Glossary of business car terms

Items added to a car, also known as ‘extras’, e.g.  a sunroof.  For income tax and National Insurance purposes, an accessory added after registration is only taken into account if the price is at least £100.

The rates used where employers reimburse employees for business travel in their company cars, or require employees to repay the cost of fuel used for private travel.

The amount an employee is required to pay as a condition of the car being available for private use.  This will be deducted from the taxable benefit for the year in which the payments were made (often referred to as contributions for private use).

The predicted sale proceeds of the car at the inception of the contract.

See mileage allowances.

An additional allowance given in the year that an expensive car is sold if the capital allowances given are insufficient to cover the actual depreciation suffered on the car.

A clawback of capital allowances which applies in the year that an expensive car is sold if the depreciation suffered is less than the capital allowances received during the life of the car.

A large final payment under a financing agreement normally in line with the predicted value of the car.

If a car is regarded as being available for private use and thus blocked from VAT recovery on the cost, it is generally referred to as a blocked car and retains this status for all future sales.

A road passenger vehicle with a seating capacity of 12 or more.

Any journey which the employee is necessarily obliged to undertake in the performance of his duties.  The Inland Revenue have successfully argued that travel from home to the normal place of work does not constitute business mileage.

Corporation tax (companies) or income tax (sole traders and partnerships) on business profits.

Customs & Excise have indicated their interpretation of the definition of business use.  In order to obtain full VAT recovery, businesses must be able to demonstrate that a car is intended for use wholly for business purposes.  This covers cars that are not made available for any private motoring, which includes motoring between the user’s home and place of business.  In order to meet the business test, purchasers will have to be able to demonstrate that by the very nature of its use a car is not available for the private use of a sole proprietor, partner, director, employee or other connected person.

A statutory tax deduction for depreciation.  The allowance is given annually and is 25% of the written down value at the beginning of the year in question, after adjusting for any acquisitions and/or disposals during the year, restricted to £3,000 per expensive car. From 1 April 2009 corporation tax relief for company cars will depend on their CO2 emissions with 160g/km and 110g/km becoming the key benchmarks

A capital sum an employee contributes towards the expenditure on the provision of a car or any qualifying accessory.  The contribution is deducted from the list price for the year in which the capital sum is contributed and each subsequent year that the employee is assessed to a benefit in kind on that car - up to a maximum of £5,000.

A car which cost £12,000 or less.

Classic cars are those which at the end of the tax year concerned are at least 15 years old (age is determined by reference to the original date of registration) and have a market value of at least £15,000.

Carbon dioxide.

For employee benefit purposes, any mechanically propelled road vehicle that meets the following criteria:

1. it is commonly used as a private vehicle and is not suited for the conveyance of goods;
2. it is not a motor cycle or invalid carriage; and
3. it is made available for private use (without the transfer of property in it) to an employee earning £8,500 or more per annum, or to a director, by reason of his employment, or to a member of his family or household.

A purchase agreement where the parties have to perform specific conditions before title passes.

For tax purposes this is a fairly complicated concept.  Generally, it includes the following:

1. companies within the same corporate group;
2. directors and the company they work for;
3. partners in a partnership;
4. sole traders; and
5. certain relatives of any of the aforementioned.

The equivalent monetary amount of what is received or receivable for a supply of goods or services.

The renting of a car for a fixed monthly cost over a pre-agreed period and mileage.  The car is returned to the owner (lessor) at the end of the period.  The agreement may include the provision of services such as maintenance.

A deferred purchase agreement normally with a balloon payment.  The rental profile is structured in many cases to satisfy the buyer’s cash flow requirements.  The agreement may include the provision of services such as maintenance, and/or may include a guaranteed minimum resale value offered by the provider of funds, normally a specialist leasing company.

See annual contributions.

A notice given to an employer by an Inspector of Taxes that the Inland Revenue is satisfied that no income tax is payable in respect of certain specific payments and benefits.  This should be negotiated directly with the local Inspector.

A charge applied to the taxable benefit of a company car and fuel.  The rate is 12.8% for 2008/2009.  This is payable by the employer if a car is available to an employee for private use.

The excess of the value of a car over any finance outstanding.

A business which is prevented from recovering VAT incurred on goods and services purchased in order to make supplies which are exempt from VAT.

A car which cost more than £12,000. 

See accessories.

Generally a lease that transfers substantially all the risks and rewards of ownership of an asset to the lessee.  As an indication, the net present value of the total payments should be at least 90% of the fair value of the leased asset.  If in doubt, seek professional advice.

Financial Reporting Standard No.5, issued by the Accounting Standards Board, which sets out how to determine the substance of a transaction and how to account for it.  It was issued in response to the growing complexity of transactions generally and reflects the realisation that the legal form of a transaction is no longer necessarily an adequate expression of its true commercial effect.  Of particular relevance to the motor industry are FRS 5’s specific comments on sale and repurchase agreements.

The fuel scale charge is based on the same percentage used to calculate the car benefit. This is applied to a set figure which is £16,900 for 2008/09 (£14,400 for 2007/08). As with the car benefit, the fuel benefit chargeable to tax on the employee is used to compute the employer’s liability to Class 1A. The combined effect of the charges makes the provision of free fuel a tax inefficient means of remuneration unless there is high private mileage.

The benefit is proportionately reduced if private petrol is not provided for part of the year. So taking action now to stop providing free fuel will have an immediate impact on the fuel benefit chargeable to tax and NIC.

Please note that if free fuel is provided later in the same tax year there will be a full year’s charge.

One which is registered for VAT and is able to recover all VAT incurred on purchases used for business purposes (other than those purchases where recovery is specifically restricted, e.g. cars).

A mechanically propelled road vehicle which is:

1. of a construction primarily suited for the conveyance of goods or burden; and
2. is designed or adopted to have a maximum weight exceeding 3,500kg when in normal use and travelling on a road laden.

An employee who undertakes business mileage in his own car may receive a mileage allowance from the employer.  This is designed to cover all the costs of owning and running the car, including depreciation and any interest paid on a loan to buy the car.  The allowance will be expressed as a rate per business mile.

The Inland Revenue allow up to a certain level of allowance to be paid tax-free.  These rates, formerly known as the Fixed Profit Car Scheme (FPCS) rates are now statutory and are known as the approved mileage rates (AMR).

The rates are

The rate for motor cycles is 24p per mile for all business miles, and the rate for bicycles is 20p per mile.

Any motor vehicle of a kind normally used on public roads which has three or more wheels and either:

• is constructed or adapted solely or mainly for the carriage of passengers; or
• has to the rear of the driver’s seat, roofed accommodation which is fitted with side windows or which is constructed or adapted for the fitting of side windows;

but does not include:

• vehicles capable of accommodating only one person;
• vehicles which meet the requirements of Schedule 6 to the Road Vehicles (Construction and Use) Regulations 1986 and are capable of carrying twelve or more seated persons;
• vehicles of not less than three tonnes unladen weight (as defined in the Table to regulation 3(2) of the Road Vehicles (Construction and Use) Regulations 1986);
• vehicles constructed to carry a payload (the difference between a vehicle’s kerb weight (as defined in the Table to Regulation 3(2) of the Road Vehicles (Construction and Use) Regulations 1986) and its maximum gross weight (as defined in that Table) of one tonne or more;
• caravans, ambulances and prison vans;
• or vehicles constructed for a special purpose other than the carriage of persons and having no other accommodation for carrying persons than such as is incidental to that purpose. Examples include ice cream vans, mobile shops, hearses, bullion vans and breakdown and recovery vehicles.

Class 1 contributions are payable in respect of earnings from an employment or office.  Certain payments in kind are chargeable to Class 1 on both the employer (secondary contributions) and the employee (primary contributions) If a company car is made available for private use by an employee and tax is payable on a car benefit charge for that particular car, a Class 1A National Insurance contribution needs to be paid.  Class 1A is also payable on the benefit of private fuel.

It is the person who was liable to pay the Class 1 secondary contributions on the employee’s most recent earnings in the tax year (the employer’s contribution) who pays Class 1A.  This means that if a third party provides a car to an employee, his employer may still need to pay the Class 1A contributions for that car even though it was not the provider.  Class 1A is never paid by the employee.

The employer pays Class 1A NICs at the main employer’s rate for Class 1 secondary contributions (the top rate is 12.8% for 2008/2009).  The contributions are payable on the cash equivalent of the benefit of the car and fuel, which is calculated in the same way that the Income Tax benefit charge is calculated.

A personal agreement for the purchase of a car by instalments through a finance company.  Normally payments will be of equal amounts over the life of the contract except for a larger final payment (often referred to as a balloon payment).  Typically this type of finance is arranged by the dealer or manufacturer who sells the car.  In practice, there are usually three alternatives at the end of the contract term:

1. keep the car by paying the balloon payment;
2. return the car and do not pay the balloon payment; or
3. part exchange the car.  If the value of the car is more than the balloon payment, the driver may be able to part exchange the car using any surplus towards the next car.

In order to be a pool car for taxable benefit purposes, a car must:

1. be available and actually used by more than one employee;
2. not be used by one employee to the exclusion of the other employees;
3. not normally be kept overnight in the vicinity of any employee’s home; and
4. not be used privately by any of the employees except when this is incidental to business use.

This applies when the business buys its own cars outright.  The residual value is not protected in any way.  When the business has no further need for the car, it is simply sold on the open market.  Generally speaking, the business will also maintain the car itself.

In comparing outright purchase with other acquisition methods, care must be taken to ensure that the additional cost of administering a fleet in this way is identified.

Cars obtained by a company or individual who intends to use them exclusively for business purposes. Generally these are cars which have never been supplied, acquired or imported in circumstances where VAT was wholly excluded from credit as input tax. Precluded from this category are cars that are either:

1. let on hire either for no consideration or for less consideration than would be payable in a commercial arm’s length transaction; or
2. made available for private use (otherwise than by letting on hire) including if the taxable person is an individual

This is not precisely defined in the tax legislation.  The Inland Revenue regard the term ‘retail price’ as being the price that an ordinary member of the public might pay.  This will include VAT, even if this has been recovered by the taxpayer in question or the leasing company.  The Inland Revenue argue that no account should be taken of any bulk discounts or special deals that a particular buyer might obtain.

In April 2000, the Inland Revenue published a bulletin stating that if the lessee knows the actual price paid by the lessor for the car when new, this can be used as the retail price when new.

A mechanically propelled road vehicle which is:

1. of a construction primarily suited for the conveyance of goods or burden;
2. not a motorcycle; and
3. is designed or adapted to have a maximum weight not exceeding 3,500kg when in normal use and travelling on a road laden.