How to reduce the cost of your company cars and vans

The road to salary sacrifice for electric cars

The growing importance of ESG and climate change is driving forward initiatives that support the reduction on CO2 emissions. It’s helpful therefore, that the ‘company car benefit in kind’ rules are designed to encourage employers to offer, and employees to drive, more environmentally friendly cars.

Electric vehicles (EVs) are becoming an ever more popular employee benefit. As company car benefits are calculated based on a car’s CO2 emissions, this represents an opportunity for cost reductions all round.

The benefit in kind charge for a fully electric company car with no CO2 emissions is:

• from April 2021 to April 2022 – 1 per cent; and
• from April 2022 to April 2025 – 2 per cent.

In comparison the benefit in kind charges for internal combustion engine (ICE) cars can be as high as 37 per cent (depending on CO2 emissions levels), multiplied by the original list price of the car.

There are also restrictions for tax purposes to the capital allowances or monthly leasing costs depending upon the cars’ emissions. Whereas with an electric car, no leasing disallowance and a possible 100 per cent first year allowance applies.

Overall, the move to an electric company car reduces both costs and CO2 emissions. Indeed the costs saved over an ICE car can instead be used towards the cost of moving to electric. The option then remains to extend company car provision to all employees through the use of a salary sacrifice arrangement where roughly half of the monthly electric car costs can be funded by the various tax savings (the optional remuneration legislation does not apply to salary sacrifice arrangements for cars with CO2 emissions below 75 g/km).

Payments for leasing and running the electric company cars are funded by a reduction to an employee's gross pay. This reduces their monthly salary, resulting in a reduction on income tax and national insurance payments by employees. Employers' National Insurance payments are reduced too.

At RSM we are working with a number of employers and car leasing companies to support businesses in tailoring their employee benefit packages to provide cost and environmental benefits via employer arranged salary sacrifice schemes.

We can advise on issues around minimum wage compliance, what happens when an employee leaves employment, employer provided electric charging points at an employee’s home as well as the complexities in ensuring an effective salary sacrifice.

What are the other benefits?

Firstly, significant environmental benefits and improved sustainability credentials come with making the switch to EVs. From a benefit in kind perspective electricity is not a ‘fuel’, further reducing the benefit in kind costs for employees. Charging company or employee-owned electric cars at the workplace (or paying for an employee to charge their company electric vehicle away from home) do not create a taxable benefit either.

There are also potentially significant fleet cost reductions to the employer. Fuel costs and maintenance are cheaper, EVs do not need servicing to the same extent as an ICE vehicle.

HMRC have also published a business mileage rate for electric vehicles making the administration and operation of these vehicles as part of the company car fleet more straightforward.

Get in touch with usual RSM contact or Mark Morton if you would like to know more about what switching to EVs could do for your business.

Generate savings by restructuring private fuel

The provision of private fuel to employees with a company car has long been an expensive and inefficient employee ‘benefit’. The combined total of all the costs to the employer and employee can be as much as twice the pump price or sometimes more - but it is not too late to put things in reverse.

Replacing petrol and diesel company cars for electric company cars is one way to reduce these costs. However, where an electric car is perhaps not yet a viable alternative and ICE cars continue to be provided, there is the option to make a few simple changes that can significantly reduce an employers’ costs whilst simultaneously increasing employees’ net pay.

How this works:

• consider the ‘breakeven’ point on the levels of private miles by an employee, ie, where the employee’s tax liability matches the cost of the fuel they use;
• anyone driving fewer private miles is worse off and would benefit from paying for the fuel themselves rather than paying the tax on the fuel ‘benefit’;
• go one step further and consider the breakeven point for the employer, ie where the overall cost of buying out the free fuel matches the cost under the current arrangements;
• if the fuel cost is less than the employer’s breakeven savings can be achieved; and
• the company would no longer need to pay for the private fuel, or related VAT and National Insurance charges.

Other benefits from the move again include:

• the ESG impact;
• removing potentially uncapped fuel costs;
• reduced fleet costs through reduced (private) mileage;
• more efficient fuel purchases and driving of company owned vehicles; and
• reduced exposure to increasing fuel price rises and increases to NIC rates.

What about vans?

The apparently straightforward question of what is a car and what is a van becomes rather complicated when it is a company provided vehicle. It may sound a little daft but a recently settled tax case has shown that some vans are really cars.

This is important because company provided vans are subject to entirely different rules from company cars, which may lead to potential tax reporting issues where employers are providing pick-trucks or combi vans to their employees.

1. Pick-up trucks: Currently, HMRC classifies these pick-ups as vans for benefit in kind purposes – that is if they have a payload of 1 tonne (1,000 kg) or more. Where a pick-up vehicle has been fitted with a hard top, this is given a generic weight of 45kg. So, a pick-up that has a payload of less than 1,040 kg which then has a hard top fitted becomes a car under HMRC definitions for benefit in kind purposes.
   
   
2. Vans with extra seats: In a recent Court of Appeal tax decision, HMRC successfully argued that certain vans are, in fact, a car for benefit in kind purposes. The case involved two different vans with a second row of seats and side window(s) behind the driver and front passenger section – sometimes referred to as ‘combi vans’ or ‘crew vans’.

There is potential for HMRC to apply the facts and findings from the tax case decided in their favour to treat combi vans provided to employees for private use (including home to work travel) as taxable under the company car rules.

How can RSM help?

Electric cars

At RSM we are working with a number of employers and car leasing companies to support businesses in tailoring their employee benefit packages to provide cost and environmental benefits via employer arranged salary sacrifice schemes.

Fuel benefits

We work with employers along with in-house teams and business expense system/fuel card providers where necessary to provide:

• personalised fuel cost calculations to ascertain true cost of providing fuel and how this can be reduced;
• support with a business case for making the changes within business;
• ensure compliance, advising on how to make the record-keeping robust yet administratively straightforward and avoiding the risk of a benefit still applying;
• how to implement any new arrangement including changes required in payroll, expense and mileage recording systems;
• support in communication to employees; and
• requesting confirmation from HMRC for approval that changes effectively remove the benefit, VAT and NIC charges.

Vans

We are also supporting a number of businesses who provide pick up or combi van type vehicles to ensure they are compliant with the rules and have applied the correct definitions for benefit in kind purposes.

If you would like further information or have any queries, please contact your usual RSM contact or Mark Morton.