"When a man opens a car door for his wife, it`s either a new car or a new wife." - Prince Philip
I was thinking of the latest revelations coming from the Tory "Party" The words of the Prince song 1999 came to mind.
"Say say two thousand zero zero party over, oops, out of time So tonight I'm gonna party like it's nineteen ninety-nine"
If we replace the word "party" with "work gathering" in the Prince song, it doesn’t have the same ring to it. Now it turns out there were many work gatherings that had beer, food, and music. Not good when the leader of a country doesn't know the difference between the two!
All sorts are going on in the world to attract our interest with Boris, Novak, and Prince Andrew. But the most shocking of all this week was that poor lady out jogging in Tullamore. A beautiful young girl killed when out in her community is heartbreaking to hear. The investigation has taken a sinister turn and I have no doubt the guards will get the perpetrator. There can never be justice for something like that. Our thoughts and prayer go out to her family, friends and pupils and staff at her school.
Last week our blog was on Thinking Time for 2022 and its focus was 5 issues for business owners to consider. In case you missed it see here
This week we are going to look at all things car related. New car registrations peak in the early months of the year. Many businesses owners will buy cars for themselves or team members. So, we thought it would be a good time to delve a little deeper into the tax implications of this. We will look at
- Benefit in Kind [BIK]
- Low business Kilometres
- Employee Contributions
- Part of the Year
- Exemptions & Capital allowances
- What's coming
Where an employer purchases a car and provides it for an employee’s use there is BIK, once there is private use. Travelling to and from work is private use. The employees pay Income Tax, PRSI and USC on the value of the benefit.
A car also includes a crew cab and a jeep but does not include
- Motorbikes less than 410kg
- Vehicles not used as a private vehicle such as a hearse or lorry
I can only picture the look on an employee’s face when you give them the keys of a hearse as their wheels to avoid BIK.
You calculate BIK on the original market value [OMV] of the car. That's easy if it’s a new car. The OMV will include Vat and VRT. If buying a second-hand car be very careful as BIK applies to the original cost of the car. If you buy a second-hand Mercedes E-class that costs €20000 now but had an OMV of €100000 your BIK is on the €100k figure.
You need to calculate the cash equivalent. This is applying a set percentage based on business kilometres travelled in a year. The more business kilometres travelled the lower the cash equivalent.
|Kilometres Driven||% of OMV|
|24,000 and below||30%|
|24.001 to 32,000||24%|
|32,001 to 40,000||18%|
|40,001 to 48,000||12%|
|48,001 and over||6%|
It is advisable to keep a logbook of business kilometres travelled. If you don't have a logbook Revenue will assume 8000 private kilometres. Let's assume you travel 42000 kilometres and have no document showing private kilometres. Then your business kilometres are 34000 and the percentage is 18.
If you travel less than 24000 business kilometres, then the percentage is 30% of the OMV. So, if a car has an OMV of €40000 and the employee does 20000 business kilometres then the cash equivalent is €12000. Where if you travel 50000 business kilometres in a year the percentage is 6% of the OMV. In this case, the cash equivalent is €2400
This is the amount that is notional pay for the employee. If we assume a monthly paid employee, using the two examples, their BIK will be €1000 and €200 per month. For a higher rate taxpayer paying tax at 52% that is a monthly cost of €520 and €104, or nil if you got a hearse. The employer will pay 11.05% employers PRSI on the BIK amount.
Low business kilometres
This can apply where an employee doesn't travel more than 24000 kilometres per annum. The cash equivalent can be reduced to 24% provided the employee
- works at least 20 hours per week
- travel at least 8000 business kilometres per annum
- spend at least 70% of their working time away from their workplace
- keep a logbook that has details of business kilometres and work purposes
The OMV of the car you give to your employee is €35000. The employee travels 10000 business kilometres. And spends more than 70% of their time away from the workplace. In this case, the cash amount is
|Monthly Notional Pay [BIK]||€700|
We will look at a couple of examples here
James LeBron works as a salesman for Office Supplies Ltd. The business is looking to buy a new car for James' use at the start of 2022. The company has a cap of €35000 but the car James wants costs €40000. James agrees to pay the extra €5000 to get his car. During 2022 the company estimates that James will have 30000 business kilometres
|Less contribution by James||€5000|
|Notional Pay [BIK]||€4600|
For 2023 the notional pay is €9600 as James has already got a deduction for the payment he made in 2022. [Nb look at see what’s coming below]
If James had to pay €100 per month to the employer for private fuel, then that would also reduce the BIK amount
|Less contribution by James||€5000|
|Less monthly fuel contribution||€1200|
|Notional Pay [BIK]||€3400|
Car for part of the year
It can be the case that your employee doesn't have use of the car for a full year. This could be because
- gave up a car before the end of the tax year
- received a car during the year
- travelled abroad for work without the car
A new salesman David Rooney joins Office Supplies Ltd on the 1st of May 2021. He travelled 18000 business kilometres from then until the end of 2021. The company car that David has had an original market value of €30000. We need to annualise the business kilometres to get the correct percentage.
Annual business kilometres are 18000 x 365/245 = 26816. This falls into the 24% band. You then reduce the BIK figure to take account of the number of days the car was in use
|€30000||24% x 245/365||€4833|
Exemptions & Capital allowances
The two main exemptions are
- An employee uses an employer provided car in a carpool
- Electric cars
For further information on the rules for a car pool to exist and on electric cars see here
Employers get a tax write off for the cost of the car through Capital allowances. They will get a tax write off of up to €24000 once the CO2 emissions category of the car is A or B.
For cars in category C, the tax write of is only 50% of the cost of the car or 50% of €24000, whichever is the lower amount.
And there are no capital allowances for cars in categories D and E.
For electric cars employers can get a 100% tax write off of the cost of the car up to €24000.
From 2023 onwards you will calculate BIK based on the CO2 emissions category of the car. If purchasing a car now or next year this is important. The lower the CO2 emissions category the lower the BIK rate will be for your employee. For a car in Category A [lowest CO2 emissions] where there is up to 26000 business kilometres the rate is 22.5%
If we look at David's example and assume he has his car for all 2023 and it is a category A car. If his business travel in 2023 is up to 26000 then his BIK is
If his business travel is between 26000 and 39000 kilometres the BIK reduces to
But if his car was a gas guzzler and in the lowest CO2 emissions category, he will pay a lot more. For up to 26000 in a Category E car the BIK is
Electric vehicles make sense as there is no BIK once the cost of the car is less than €50000. Even if the cost is above €50000 you reduce the cash equivalent by €50000. See our previous blog on electric cars here
Employers need to look at the emissions category of any car they buy. If buying second hand don't get caught and remember it's the original market value of the car. If the business use of the car is more than 60% then the employer can get 20% of the Vat cost back. Beware that if you give an employee a monthly or weekly allowance to buy a car that is taxable pay. Electric makes huge sense from a tax point of view and will be attractive for business owners.
We provide this type of information to our clients to help them in their businesses. If you would like this type of service call Deirdre on 051396703 or contact us.