It is well known that as part of their aim to achieve a greener environment, the Government is actively targeting drivers of high carbon dioxide (CO2) emitting company cars through the sliding scale of benefit in kind taxation. Generally company car drivers with cars with high levels of CO2 emissions will have a higher taxable benefit, conversely company car drivers with low emitting cars are subjected to lower levels of personal taxation.

However there are also benefits for the company itself for persuading an employee to select a low CO2 emitting car. Depending on whether the company buys the car or leases the car will determine the tax benefit available. The Government has decided that a low CO2 emitting car will be one where the CO2 emissions do not exceed 120 grams per kilometre driven. Although there are not many cars which currently meet this level the numbers are increasing all the time.

If the company buys the car outright it will be entitled to capital allowances which are deductible against the company’s taxable profits. If the car has a list price in excess of £12,000 then these allowances are normally restricted to the lower of £3,000 or 25% on a reducing balance basis.

However, where a company acquires a new car which has low levels of CO2 emissions then the capital allowances available are more attractive. The expenditure will qualify for first year allowances of 100%.

Example 1

ABC Ltd buys a car as a company car for £14,000. The company pays tax at 30%. The table shows the cashflow benefit to the company of the car qualifying as a low emitting vehicle:

The table shows that with a low emitting car the company reduces its tax bill in year 1 by £3,300, with the balance being paid out over a number of years.

Where a company leases a low CO2 emitting vehicle, rather than purchasing it, there will be no partial disallowance of the leasing costs as there is on higher emitting cars with a list price in excess of £12,000 (expensive car leasing disallowance).

Example 2

ABC Ltd leases a car as a company car for £300 per month which has a retail price when new of £15,000. If the car meets the low emissions level then there will be no disallowance of the lease costs. Again the company pays tax at 30%.

*Disallowable amount = (P-£12,000)/2P where P is the retail price of the car

Where a car is leased then the tax saving is absolute, rather than a deferral where capital allowances are available.

Finally, the company will also have to pay less for the vehicle excise duty as a low CO2 emitting car falls into the lowest band of £70 for petrol cars and £80 for diesel cars. The lowest band otherwise is £100 and £110 respectively, rising to £155 and £160 respectively for cars emitting more than 186g/km of CO2.

Overall therefore the company is clearly better off, whether buying or leasing, by persuading employees to select cars that meet the low level of CO2 emissions. As the employee will also be paying less tax then it is likely that uptake of low emission cars can only increase.

Ben Moynihan
Senior Tax Manager
Deloitte & Touche