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Car Benefit Charge – Situations where cars are changed frequently
Monday, November 17th, 2008
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Summary: The existing local “averaging” procedures, agreed between employers and tax offices in order to calculate the car benefit charge for employees who change their cars very frequently, is replaced by a new, seven-step, national averaging procedure from April 2009.
In August 2008, HMRC made a number of changes to its Employment Income Manual, one of which was to specify a temporary “averaging” arrangement that employers could use to calculate the car benefit charge where the car allocated to employees changes very frequently, even on a daily basis. The arrangement does not apply, however, if the allocated car is provided for exclusive use for a predictable period of time, such as a employee whose car is changed monthly.
The problem situations arise principally in the motor industry and the procedure in effect for 2008/09 allows employers to perform a single calculation for whole of the tax year by agreeing with their tax inspector
- the price of a notional car, and
- the CO2 emissions figure for that notional car.
The arrangement is intended solely to simplify the calculation of the car benefit charge, not to provide a lower tax charge overall than that which would otherwise apply.
The announcement about this “averaging” arrangement also stated that a new, national arrangement would be introduced from 2009/10 when discussions with the various trade bodies had been completed.
HMRC has now released advance copies of the pages that are to be inserted in the Employment Income Manual in order to give affected employers time to make the necessary changes from the start of the 2009/10 tax year. The guidance covers three specific situations, namely,
- test and experimental cars
- demonstration and courtesy cars
- employees with frequent changes of car
Test and experimental cars
The vehicles in question are cars being used for testing in a documented research programme by a manufacturer of either the car or of the specific components under test.
Test engineers in both the motor industry and the components industry are often required, as part of their jobs, to test cars under various driving conditions. For certain types of test, such as cold starting, the only practical way of conducting them is for the engineers concerned to use the cars for private journeys and to report on their performance.
In law, private use of a test car results in a car benefit charge. However, HMRC accepts that no benefit charge would arise if the primary use of the car is for testing and any private use is clearly subsidiary to that testing.
Note, however, the following situations:
- If an employee does not have a company car, or has a company car for which no tax charge arises (e.g. because there is no private use), a car benefit charge would arise if the “primary use” test, above, were not met, e.g. because a test car is used for holiday travel.
- If an employee has a taxable company car and the test car is used instead, HMRC accepts that the test car can be viewed as a replacement car, without any additional tax charge.
Demonstration and courtesy cars
Where car salesmen and servicing staff are allowed to use demonstration or courtesy cars for their private use, a car benefit charge applies. There is only one minor exception, namely where a car is taken home at night as part of a collection and delivery arrangement with a customer or for the specific purpose of calling on a prospective customer, the whole journey would be viewed as business travel and the commuting part of the journey would not be treated as private use. However, if the employee is already liable for the car benefit charge, such a business journey does not serve to reduce the charge in any way.
Employees with frequent changes of car
From 6 April 2009, all local “averaging” arrangements with tax offices cease to apply. They are replaced by new national arrangements, drawn up following consultation with relevant trade bodies, that qualifying employers may use instead of the statutory rules. They apply to situations where there are very frequent changes of car, in particular where an employee is contractually entitled to take a car home, but not any specific car. Such situations arise commonly in motor manufacturing, the retail car sales industry (both new and second-hand cars), car leasing businesses, daily car rental businesses and some fleet operators. Employers in these sectors are not obliged to use these alternative non-statutory arrangements but it is expected that they will do so as they do away with the need to perform multiple calculations in order to arrive at a single car benefit charge. However, employers not wishing to take advantage of these national arrangements must follow the statutory procedures in full.
If the employer decides to use the new arrangements, individual employees may, if they prefer, choose to be taxed under the normal statutory car benefit rules. This would involve individual car benefit charge calculations for every car provided in the tax year, the situation that the new arrangements are intended to avoid. As the new arrangements are not intended to result in a lower or higher tax charge for the employees involved, an employee preferring to be taxed using the full statutory method will be responsible for maintaining the necessary records. If the employer uses the new simpler method, no detailed record-keeping is required, so the record-keeping responsibility falls on the employee instead.
Two arguments are sometimes put forward to support special reductions in the car benefit charge, namely:
- that the employee does not know, from day to day, which car will be made available,
- that, in second-hand car dealerships, only older cars can be made available.
Concessions for such situations are not possible within the legislation. The new national averaging method is not intended to result in a lower benefit charge than would apply using the statutory method.
The new averaging process has 7 steps, as follows:
Step 1: Identify the cars to be averaged
Each location or franchise site records all of the cars available for private use by employees on the night of 5/6 April, i.e. immediately before the tax year starts. They should include any such cars that are with customers at the time. Daily rental businesses may use all of the cars in their entire fleet, regionally or nationally, that are available for private use. It is for the employer to decide which cars are included, based on a monitored policy document. For each car, the employer must record
- the “price” of the car, i.e. its list price (or notional list price if it does not have a list price) and any accessories, including delivery and VAT (but not capped at £80,000 at this stage),
- the car’s CO2 emissions figure, and
- the fuel type.
If a car does not have a CO2 emissions figure, the following Tables apply.
Step 2: Separate the cars into groups
There is one rule for daily rental businesses, another for all other qualifying businesses. Daily rental businesses already group the vehicles that they hire out for commercial reasons and those groups are used for this purpose. All other businesses use the following Table:
In the case of multi-franchise locations,
- where employees have private use of cars from two or more different car manufacturers, each group may include car models from those different manufacturers. Conversely, if the employees only have access to the cars of their own franchise, each franchise will have its own groups.
- where demonstration cars are not made available to employees but cars of other manufacturers are provided instead, the cars allocated to each group are those that are actually made available for private use, not the demonstration cars.
Step 3: Calculate the average price for the notional car in each group
The procedure is to
- take the uncapped price of each car in the group
- add the prices together and divide by the number of cars in the group
- restrict the result to £80,000 if necessary.
Daily rental businesses perform two calculations, the first is the above calculation for each of their car groups; the second is a single average price for all of the cars counted at 5/6 April or those in the entire national or regional fleet.
Step 4: Find the appropriate percentage for the notional car
This is done in two stages.
Step 4A:
- add together the CO2 emission figures for all of the cars in the group, except for any without an emissions figure
- for each diesel car in the group to which the diesel supplement applies – add 15
- for each car that is not a qualifying low emissions car (QUALEC)
- that is a hybrid – deduct 15
- that is a bi-fuel (type B) – deduct 10
- that is manufactured to run on E85 (type G) – deduct 10
- for each car that does not have a CO2 emission figure, add in the emission figure derived from the Table at Step 1
- divide the result by the number of cars in the group.
Step 4B:
The resulting average is deemed to be the notional CO2 emission rating for a petrol car, as the adjustments for all of the other types of fuel have already been taken into consideration. The appropriate percentage is found from the “petrol” column of the standard ready reckoner for the tax year.
Step 5: Calculate the benefit charge for the notional car
For the notional car in each group, multiply the average price from Step 3 by the appropriate percentage from Step 4B.
Step 6: Identify the qualifying employees
The employees for whom this averaging procedure may be used are those who
- work in motor manufacturing, the new and used retail car sales industry, car leasing and daily rental businesses, and fleet operators, and
- have the contractual right to take a car home but are not allocated a particular car.
The list is compiled by the employer on 6 April of each tax year and maintained throughout the year to reflect leavers and starters.
Step 7: Allocate qualifying employees to car groups
Each member of staff is allocated to one of the groups, thereby determining which cars are available to them. The allocation may be done for each individual or for each job or grade. The number of employees in each group may not exceed the number of cars in that group as each employee is contractually entitled to a car. There must be a number of employees allocated to every group as all cars included are those that are available for employees’ private use.
If there is only one car in a group and one qualifying employee, this averaging arrangement may still be used, even though, in practice, the price and CO2 emission figures for the notional car are, in most cases, the same as the actual car. There is also the advantage that the employer does not need to complete a form P46(Car) when the car is changed because the notional values for that group for the year do not change.
Three situations require clarification:
- Employees joining during the year are allocated to the appropriate group from the date on which they are first entitled to use a car in that group. The employer completes a form P46(Car) for each new employee, using the details for the notional car for the allocated group.
- When an employee leaves, the employer completes a form P46(Car) to indicate that the notional car has been withdrawn.
- Employees who change their job during the year may move up or down a group. This does not require submission of a form P46(Car) although employers may complete a form in this situation if they wish. The employee is shown on form P11D as having two cars available in succession during the year, with the car details relevant to each notional car reported for the period of availability.
In the case of daily rental businesses, only one grade or kind of employee is typically allowed to use a car privately and such employees are required to use a car from the lowest group available. In this situation, each employee should be allocated to the rental business’s car group (Step 2) that has an average price that is immediately below the average for all available cars (special Step 3 calculation). For tax purposes, they are treated as using a car from that group even though, in practice, they may use cars from higher or lower groups, as available. However, if an employee is allowed to use any available car, the average price calculated across all of the groups (special Step 3 calculation) is used to calculate the benefit charge at Step 5.
If, for whatever reason, there is no car available from the employee’s allocated car group and a car from a lower or higher group is taken home instead, the statutory “replacement car” rules are modified to apply to the situation. No charge is made for the using the replacement car if
- it is not materially better than the normal (i.e. notional) car, or
- it is not made available under an arrangement of which the main purpose, or one of the main purposes, is to provide the benefit of a car that is materially better than a car of the group to which the employee is allocated.
Procedures and record-keeping
Employers using the alternative national arrangements must keep the following records:
Cars:
- cars available to employees for private use on 6 April in each tax year
- the “price” for each car, i.e. list price plus accessories, including VAT
- the CO2 emissions figure and fuel-type of each car
- the groups to which the cars were allocated
- the car benefit charge for each group and how this was calculated.
Employees:
- list of employees entitled to use those cars in the tax year
- the group to which each employee is allocated
- why that employee (or group of employees) was allocated to that group
- the dates on which new employees join or current employees leave
- any employee who changes group in a year, with the date of change.
If an employer fails to provide such records when required to do so, HMRC is entitled to recover car benefit charges and, where applicable, car fuel benefit charges on the statutory basis, for the current and past years.
A form P11D must be completed and filed for each employee, using the notional values for the car or cars reported. It would only be necessary to report more than one car if the employee were to change groups during the tax year.
A form P46(Car) is only needed when an employee joins or leaves the employment. No form is needed if an employee changes groups.
Individual employees may elect to have their car benefit charge calculated using the statutory method. See Employees with frequent changes of car, above.
Car fuel benefit
Employees affected by the new averaging arrangements are also liable for the car fuel benefit charge if any fuel is provided for private use. If a car dealership puts fuel in a demonstration car and an employee uses some of that fuel for personal use, the fuel benefit charge applies. In all other situations where the averaging arrangement applies, the only way that the fuel benefit charge can be avoided is if the employee personally pays for all business and private fuel and is not reimbursed for any of it.
If an employer wishes to ensure that the fuel benefit charge is reduced to nil, the employer must be able to show that the employee was required to make good the full cost of all private mileage done in the notional car and that the employee did in fact do so. HMRC’s advisory mileage rates may be used for this purpose, in which case it would be necessary to determine the engine size band of the notional car.
The fuel benefit charge is calculated using the statutory procedure, using the appropriate percentage for the notional car.
Example
The following example is based on that provided in HMRC’s Employment Income Manual. Adjustments to the procedure would be required for daily rental businesses.
Further information:
Car averaging: guidance for new arrangements from 6 April 2009
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