It's not unusual for the government to give with one hand and then take back with the other. To some extent this is what has happened with luxury company cars. Recent changes have generally improved the tax relief that a business receives when it buys or leases a luxury car. However, in the near future, the tax cost of being provided with a luxury company car is going to increase for directors and employees, in some cases quite drastically.
Purchasing a company car
From 1 April 2009 for limited companies, and from 6 April 2009 for unincorporated businesses, there's no longer any restriction to the amount of writing down allowance that can be claimed when a car is purchased. Instead, the rate of writing down allowance now depends on a car's CO2 emissions.
Cars with CO2 emissions of between 111 and 160 grams per kilometre qualify for writing down allowances at the rate of 20% on the full purchase price. If CO2 emissions are greater than 160 grams per kilometre (normally the case for luxury cars) writing down allowances are given at the rate of 10%. Previously, writing down allowances for cars were subject to a £3,000 restriction.
Cars qualifying for writing down allowances at the rate of 20% are included in the general pool, while cars qualifying for writing down allowances at the rate of 10% are included in the special rate pool.
The main reason for making this change is that it has reduced capital allowances compliance costs as there is no longer any need to keep separate records for each car.
For example, a company purchases a Ferrari F430 spider convertible for the use of a director for £144,500. This car has CO2 emissions of 420 grams per kilometre. Previously, the company could have claimed writing down allowances of £3,000 per year. The car is now be included as expenditure in the special rate pool (as CO2 emissions are greater than 160 grams per kilometre) and the company will receive writing down allowances at the rate of 10% per year on a reducing balance basis. The allowance in the year of purchase will therefore be £14,450 (£144,500 at 10%), reducing each year thereafter. However, under the old system a balancing allowance was given in the year of disposal.
For example, if the Ferrari was sold after three years for £65,000 a balancing allowance of £73,500 (£144,500 - £3,000 - £3,000 = £138,500 - £65,000) would have been given in that year. Under the new system, the sale proceeds are simply deducted from the pool of expenditure, and writing down allowances will continue to given on the remaining expenditure in the pool. The new system is therefore beneficial where luxury cars are kept for several years, but may be less beneficial when they are replaced on a regular basis.
The treatment of cars already owned at 1 April 2009/6 April 2009 is to remain unchanged for a period of five years. Therefore the £3,000 writing down allowance restriction still applies to these cars.
Leasing a company car
From 1 April 2009 for limited companies, and from 6 April 2009 for unincorporated businesses, there has also been a change in the tax treatment of the cost of leasing cars. Previously, when calculating taxable profits, a proportion of the lease cost was disallowed if the retail price of the leased car was more then £12,000. This adjustment was based on the formula:
£12,000 + Retail price
2 x Retail price
Say the annual cost to lease a Ferrari F430 spider convertible is about £31,800 plus VAT. Only 50% of the VAT can normally be reclaimed for leased cars, so the cost to the business is £34,582 (£31,800 + 50% of £5,565 (£31,800 x 17.5%)). Previously, only £18,727 of the leasing costs would have been allowable:
£34,582 x £12,000 + £144,500 = £18,727
2 x £144,500
There is now no adjustment where the CO2 emissions of a leased car do not exceed 160 grams per kilometre, regardless of the retail price. Where CO2 emissions are more than 160 grams per kilometre then 15% of the leasing costs are disallowed in calculating taxable profits. Therefore in the case of the Ferrari, £29,395 (£34,582 less 15%) will now be allowed. This is a considerable improvement, and in many cases will make leasing a luxury car more attractive than purchasing one.
The new treatment only applies to leases entered into after 1 April 2009/6 April 2009.
When a company car is provided to a director or an employee the taxable benefit is based on the list price of the car and the level of its carbon dioxide (CO2) emissions. Currently, the list price is restricted to a maximum of £80,000, but from 6 April 2011 this maximum will cease to apply.
For example, the taxable benefit for the Ferrari F430 spider convertible is currently based on a figure of £80,000, but from 2011–12 the benefit will be based on the actual list price of £144,500.
The taxable benefit is calculated as a percentage of the list price. For 2009-10, the maximum percentage of 35% applied where a car's CO2 emissions were 235 grams per kilometre (g/km) or higher. For 2010–11 this figure has been reduced to 230 g/km, and it will be reduced to 225 g/km for 2011–12.
Another change that may also increase the cost of being provided with a luxury company car is the additional higher income tax rate of 50% that applies from 6 April 2010 to directors and employees with taxable income over £150,000.
For example, a director with taxable income of £200,000 is provided with a Ferrari F430 spider convertible as a company car. For 2009-10 the director would have paid income tax of £11,200 (£80,000 x 35% = £28,000 at 40%) in respect of the company car. In 2010–11 this tax cost will rise to £14,000 (£80,000 x 35% = £28,000 at 50%), and in 2011–12 it will rise to £25,287 (£144,500 x 35% = £50,575 at 50%). The cost will therefore more than double from 2009-10 to 2011-12.
From 6 April 2011 NIC rates are due to increase by 1%, so the employer's class 1A NIC in respect of the Ferrari will rise from £3,584 (£28,000 at 12.8%) in the current year, to £6,979 (£50,575 at 13.8%) in 2011–12.
The drastic increase in the tax cost of having the use of a luxury company car after 6 April 2011 may mean that it is beneficial for a director or employee to instead receive additional remuneration and then to acquire the car themselves – even if the director or employee is paying the additional higher rate of income tax of 50%.
Let's assume the following for 2010–11 and 2011–12:
- Ferrari F430 spider convertible leased for £37,365
- The employer pays corporation tax at the marginal rate, and this is 29.75% for the financial year 2010 onwards.
- The director pays income tax at the additional higher rate of 50%.
- Employee's NIC is 1% for 2010-11 and 2% for 2011-12.
- Employer's NIC is 12.8% for 2010–11 and 13.8% for 2011–12.
If not provided with a company car, the director will save the tax of £14,000 payable in respect of the benefit. This means that the director will need additional net of tax remuneration of £23,365 (£37,365 - £14,000) in order to pay the leasing costs and be in the same financial position as if a company car was provided. The gross remuneration will be £47,684 (£23,365 x 100/(100 - (50 + 1))).
The employer will pay NIC of £6,104 (£47,684 at 12.8%), so the total net of tax cost for the employer of paying additional remuneration is £37,786 (£47,684 + £6,104 = £53,788 less corporation tax at 29.75%).
If the employer had instead leased the company car then they would have paid leasing costs of £34,582 (£37,365 less the 50% VAT recovery) and class 1A NIC of £3,584. Only £29,395 of the leasing costs receive tax relief, so the total net of tax cost for the employer is £28,355 (£34,582 + £3,584 = £38,166 less corporation tax of £9,811 (£29,395 + £3,584 = £32,979 at 29.75%)). In this case, it is therefore beneficial to provide the company car.
If not provided with a company car, the director will save the tax of £25,287. The additional net of tax remuneration needed is £12,078 (£37,365 - £25,287), so the gross remuneration required will be £25,162 (£12,078 x 100/(100 - (50 + 2))).
The employer will pay NIC of £3,402 (£24,649 at 13.8%), so the total net of tax cost for the employer is £20,066 (£25,162 + £3,402 = £28,564 less corporation tax at 29.75%).
If the employer had leased the company car then they would have paid leasing costs of £34,582 and class 1A NIC of £6,979. The total net of tax cost for the employer is £30,740 (£34,582 + £6,979 = £41,561 less corporation tax of £10,656 (£29,395 + £6,979 = £36,374 at 29.75%)). It is now more beneficial to pay additional remuneration.
Although the taxable benefit change is still some way in the future, it will be an important consideration when choosing a new company luxury car, or even whether to have a company car at all.