HMRC Targets Luxury Company Car Schemes

Harriet Davies 10 March 2011

HMRC Targets Luxury Company Car Schemes

UK-based senior executives who count generous company car schemes among their benefits, as well as owner-directors running their luxury car through the company, are to be targeted with a new income tax charge from 6 April, warn Baker Tilly.

New rules coming into force this year abolish the £80,000 (around $129,667) maximum list price on the P11D tax paid on company cars. This means taxes paid on Ferraris, Lamborghinis, Bentleys and top-end Mercedes and BMWs will increase significantly, according to the professional services firm.

The current system reduces income taxes and national insurance contributions due to the cap, which results in a maximum income tax of £14,000 per annum and a maximum NIC of £3,584.

Baker Tilly gives the following example to demonstrate the effects of the removal of the cap: an executive driving a Ferrari 612 with a list price of around £222,000 would pay income tax of almost £39,000 per annum, and the employer would face a bill for Class 1A NICs of over £10,000 per annum, giving a total tax bill in 2011-12 of almost £50,000. This represents an increase of 182 per cent as compared with a capped year.

The firm also warns that buying second-hand cars could become a “tax headache”, as Her Majesty’s Revenue & Customs charges car benefits on the list price, which is the amount for which the vehicle would be purchased if new.

David Heaton, employer consulting partner at Baker Tilly, said the result of the tax was likely to be “the disappearance of the supercar from companies”.

“The super-rich may not worry about the extra tax, but there is a real danger that some drivers of older company-owned supercars could be caught out. You can pick up a 2005 model Ferrari 612 Scaglietti for about £65,000, but as a company car the tax bill is based on its list price of £177,000: £39,500 of tax and NIC per year to drive a car worth £65,000 is not very attractive,” he added.

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