Motor cars

This article is relevant to those of you sitting the TX-UK exam in the period 1 June 2022 to 31 March 2023, and is based on tax legislation as it applies to the tax year 2021–22 (Finance Act 2021).

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

Purchasing a motor car

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

Motor 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 motor 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 2021. The following new motor cars were purchased during the year ended 31 March 2022:

Motor car (1) is electric-powered.

The company’s capital allowances for the year ended 31 March 2022 are:

• Motor car (1) has zero CO₂ emissions and therefore qualifies for the 100% first year allowance.
• Motor car (2) has CO₂ emissions between 1 and 50 grams per kilometre and is therefore included in the main pool.
• Motor 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 motor 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. Motor 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 2021, the tax written down values of her plant and machinery were:

The following new motor cars were purchased during the year ended 5 April 2022:

The following motor cars were sold during the year ended 5 April 2022:

Motor cars (1) and (2) were used by Judith, and 35% of the mileage was for private journeys. Motor cars (3) and (4) were used by an employee, and 10% of the mileage was for private journeys. The original cost of motor 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 2022 is:

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

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

EXAMPLE 3
Auy and Bim commenced in partnership on 6 April 2021. The following new motor cars were purchased during the year ended 5 April 2022:

Motor car (1) is electric-powered. This motor car is used by Auy, and 40% of the mileage is for business journeys. Motor 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 2022 are:

Unless a motor 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 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 2022, the company purchased a motor car for £36,000 (including VAT of £6,000) and equipment for £48,000 (including VAT of £8,000). The motor 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 motor car is not recoverable. Capital allowances will therefore be based on the VAT inclusive expenditure of £36,000.

Leasing a motor car

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

EXAMPLE 5
When calculating its trading profit for the year ended 31 March 2022, Fabio Ltd deducted the following leasing costs:

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

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

EXAMPLE 6
During the quarter ended 31 March 2022, Jimi, a sole trader, leased a motor car at a cost of £960 (inclusive of VAT). The motor car is used by Jimi and 70% of the mileage is for private journeys.

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

Motor expenses

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

EXAMPLE 7
When calculating its trading profit for the year ended 5 April 2022, the partnership of Look & Hear deducted motor expenses of £4,100. This figure includes £2,600 in respect of the partners’ motor cars, with 30% of this amount being in respect of private journeys.

The disallowance for motor 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 then 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 motor 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 motor car which is used 70% for business mileage. During the quarter ended 31 March 2022, Vanessa spent £1,128 on repairs to the motor car and £984 on fuel for both business and private mileage. The relevant quarterly scale charge is £336. All figures are inclusive of VAT.

Vanessa will include the following entries on her VAT return for the quarter ended 31 March 2022:

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 motor car which is used for both business and private mileage. For the quarter ended 31 March 2022, 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 2022:

Provision of a company motor car

When an employee is provided with a company motor car, then the taxable benefit is calculated as a percentage of the motor car’s list price. The percentage is based on the level of the motor 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-powered motor cars with zero CO₂ emissions is 1%.

• For hybrid-electric motor cars with CO₂ emissions between 1 and 50 grams per kilometre, the electric range of a motor car is relevant in determining the car benefit percentage, as follows:
  
  Electric range 
  130 miles or more – 1%
  70 to 129 miles – 4%
  40 to 69 miles – 7%
  30 to 39 miles – 11%
  Less than 30 miles –13%
  
  
• For a motor car with a CO₂ emission rate of between 51 and 54 grams per kilometre, the percentage is 14%.
  
  
• A 15% base percentage applies once CO₂ emissions reach a base level of 55 grams per kilometre.
  
  
• The base percentage of 15% 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. Company diesel cars meeting the RDE2 standard are treated as if they were petrol cars. The percentage rates (including the lower rate of 14%) 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 motor car is unavailable for part of the tax year. This could be the tax year when a motor car is first provided, the tax year when a motor car ceases to be provided or because a motor 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 motor 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 that is used by more than one employee, that is used only for business journeys (private use is only permitted if it merely incidental to a business journey), and where the motor car is not normally kept at or near an employee’s home.

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

EXAMPLE 10
During the tax year 2021–22, Fashionable plc provided the following employees with company motor cars:

Amanda was provided with a hybrid-electric company car throughout the tax year 2021–22. The motor 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 powered company car throughout the tax year 2021–22. The motor car has a list price of £16,400 and an official CO₂ emission rate of 104 grams per kilometre. The motor car meets the RDE2 standard.

Charles was provided with a new diesel powered company car on 6 August 2021. The motor car has a list price of £13,500 and an official CO₂ emission rate of 107 grams per kilometre. The motor car does not meet the RDE2 standard.

Diana was provided with a new petrol powered company car throughout the tax year 2021–22. The motor car has a list price of £84,600 and an official CO₂ emission rate of 183 grams per kilometre. Diana paid Fashionable plc £1,200 during the tax year 2021–22 for the use of the motor car. Diana was unable to drive her motor car for two weeks during February 2022 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 motor car is relevant. This is between 70 and 129 miles, so the relevant percentage is 4%. The motor car was available throughout 2021–22, so the benefit is £1,288 (32,200 x 4%).

Betty
The CO₂ emissions are above the base level figure of 55 grams per kilometre. The CO₂ emissions figure of 104 is rounded down to 100 so that it is divisible by five. The minimum percentage of 15% is increased in 1% steps for each five grams per kilometre above the base level, so the relevant percentage is 24% (15% + 9% ((100 – 55)/5)). The 4% surcharge for diesel cars is not applied because the RDE2 standard is met. The motor car was available throughout 2021–22, 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% (15% + 10% ((105 – 55)/5) + 4% (charge for a diesel car not meeting the RDE2 standard)). The motor car was only available for eight months of 2021-22, 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% (15% + 25% ((180 – 55)/5)), but this is restricted to the maximum of 37%. The motor car was available throughout 2021–22, so the benefit is £30,102 ((84,600 x 37%) – 1,200). The contribution by Diana towards the use of the motor car reduces the benefit. The motor 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, then there will additionally be a fuel benefit. This is also based on a motor car’s CO₂ emissions.

Base figure: For the tax year 2021–22 the base figure is £24,600.

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 motor 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 2021, then the fuel benefit for the tax year 2021–22 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 2021, and then again from 1 January to 5 April 2022, then 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 2021 and 5 April 2022.

Betty was provided with fuel for private use between 6 April and 31 December 2021.

Charles was provided with fuel for private use between 6 August 2021 and 5 April 2022.

Diana was provided with fuel for private use between 6 April 2021 and 5 April 2022. She paid Fashionable plc £600 during the tax year 2021–22 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 2021–22, so the fuel benefit is £984 (24,600 x 4%).

Betty
Betty was provided with fuel for private use for nine months of 2021–22, so the benefit is £4,428 (24,600 x 24% x 9/12).

Charles
Charles was provided with fuel for private use for eight months of 2021–22, so the benefit is £4,756 (24,600 x 29% x 8/12).

Diana
Diana was provided with fuel for private use throughout 2021–22, so the benefit is £9,102 (24,600 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 13.8%.

EXAMPLE 12
Continuing with examples 10 and 11.

The total amount of taxable benefits for 2021–22 is £59,006 (1,288 + 3,936 + 2,610 + 30,102 + 1,800 + 984 + 4,428 + 4,756 + 9,102), so Fashionable plc will have to pay class 1A NIC of £8,143 (59,006 at 13.8%).

Use of own motor car

Employees who use their own motor 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 motor 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 motor cars for business travel during the tax year 2021–22.

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 that 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 2021–22, Joan used her private motor 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 does qualify 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 2021–22, she drove 1,180 miles in her motor car in respect of the property letting business. She uses HMRC’s approved mileage rates to calculate her expense deduction. The mileage was for the following purposes

The mileage that 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, then 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 2021, she purchased a motor car with CO₂ emissions of 30 grams per kilometre for £15,600. The motor car is used by Winifred, and 70% of the mileage is for private journeys. For the year ended 5 April 2022, motor expenses were £4,800, with Winifred driving 8,000 business miles.

For the year ended 5 April 2022, Winifred can claim an expense deduction of £3,600 (8,000 miles at 45p). Capital allowances and actual motor expenses are not relevant when approved mileage allowances are claimed.

Capital gains tax and inheritance tax

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

Written by a member of the TX-UK examining team