023, and is therefore not examinable as regards exams falling in the period 1 June 2024 to 31 March 2025.
Cars regularly feature in TX-UK exams, which is not surprising given that acquiring, running, or having the use of a car can have income tax, corporation tax, value added tax (VAT) or national insurance contribution (NIC) implications.
When a sole trader, partnership or limited company purchases a car, capital allowances will be available. Cars do not qualify for the annual investment allowance, although new cars with zero CO2 emissions qualify for a 100% first-year allowance.
Cars qualifying for writing down allowances at the rate of 18% (CO2 emissions between 1 and 50 grams per kilometre) are included in the main pool, whilst cars qualifying for writing down allowances at the rate of 6% (CO2 emissions over 50 grams per kilometre) are included in the special rate pool.
Second-hand cars with zero CO2 emissions only qualify for writing down allowances at the rate of 18%.
There is no private use adjustment where a car is used by a director or an employee – an adjustment is only made where there is private use by a sole trader or a partner. Cars with private use are not pooled, but are kept separate so that the private use adjustment can be calculated.
Where partners own their cars privately, it is the partnership (and not the individual partners) which make the capital allowances claim.
Unless a car is used exclusively for business purposes, input VAT is not recoverable when it is purchased. Output VAT will then not be due on the car’s disposal. Therefore, for capital allowance purposes, VAT inclusive figures are used.
When calculating a business’s trading profit, no adjustment is necessary where the CO2 emissions of a leased car do not exceed 50 grams per kilometre. Where CO2 emissions are more than 50 grams per kilometre, 15% of the leasing costs are disallowed in the calculation.
Where a leased car is available for private use, 50% of input VAT on leasing costs is non-deductible.
When calculating the trading profit for a sole trader or a partnership, an adjustment will be necessary for the private proportion of car expenses which relate to the sole trader or the partners. No adjustment is necessary where car expenses relate to directors or employees.
Provided there is some business use, the full amount of input VAT can be reclaimed in respect of repairs.
Where fuel is provided all the input VAT (for both private and business mileage) can be recovered, but the private use element is then normally accounted for by way of an output VAT scale charge. This is based on the car’s CO2 emissions, and will vary according to the length of the VAT period. The scale charge can apply to sole traders, partners, employees or directors.
However, if an employee or director is charged the full cost for the private fuel provided, output VAT will instead be calculated on this charge to the employee or director.
When an employee is provided with a company car, the taxable benefit is calculated as a percentage of the car’s list price. The percentage is based on the level of the car’s carbon dioxide (CO2) emissions.
List price: Any discounts given to the employer are ignored. The employee can reduce the figure on which his or her company car benefit is calculated by making a capital contribution of up to £5,000.
Percentage: The percentage for electric cars with zero CO2 emissions is 2%.
Diesel cars: There is a 4% surcharge for diesel cars which do not meet the real driving emissions 2 (RDE2) standard. Diesel cars meeting the RDE2 standard are treated as if they were petrol cars. The percentage rates (including the lower rate of 15%) are increased by 4% for diesel cars which do not meet the standard, but not beyond the maximum percentage rate of 37%.
Reduction: The taxable benefit is proportionately reduced if a car is unavailable for part of the tax year. This could be the tax year when a car is first provided, the tax year when a car ceases to be provided or because a car is unavailable for a period of at least 30 continuous days.
Contribution: Any contribution made by an employee towards the use of a company car will reduce the taxable benefit.
Pool Cars: The use of a pool car does not result in a company car benefit. A pool car is one which is used by more than one employee, and is used only for business journeys (private use is only permitted if it is merely incidental to a business journey), and where the car is not normally kept at or near an employee’s home.
Related benefits: The car benefit covers all the costs associated with having a car such as insurance and repairs. The only cost which will result in an additional benefit is the provision of a chauffeur.
If fuel is provided for private use, there will additionally be a fuel benefit. This is also based on a car’s CO2 emissions.
Base figure: For the tax year 2023-24 the base figure is £27,800.
Percentage: The percentage used in the calculation is exactly the same as that used for calculating the related company car benefit.
Reduction: The fuel benefit is proportionately reduced if a car is unavailable for part of the tax year.
The fuel benefit can also be proportionately reduced where the fuel itself is only provided for part of the tax year. However, it is not possible to opt in and out depending on monthly use. If, for example, fuel is provided from 6 April to 30 September 2023, the fuel benefit for the tax year 2023-24 will be restricted to just six months. This is because the provision of fuel has permanently ceased. However, if fuel is provided from 6 April to 30 September 2023, and then again from 1 January to 5 April 2024, the fuel benefit will not be reduced - the cessation was only temporary.
Contribution: No reduction is made for contributions made by an employee towards the cost of private fuel unless the entire cost is reimbursed. In this case there will be no fuel benefit.
The employer is responsible for paying class 1A NIC in respect of taxable benefits at the rate of 13.8%.
Employees who use their own car for business travel must use HM Revenue and Customs (HMRC) approved mileage allowances in order to calculate any taxable benefit arising from mileage allowances received from their employer. Employees who use their cars for business mileage without being reimbursed by their employer (or where the reimbursement is less than the approved mileage allowances), can use the approved mileage allowances as a basis for an expense claim.
The rate of approved mileage allowance for the first 10,000 business miles is 45p per mile, and for business mileage in excess of 10,000 miles the rate is 25p per mile.
Unlike other taxable benefits which are subject to class 1A NIC, any taxable benefit arising from mileage allowances is treated as earnings subject to both employee and employer’s class 1 NICs.
Sometimes, rather than being given the amount of business mileage, you might have to ascertain what it is. Remember that business mileage does not include:
Ordinary commuting: This is where an employee drives between home and their normal workplace. This includes the situation where an employee is required to go into work at the weekend or because of an emergency such as to turn off a fire alarm.
Private travel: This is any journey which is not for work purposes.
Business mileage includes the following:
Travel to visit clients: This is provided the journey is not virtually the same as the employee’s ordinary commute, such as where an employee travels from home to a client’s premises which are situated near their normal workplace.
Travel to a temporary workplace: A temporary workplace is one where the employee expects to be based for less than 24 months. Again, there is the provision that the journey must not be virtually the same as the employee’s normal commute.
The authorised mileage allowances can also be used in other circumstances.
If a sole trader or partnership uses the cash basis to calculate trading profit, the business can use approved mileage allowances to determine the deduction for business mileage.
The disposal of a car is exempt for CGT purposes, but there is no exemption from IHT. Therefore, a person’s estate includes the value of any cars which they own at the date of death.
Written by a member of the TX-UK examining team