Should I offer my employees a company car?

It’s a nice question to ask yourself because it means your business is doing well, but this is not a decision that should be taken lightly. There are many things to consider, from cash-flow to usage and the value it would add to your business.

There are also numerous tax issues, which we aim to address below, in our guide to leasing a vehicle for your employees in the UK.

The company car was once one of the key perks of the executive level employee, and it was highly popular. But things have changed, and there are a number of tax implications which make the company car scheme more challenging for small business owners.

Reclaiming VAT

While it is true that VAT can be reclaimed, in the UK VAT registered businesses can usually only reclaim 50% of the VAT they pay on the cars leased. This number drops to 0% if the car is actually purchased by the company for use by the employee.

This is because the company car, while primarily used for work, will also always be used for personal journeys not connected to the company role. In other words, if the company can prove that the car is used 100% for work, then 100% of the VAT can be repaid, but this is a headache and most avoid going down this route and opt instead for a 50/50 claim.

Following this logic, 100% of the VAT can be repaid on pool cars, as these are never taken home for personal use, so this might be one option to consider. However, be aware of the rules as they are very strict and include being able to prove that the cars stay on site overnight.

Capital gains

Cars do not qualify for the Annual Investment Allowance, and so need to be included on the Writing Down Allowance if they are to be offset as a capital allowance.

The amount that can be written down depends on CO2 emissions and the age of the car. The allowances and levels can be explored here.

Tax for Employers

Lastly, Class 1A National Insurance Contributions must be paid on the taxable value of the cars which are offered to employees. This tax rate is set at 13.8%.

This same rate of tax must also be paid on the fuel used by employees for personal use, but which was paid for by the company. You can find more information about the fuel rates here.

If you are a small business owner, or are interested in company cars, speak to the professionals at Mayday Vehicle Rentals for further information.

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