Tax impact of Covid-19 on company cars

25/07/2020 - 6 minutes read

While there has been no tax break on company cars that have sat on the drive during the pandemic, a rebate on fuel benefits is still possible

For many employees with a company car sitting idle during the coronavirus lockdown, what was once a valued benefit has become an expensive ornament which has hardly been used over the last three months. However, all is not lost for those who also have their fuel paid for by their employer, as a tax refund could be on the cards.

According to the benefits-in-kind statistics published by the government in June 2019, nearly a million people in the UK benefit from a company car. Unloved and likely in need of a wash, there may be some pent-up resentment from employees towards the amounts of tax and salary currently being sacrificed each month in honour of their redundant company car.

Given the likely lack of use, personal or otherwise, of company cars in the last three months, employees might be hoping for a relaxation of the benefit-in-kind (BiK) tax charges that are normally imposed on them.

Unfortunately, HMRC’s generosity has not extended that far. HMRC has already clarified that the taxable benefit for the use of a company car will continue to apply in circumstances where the car is still available for private use. 

A car sitting on a furloughed employee’s driveway is likely to be considered by HMRC as ‘available’ for use. 

In order to reduce the taxable benefit from arising, HMRC has explained that either the car or at least the keys to the car must have been handed back to the employer. That opportunity has not been well publicised so for the vast majority of those with company cars, their tax position is likely to remain unchanged this year.

Cost of fuel benefit

Current statistics show that around 8% of the total taxable benefits in the UK relate to company car fuel. Around 140,000 people receive the benefit, with the total taxable value of fuel benefits amounting to £590m across the UK.

Those figures are perhaps a little surprising as car fuel benefits are often very costly from a tax perspective because the taxable benefit is fixed and takes no account of the actual private use in the year. This can result in the tax being paid on the fuel benefit outweighing the cost of actual fuel used for private journeys during the year.

The issue is probably best highlighted with an example.

  • – In order to calculate the taxable fuel benefit in 2020/21 tax year, you multiply an amount of £24,500 by a percentage derived from the car’s CO2 emissions figure. 
  • – For one of the most popular company cars, a diesel Mercedes-Benz E-Class, the CO2 emissions percentage works out as 36%.
  • – The taxable benefit of fuel paid for by the employer for this car works out as £8,820 (i.e. £24,500 x 36%).
  • – A higher rate taxpayer will therefore suffer an income tax liability of £3,528 for their fuel benefit. 
  • – Assuming a fuel economy of 50 miles per gallon and with diesel prices averaging around 114 pence per litre in recent months.

Benefit opportunity

The problem is exacerbated by lower fuel prices and the fact that private use of a company car in recent months during lockdown is likely to be lower than it might otherwise have been. 

However, there is still an opportunity for some to reclaim part of this tax. If the employer requires the employee to ‘make good’ (i.e. repay) amounts for fuel used on private journeys and the fuel benefit is repaid before 6 July 2021, then HMRC should agree no BiK charge should arise for the 2020/21 tax year.

The provisions are set out in s151 Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003) and outline that the cash equivalent of a fuel benefit if either Condition A or B is met:

Condition A: in the tax year in question, the employee is required to make good to the employer the whole of the expense incurred relating to fuel for the employee’s private use and does so on or before 6 July following that tax year.

Condition B: in the tax year in question, the fuel is made available only for business travel.

In order to satisfy HMRC that Condition A is met, the requirement to ‘make good’ should ideally be in force before the fuel is provided.

It is therefore sensible for employees receiving fuel benefits to explore with their employer whether they are strictly required to repay amounts of their fuel benefit incurred through private use. If not, perhaps it is time for employers to review their fuel benefit provision as it could potentially lead to a reclaim of income tax for their staff in the future.

Now that the car has earned its keep, perhaps it’s time to get the power-washer and turtle wax out and show it some love after all.

Contact MCL Chartered Accountants today on 01702 593 029 to optimise your tax position