If your employees enjoy multiple changes of company car during the year, could averaging the car benefit calculation save tax? If so, what’s involved and how can they avoid an unexpected tax bill?
The issue
It is customary in certain trades, such as car rentals, for employees to have private use of several cars in the tax year. While their employment contract typically states that they have a contractual right to take a car home, they have no right to a specific vehicle. Tip. This issue also affects employees in other sectors, such as estate agents and sales.
The provision of an employer-provided car results in a taxable benefit in kind charge on the employee, with an associated Class 1A NI liability borne by the employer. The cash equivalent of the benefit is normally based on the exact details of each car’s list price, emissions figure and tally of days available. As this is administratively cumbersome for multiple cars, HMRC allows an averaging mechanism in order to simplify the calculations, which can be used by any business where frequent changes of car occur. Tip. Averaging is not a tax-saving device – merely a time-saving one. Tip. Although unlikely, an employee has the right to the statutory calculation, but the onus is on them to provide evidence of every car driven.
What’s involved?
Each employee is deemed to drive a single notional petrol car in place of the numerous cars actually available to them. The calculation involves several steps which broadly:
- groups the available cars in terms of price
- calculates the average price and emissions level of all the cars in each group which is represented by the “notional car”
- allocates employees to each group as appropriate; and
- calculates the benefit for each employee based on the notional car of the relevant group.
Trap. HMRC doesn’t accept any reduction in recognition of older cars or the fact that the employee can’t choose which car is actually made available. Trap. Employees can get slammed with an expensive car fuel benefit charge based on the notional car unless they make good all of the private fuel used. Tip. HMRC accepts that an employee may drive a car in another group on occasion. If this becomes a pattern, the employee is treated as driving two notional cars.
Good record keeping
To avoid mistakes, you should keep detailed records including:
- the list price, type of fuel and emissions figure of each car
- the cars allocated to each group and how the “notional car” benefit has been calculated
- a list of employees within the arrangements, including dates of starters and leavers; and
- how employees have been allocated to each group.
Tip. Make sure you draft a watertight policy on the private use of cars which your employees sign up to. Trap. Failure to implement the averaging rules properly and retain sufficient records could lead to penalties and HMRC will recoup any lost tax.
Is it worth it?
Unless it’s actually difficult to identify individual car usage or many employees are affected by such arrangements, it will often not be advantageous to undertake car averaging, as it represents a compromise on accuracy and also potentially exposes your business to HMRC scrutiny.
When many of your employees have frequent changes in their company car, averaging can be a simpler method of calculating the car benefit charge. However, you’ll need to have a robust recording system and, unless the employee pays you for their private fuel, they could be landed with a nasty increased tax bill.
This article has been reproduced by kind permission of Indicator – FL Memo Ltd. For details of their tax-saving products please visit www.indicator-flm.co.uk or call 01233 653500.