Contract hire is growing year on year as the method of vehicle funding for individuals and businesses alike. According to the BVRLA member fleet statistics, the number of cars on contract hire grew by 46,555 between 2011 and 2012. It is also no surprise that a big proportion of these cars relate to the SME market.
While clearly this is fantastic news for CarLease UK, and similar vehicle brokers, it is important that businesses (and individuals) take note of the continuing changes to the way contract hire vehicles are accounted for and the tax implications for both employer and employee.
For businesses, one of the main topics of conversation is how contract hire will be reflected on a company’s accounts. Currently, contract hire vehicles need not be shown on the balance sheet, which has corresponding benefits for liquidity ratios and gearing. However, conversations are now well underway to change this and contract hire vehicles may be shown on the balance sheet. Initially this will be for plc’s only but eventually this will become necessary for all companies. Simply, for SME’s, how they account for contract hire and leasing vehicles could drastically change.
Another major benefit with contract hire is that the monthly rentals for the vehicle can be offset against Corporation Tax, thereby reducing your tax bill. However, in light of a commitment to emission reductions and more eco-friendly fleets, since April of this year only vehicles up to 130g/km will be 100% allowable. For vehicles above this figure, only 85% of the rentals will be allowable. A number of vehicles will now fall outside of the 100% bracket.
Will it stop there? Probably not unfortunately. Firstly, you have a commitment from both UK and Europe to reduce emissions; how better than to target the company purse strings when attitudes need changing. Secondly, the Government needs tax. As car manufacturers make the necessary changes to bring them in line with changing thresholds, the goalposts will be moved. Sceptical we know, but tax is one of life’s great certainties after all.
Much of the above will of course lead to many businesses considering whether or not a company car scheme is viable, particularly with a number of new assets being littered on the balance sheet. Company car allowances (or cash for cars) is already becoming popular but, in light of the changes, it is likely to become much more popular.
While company car drivers may actually not be given a choice in relation to how their vehicle will be procured (whether business or personal contract hire), you might also see more company car drivers voluntarily jumping out of the company car scheme. If you drive a company car a benefit in kind situation arises for which you must account in relation to your income tax. This depends on the P11d value of the vehicle, the emissions of the vehicle and your personal threshold for income tax.
As highlighted above, the ongoing commitment to emission reductions has seen company car drivers paying more tax. Year on year the rate of BIK has increased in respect of CO2. The higher the level of CO2, the higher the rate of BIK you pay. For example in 2012/13 a 120g/km car would land in the 15% tax band but in 2016/17 this will be 21%. The stiff changes hit the company car driver straight in the pocket and ultimately leads to thoughts of alternative solutions.
Like individuals who lease instead of buying, company car drivers may begin to jump at the chance to take up any company car allowance or cash for car schemes and run their vehicles personally. This is an entirely different consideration and the company driver needs to consider tax, insurance, servicing etc. For a review of this please see our Company Car or Cash feature.
Please remember that the above is general guidance only and all specific tax queries should be sent directly to your accountants and tax advisors. CarLease UK can of course help you with this process.