Cars

This article is relevant to those of you sitting the TX-UK exam in the period 1 June 2023 to 31 March 2024, and is based on tax legislation as it applies to the tax year 2022–23 (Finance Act 2022).

Cars regularly feature in TX-UK exams, which is not surprising given that acquiring, running, or having the use of a car can have income tax, corporation tax, value added tax (VAT) or national insurance contribution (NIC) implications.

Purchasing a car

When a sole trader, partnership or limited company purchases a car, capital allowances will be available. Cars do not qualify for the annual investment allowance, although new electric cars with zero CO₂ emissions qualify for a 100% first-year allowance.

Cars qualifying for writing down allowances at the rate of 18% (CO₂ emissions between 1 and 50 grams per kilometre) are included in the main pool, whilst cars qualifying for writing down allowances at the rate of 6% (CO₂ emissions over 50 grams per kilometre) are included in the special rate pool.

EXAMPLE 1
Newstart Ltd commenced trading on 1 April 2022. The following new cars were purchased during the year ended 31 March 2023:

Car (1) is electric.

The company’s capital allowances for the year ended 31 March 2023 are:

• Car (1) has zero CO₂ emissions and therefore qualifies for the 100% first year allowance.
• Car (2) has CO₂ emissions between 1 and 50 grams per kilometre and is therefore included in the main pool.
• Car (3) has CO₂ emissions over 50 grams per kilometre and is therefore included in the special rate pool.

There is no private use adjustment where a car is used by a director or an employee – an adjustment is only made where there is private use by a sole trader or a partner. Cars with private use are not pooled, but are kept separate so that the private use adjustment can be calculated.

EXAMPLE 2
Judith prepares accounts to 5 April. On 6 April 2022, the tax written down values of her plant and machinery were:

The following new cars were purchased during the year ended 5 April 2023:

The following cars were sold during the year ended 5 April 2023:

Cars (1) and (2) were used by Judith, and 35% of the mileage was for private journeys. Cars (3) and (4) were used by an employee, and 10% of the mileage was for private journeys. The original cost of car (4) was £14,300, and this has previously been added to the main pool.

Judith’s capital allowance claim for the year ended 5 April 2023 is:

• The private use of cars (3) and (4) is irrelevant since such usage will be assessed on the employee as a taxable benefit.
• Note that with car (2), the full writing down allowance is deducted in calculating the written down value carried forward.

Where partners own their cars privately, it is the partnership (and not the individual partners) which make the capital allowances claim.

EXAMPLE 3
Auy and Bim commenced in partnership on 6 April 2022. The following new cars were purchased during the year ended 5 April 2023:

Car (1) is electric. This car is used by Auy, and 40% of the mileage is for business journeys. Car (2) is used by Bim, and 85% of the mileage is for business journeys.

The partnership’s capital allowances for the year ended 5 April 2023 are:

Unless a car is used exclusively for business purposes, input VAT is not recoverable when it is purchased. Output VAT will then not be due on the car’s disposal. Therefore, for capital allowance purposes, VAT inclusive figures are used.

EXAMPLE 4
Lynx Ltd is registered for VAT. During the year ended 31 March 2023, the company purchased a car for £36,000 (including VAT of £6,000) and equipment for £48,000 (including VAT of £8,000). The car is used by Lynx Ltd’s sales director, and 40% of the mileage is for private journeys.

The VAT included in the cost of the equipment is recoverable, so capital allowances will be based on the net of VAT expenditure of £40,000 (48,000 – 8,000).

Given the private use by the sales director, the VAT included in the cost of the car is not recoverable. Capital allowances will therefore be based on the VAT inclusive expenditure of £36,000.

Leasing a car

When calculating a business’s trading profit, no adjustment is necessary where the CO₂ emissions of a leased car do not exceed 50 grams per kilometre. Where CO₂ emissions are more than 50 grams per kilometre, 15% of the leasing costs are disallowed in the calculation.

EXAMPLE 5
When calculating its trading profit for the year ended 31 March 2023, Fabio Ltd deducted the following leasing costs:

• The disallowance of leasing costs for the car with CO₂ emissions of 70grams per kilometre is £492 (3,280 x 15%).
• There is no disallowance for the car with CO₂ emissions of 25 grams per kilometre as this is less than 50 grams per kilometre.

Where a leased car is available for private use, 50% of input VAT on leasing costs is non-deductible.

EXAMPLE 6
During the quarter ended 31 March 2023, Jimi, a sole trader, leased a car at a cost of £960 (inclusive of VAT). The car is used by Jimi and 70% of the mileage is for private journeys.

The car is available for private use, so £80 (960 x 20/120 x 50%) of the input VAT is non-deductible.

Car expenses

When calculating the trading profit for a sole trader or a partnership, an adjustment will be necessary for the private proportion of car expenses which relate to the sole trader or the partners. No adjustment is necessary where car expenses relate to directors or employees.

EXAMPLE 7
When calculating its trading profit for the year ended 5 April 2023, the partnership of Look & Hear deducted car expenses of £4,100. This figure includes £2,600 in respect of the partners’ cars, with 30% of this amount being in respect of private journeys.

The disallowance for car expenses is £780 (2,600 x 30%).

Provided there is some business use, the full amount of input VAT can be reclaimed in respect of repairs.

Where fuel is provided all the input VAT (for both private and business mileage) can be recovered, but the private use element is then normally accounted for by way of an output VAT scale charge. This is based on the car’s CO₂ emissions, and will vary according to the length of the VAT period. The scale charge can apply to sole traders, partners, employees or directors.

EXAMPLE 8
Vanessa is self-employed, and has a car which is used 70% for business mileage. During the quarter ended 31 March 2023, Vanessa spent £1,128 on repairs to the car and £984 on fuel for both business and private mileage. The relevant quarterly scale charge is £402. All figures are inclusive of VAT.

Vanessa will include the following entries on her VAT return for the quarter ended 31 March 2023:

However, if an employee or director is charged the full cost for the private fuel provided, output VAT will instead be calculated on this charge to the employee or director.

EXAMPLE 9
Ivy Ltd provides one of its directors with a company car which is used for both business and private mileage. For the quarter ended 31 March 2023, the total cost of petrol was £720, with the director being charged £216 for the private use element. Both figures are inclusive of VAT.

Ivy Ltd will include the following entries on its VAT return for the quarter ended 31 March 2023:

Provision of a company car

When an employee is provided with a company car, the taxable benefit is calculated as a percentage of the car’s list price. The percentage is based on the level of the car’s carbon dioxide (CO₂) emissions.

List price: Any discounts given to the employer are ignored. The employee can reduce the figure on which his or her company car benefit is calculated by making a capital contribution of up to £5,000.

Percentage: The percentage for electric cars with zero CO₂ emissions is 2%.

• For hybrid-electric cars with CO₂ emissions between 1 and 50 grams per kilometre, the electric range of a car is relevant in determining the car benefit percentage, as follows:
  
  Electric range 
  130 miles or more – 2%
  70 to 129 miles – 5%
  40 to 69 miles – 8%
  30 to 39 miles – 12%
  Less than 30 miles –14%
  
  
• For a car with a CO₂ emission rate of between 51 and 54 grams per kilometre, the percentage is 15%.
  
  
• A 16% base percentage applies once CO₂ emissions reach a base level of 55 grams per kilometre.
  
  
• The base percentage of 16% rises in 1% steps for each 5 grams per kilometre above the base level of 55 grams per kilometre, up to a maximum of 37%.

Diesel cars: There is a 4% surcharge for diesel cars which do not meet the real driving emissions 2 (RDE2) standard. Diesel cars meeting the RDE2 standard are treated as if they were petrol cars. The percentage rates (including the lower rate of 15%) are increased by 4% for diesel cars which do not meet the standard, but not beyond the maximum percentage rate of 37%.

Reduction: The taxable benefit is proportionately reduced if a car is unavailable for part of the tax year. This could be the tax year when a is first provided, the tax year when a car ceases to be provided or because a car is unavailable for a period of at least 30 continuous days.

Contribution: Any contribution made by an employee towards the use of a company car will reduce the taxable benefit.

Pool cars: The use of a pool car does not result in a company car benefit. A pool car is one which is used by more than one employee, and is used only for business journeys (private use is only permitted if it is merely incidental to a business journey), and where the car is not normally kept at or near an employee’s home.

Related benefits: The car benefit covers all the costs associated with having a car such as insurance and repairs. The only cost which will result in an additional benefit is the provision of a chauffeur.

EXAMPLE 10
During the tax year 2022–23, Fashionable plc provided the following employees with company cars:

Amanda was provided with a hybrid-electric company car throughout the tax year 2022–23. The car has a list price of £32,200, an official CO₂ emission rate of 24 grams per kilometre and an electric range of 90 miles.

Betty was provided with a new diesel company car throughout the tax year 2022–23. The car has a list price of £16,400 and an official CO₂ emission rate of 99 grams per kilometre. The car meets the RDE2 standard.

Charles was provided with a new diesel company car on 6 August 2022. The car has a list price of £13,500 and an official CO₂ emission rate of 102 grams per kilometre. The car does not meet the RDE2 standard.

Diana was provided with a new petrol company car throughout the tax year 2022–23. The car has a list price of £84,600 and an official CO₂ emission rate of 178 grams per kilometre. Diana paid Fashionable plc £1,200 during the tax year 2022–23 for the use of the car. Diana was unable to drive her car for two weeks during February 2023 because of an accident, so Fashionable plc provided her with a chauffeur at a total cost of £1,800.

Amanda
With CO₂ emissions between 1 and 50 grams per kilometre, the electric range of the car is relevant. This is between 70 and 129 miles, so the relevant percentage is 5%. The car was available throughout 2022–23, so the benefit is £1,610 (32,200 x 5%).

Betty
The CO₂ emissions are above the base level figure of 55 grams per kilometre. The CO₂ emissions figure of 99 is rounded down to 95 so that it is divisible by five. The minimum percentage of 16% is increased in 1% steps for each five grams per kilometre above the base level, so the relevant percentage is 24% (16% + 8% ((95 – 55)/5)). The 4% surcharge for diesel cars is not applied because the RDE2 standard is met. The car was available throughout 2022–23, so the benefit is £3,936 (16,400 x 24%).

Charles
The CO₂ emissions are above the base level figure of 55 grams per kilometre. The relevant percentage is 29% (16% + 9% ((100 – 55)/5) + 4% (charge for a diesel car not meeting the RDE2 standard)). The car was only available for eight months of 2022–23, so the benefit is £2,610 (13,500 x 29% x 8/12).

Diana
The CO₂ emissions are above the base level figure of 55 grams per kilometre. The relevant percentage is 40% (16% + 24% ((175 – 55)/5)), but this is restricted to the maximum of 37%. The car was available throughout 2022–23, so the benefit is £30,102 ((84,600 x 37%) – 1,200). The contribution by Diana towards the use of the car reduces the benefit. The car was unavailable for two weeks; as this is less than 30 continuous days there is no reduction in the benefit. The provision of a chauffeur will result in an additional benefit of £1,800.

If fuel is provided for private use, there will additionally be a fuel benefit. This is also based on a car’s CO₂ emissions.

Base figure: For the tax year 2022–23 the base figure is £25,300.

Percentage: The percentage used in the calculation is exactly the same as that used for calculating the related company car benefit.

Reduction: The fuel benefit is proportionately reduced if a car is unavailable for part of the tax year.

The fuel benefit can also be proportionately reduced where the fuel itself is only provided for part of the tax year. However, it is not possible to opt in and out depending on monthly use.  If, for example, fuel is provided from 6 April to 30 September 2022, the fuel benefit for the tax year 2022–23 will be restricted to just six months. This is because the provision of fuel has permanently ceased. However, if fuel is provided from 6 April to 30 September 2022, and then again from 1 January to 5 April 2023, the fuel benefit will not be reduced - the cessation was only temporary.

Contribution: No reduction is made for contributions made by an employee towards the cost of private fuel unless the entire cost is reimbursed. In this case there will be no fuel benefit.

EXAMPLE 11
Continuing with example 10.

Amanda was provided with fuel for private use between 6 April 2022 and 5 April 2023.

Betty was provided with fuel for private use between 6 April and 31 December 2022.

Charles was provided with fuel for private use between 6 August 2022 and 5 April 2023.

Diana was provided with fuel for private use between 6 April 2022 and 5 April 2023. She paid Fashionable plc £600 during the tax year 2022–23 towards the cost of private fuel, although the actual cost of this fuel was £1,000.

Amanda
Amanda was provided with fuel for private use throughout 2022–23, so the fuel benefit is £1,265 (25,300 x 5%).

Betty
Betty was provided with fuel for private use for nine months of 2022–23, so the benefit is £4,554 (25,300 x 24% x 9/12).

Charles
Charles was provided with fuel for private use for eight months of 2022–23, so the benefit is £4,891 (25,300 x 29% x 8/12).

Diana
Diana was provided with fuel for private use throughout 2022–23, so the benefit is £9,361 (25,300 x 37%). There is no reduction for the contribution made by Diana because the cost of private fuel was not fully reimbursed.

The employer is responsible for paying class 1A NIC in respect of taxable benefits at the rate of 15.05%.

EXAMPLE 12
Continuing with examples 10 and 11.

The total amount of taxable benefits for 2022–23 is £60,129 (1,610 + 3,936 + 2,610 + 30,102 + 1,800 + 1,265 + 4,554 + 4,891 + 9,361), so Fashionable plc will have to pay class 1A NIC of £9,049 (60,129 at 15.05%).

Use of own car

Employees who use their own car for business travel must use HM Revenue and Customs (HMRC) approved mileage allowances in order to calculate any taxable benefit arising from mileage allowances received from their employer. Employees who use their cars for business mileage without being reimbursed by their employer (or where the reimbursement is less than the approved mileage allowances), can use the approved mileage allowances as a basis for an expense claim.

The rate of approved mileage allowance for the first 10,000 business miles is 45p per mile, and for business mileage in excess of 10,000 miles the rate is 25p per mile.

Unlike other taxable benefits which are subject to class 1A NIC, any taxable benefit arising from mileage allowances is treated as earnings subject to both employee and employer’s class 1 NICs.

EXAMPLE 13
Dan and Diane used their own cars for business travel during the tax year 2022–23.

Dan drove 8,000 miles in the performance of his duties, and his employer reimbursed him at the rate of 60p per mile.

Diane drove 12,000 miles in the performance of her duties, and her employer reimbursed her at the rate of 30p per mile.

Dan
The mileage allowance received by Dan was £4,800 (8,000 at 60p), and the tax-free amount was £3,600 (8,000 at 45p). The taxable benefit is therefore £1,200 (4,800 – 3,600).

The taxable benefit will be included as part of Dan’s taxable income. It will also be subject to both employee and employer’s class 1 NICs.

Diane
Diane can make an expense claim of £1,400:

Sometimes, rather than being given the amount of business mileage, you might have to ascertain what it is. Remember that business mileage does not include:

Ordinary commuting: This is where an employee drives between home and their normal workplace. This includes the situation where an employee is required to go into work at the weekend or because of an emergency such as to turn off a fire alarm.

Private travel: This is any journey which is not for work purposes.

Business mileage includes the following:

Travel to visit clients: This is provided the journey is not virtually the same as the employee’s ordinary commute, such as where an employee travels from home to a client’s premises which are situated near their normal workplace.

Travel to a temporary workplace: A temporary workplace is one where the employee expects to be based for less than 24 months. Again, there is the provision that the journey must not be virtually the same as the employee’s normal commute.

EXAMPLE 14
During the tax year 2022–23, Joan used her private car for both private and business journeys. She was reimbursed by her employer, Steam Ltd, at the rate of 40p per mile for the following mileage:

• The mileage allowance received by Joan was £3,416 (8,540 at 40p).
• Ordinary commuting does not qualify for relief, but the travel to the temporary workplace qualifies as the 24-month limit is not exceeded.
• The tax-free amount is £2,727 ((3,360 + 1,870 + 830) at 45p).
• The taxable benefit is therefore £689 (3,416 – 2,727).

The authorised mileage allowances can also be used in other circumstances.

EXAMPLE 15
Leticia lets out a property. During the tax year 2022–23, she drove 1,180 miles in her car in respect of the property letting business. Leticia uses HMRC’s approved mileage rates to calculate her expense deduction. The mileage was for the following purposes:

The mileage which Leticia drove in respect of the property purchase is capital in nature, and therefore does not qualify. Her mileage allowance is therefore £459 ((880 + 140) at 45p).

If a sole trader or partnership uses the cash basis to calculate trading profit, the business can use approved mileage allowances to determine the deduction for business mileage.

EXAMPLE 16
Winifred is self-employed, using the cash basis to calculate her trading profit. On 10 April 2022, she purchased a car with CO₂ emissions of 30 grams per kilometre for £15,600. The car is used by Winifred, and 70% of the mileage is for private journeys. For the year ended 5 April 2023, car expenses were £4,800, with Winifred driving 8,000 business miles.

For the year ended 5 April 2023, Winifred can claim an expense deduction of £3,600 (8,000 miles at 45p). Capital allowances and actual car expenses are not relevant if approved mileage allowances are claimed.

Capital gains tax and inheritance tax

The disposal of a car is exempt for CGT purposes, but there is no exemption from IHT. Therefore, a person’s estate includes the value of any cars which they own at the date of death.

Written by a member of the TX-UK examining team