A greener company car scheme?

As the owner of a medium-sized company, you are keen to start a company car scheme for senior staff which encourages them to switch to vehicles with lower emissions. But what tax factors should they be aware of, and could salary sacrifice be the most efficient approach?  Audrey Rankine explains in this article.

In line with your green objectives and policies, you are considering the introduction of a company car scheme where key staff would be encouraged to choose a low emission or electric vehicle. This would be subject to a minimum length of service, and initially restricted to management and senior staff. But if successful you would hope to expand the scheme going forward.

You and the team have a basic understanding of the benefit-in-kind consequences, but what other factors should be considered? Such as what are the implications of using a salary sacrifice arrangement to fund a business leasing arrangement?

Here is an overview of the different company car scheme options and the tax implications for your company and your team.

Capital allowances on purchases
The first thing to consider is how the company can claim relief for the cost of the vehicles being provided. This will be in the form of capital allowances (CAs), and the precise treatment differs for new, second hand and leased vehicles. There are then further differences with reference to the CO2 emissions.

Please note. The annual investment allowance cannot be claimed for any vehicle except for a company van or other non-car (truck, motorcycle etc).

A 100% first year allowance (FYA) is available for new and unused electric vehicles (EVs), i.e. those powered by electricity only. If the full amount is not claimed, the balance qualifies for writing down allowances (WDAs), which will be 18% for a zero-emission EV.

Please note, a second-hand EV will only qualify for WDAs.

Hybrids, either petrol or diesel (which meet the Euro 6d standard), are a good choice where low emissions are required, but the limited range of EV makes it impractical. Hybrids do not qualify for the FYA, so will be relieved via WDAs.

The rate depends on the emissions: 18% if these are 50g/km or less and 6% if above 50g/km.

Leased cars
Where a car is leased rather than purchased, the ownership of the asset never passes to the company. Instead, the company makes a series of rental payments over an agreed term, this is usually between two and four years. As a result, the car does not become an asset on the balance sheet and the outstanding payments are not shown as a liability.

Please note, this can potentially help the company to maintain a good credit standing.

The company cannot claim CAs, as the right to these remains with the provider. Instead, lease payments are directly deductible from income for corporation tax purposes. However, a 100% deduction is only available if the car’s CO2 emissions are 50g/km or less. Otherwise, the deduction is restricted to 85%.

Maintenance and repairs
If the company pays for the running costs of the car (except fuel) such as servicing and repairs, these are separate to the purchase cost or rent aspect of the lease. These are revenue expenses that are fully deductible, irrespective of private use.

However, lease contracts often include servicing and repairs. If that is the case, you should ensure that the maintenance aspect is shown separately as it will increase VAT recovery.

VAT considerations
Generally, the VAT on the purchase of a car provided to an employee will not be recoverable, as there will almost always be some private usage.

However, this is not the case with commercial vehicles, motorcycles or pool cars (where private use is prohibited). These are not considered here.

However, if the car is leased, 50% of the VAT on the lease payments relating to the rental can be recovered. If the agreement includes maintenance, 100% of the VAT can be recovered on that element as long as it is identifiable. It must be shown as a separate line on the rental invoice.

Benefit-in-kind (BiK)
You would like to encourage, but not insist on, the choice of electric cars. However, the choice of zero or low-emission vehicles can offer significant personal tax advantages, making this an additional incentive for employees to choose these options.

A company provided car is taxable according to particular rules under the benefit code. The taxable amount is calculated by reference to the relevant percentage multiplied by the list price of the car. The relevant percentage for cars with lower emissions is lower than those with higher emissions, and so the tax charge is also lower. The relevant percentage of an EV is currently only 2%.

EXAMPLE
GREEN CAR A has a list price of £30,000 and is wholly electric.
BLUE CAR B is diesel powered and also has a list price of £30,000.
BLUE CAR B has an official CO2 emissions figure of 129g/km. The relevant percentages are 2% and 34% respectively for 2024/25. The taxable amounts are therefore:

2% x £30,000 = £600 and 34% x £30,000 = £10,200.

For a 40% taxpayer, these equate to tax charges of £240 and £4,080 – a significant difference.

The company will also have to pay Class 1A NI at 13.8%, so will see a lower bill for greener cars.

*Please note, the CO2 emissions figure is listed on the V5 document.

In an ideal world, your company would like to offer EV-only vehicles, but you have concluded that this is impractical due to some staff not able to carry out home charging, as well as staff who often travel to customers where the current range offered by EVs would not be sufficient. As a result, the intention is to offer EVs and hybrid models with emissions up to 50g/km.

Hybrids are simply treated as petrol or diesel vehicles for BiK purposes. The relevant percentage depends on the electric only range of the vehicle as follows:
• More than 130 miles – 2%
• 70 to 129 miles – 5%
• 40 to 69 miles – 8%
• 30 to 39 miles – 12%
• Less than 30 miles – 14%

As you can see, a hybrid with a high electric-only range is taxed at the same percentage as an EV.

The list price of the car is inclusive of VAT. If you obtain a discount, this is disregarded.

There are a number of factors that can reduce the taxable amount, including:

• Whether the employee has paid toward the cost of the car – this is called a capital contribution. The maximum capital contribution which has any effect on the calculation is £5,000 even if the employee contributes more.
• How many days the car is available to the employee in the tax year, ignoring any periods of less than 30 days when it wasn’t available.
• Any contribution from net pay towards the private use of the vehicle. This only has any effect for tax if you require the employee to make a contribution, a voluntary contribution has no effect.
• Whether the car is shared with another employee, including a spouse or civil partner. If so, the car benefit charge must be apportioned between the various drivers on a just and reasonable basis.

Salary sacrifice
Although the optional remuneration agreement (OpRA) rules introduced in 2017 curtailed many of the tax and NI savings, salary sacrifice arrangements can still be very efficient, especially for EVs and hybrids. For this reason, you could offer the vehicles under a lease arrangement with your employees, whereby they give up sufficient salary to cover the lease payments of the vehicle they choose.

However, a crucial exception to the OpRA rules exists for company cars with emissions of 75g/km or lower. As a result, your employees would be taxed on the cash equivalent with no need to compare this to the amount of salary foregone.

EXAMPLE
Sales Manager James has indicated he will choose a hybrid with an electric range of 125 miles. As the CO2 emissions are less than 50g/km, the relevant percentage for 2024/25 is 5%. The list price is £29,000, so the taxable amount is £1,450. As a 40% taxpayer this will mean £580 in additional tax in 2024/25. The lease cost is £330 per month including VAT. James agrees to sacrifice £3,960 of his salary. Under the OpRA rules, this amount would normally be the amount subject to tax, but because the emissions are below 75g/km, he will be charged on the lower £1,450.

As the OpRA rules don’t apply, employees are funding the car payments from gross salary, i.e. before tax and NI are deducted. The net cost to James in the example above is £3,960, less the tax and NI saved (42%) of £1,663, plus the BiK charge of £580, i.e. £2,877. He therefore saves £1,083 compared with a similar personal lease or HP contract.

In practice, an individual will not be able to obtain the same deal as a company could, even ignoring any potential company discount. So it is likely that if James opted for a private car he would be far more restricted in choice. The price premium attached to EVs and hybrids might even put these out of his reach altogether.

The company will also save NI. It will pay £200 Class 1A on the £1,450 cash equivalent, but it will save secondary Class 1 on the salary given up, i.e. £3,960 x 13.8% = £546 – a net saving of £346 per year.

This will offset the 50% blocked VAT on the rental element of the lease payments, meaning that running the scheme is cost neutral, or even slightly beneficial, for you.

Please note, the lease costs are a deductible revenue expense as discussed above. However, in our example the deduction simply replaces the deduction that would have applied to the salary that has been given up, it doesn’t save anything extra.

Additional bonus
Don’t forget that the tax and NI savings are only one of the perks for employees. A business lease will usually cover vehicle excise duty, insurance, breakdown cover, as well as servicing and repairs. Meaning that the real saving could be significantly more in practice, particularly for employees with older vehicles.

Pool cars
If staff must undertake long journeys to see customers, you could consider acquiring some pool cars which can be used for this purpose. The advantage of this is that the VAT on the purchase price or lease payments can be reclaimed in full. You could also have your company’s branding on the car, something which would be undesirable for a car made available to individual employees.

To qualify as a pool car for a particular tax year, all of the following conditions must be met:

1. The car was made available to, and actually used by, more than one employee.
2. The car was made available by reason of the employee’s employment.
3. The car was not ordinarily used by one employee to the exclusion of others.
4. Any private use of the car by an employee was merely incidental to their other use of the car.
5. The car was not normally kept overnight at or near any residential premises where any employee was residing.

It is good practice to have a policy for use of pool cars and have some form of log to monitor who has used the car, what for, the purpose of the use, the places travelled between (including the postcodes), and the mileage before the car was used and the mileage at the point of return.

IN SUMMARY
Relief for purchased cars is given via capital allowances. Only wholly electric vehicles qualify for the 100% first year allowance, so you may wish to consider leasing instead.
If the emissions are 50g/km or below, 100% of the payments will be deductible.

Salary sacrifice can still produce big savings, as long as the cars have emissions of not more than 75g/km, as the optional remuneration agreement rules don’t apply.

If you are planning to introduce a company car scheme and would like further advice, please do not hesitate to contact one of the team at JRW Hogg & Thorburn.