Motoring expenses: private use of business cars
What private use means
The term “private use” is not legally defined. It should be given its everyday meaning. In practical terms it applies to all journeys where the purpose of that journey is not solely a business purpose.
It is important to note that journeys to and from someone’s place of work are for private purposes. Where business trips follow part of the same route as a person’s home to work route the journey is considered to be for both private and business purposes.
People whose place of work is also their home address can make business trips which begin and end at their home address.
Some people who fund the running of a car from their business may say that it is not used at all for private motoring. When checking if this is so, HMRC staff will consider the following:
- where is the car kept outside of working hours?
- does the person have access to any other cars which are funded purely outside of the business?
- is the mileage of the car consistent with business only use of that car?
Charges to employees for the private use of a car
Output tax must be accounted for if an employee is charged for the private use of a business car or other vehicle on which the business recovered 100% of the input tax.
If an employee is charged for the private use of a leased car that was subject to the 50% block no output tax will be due on those charges. The reason for this is that the 50% block is a proxy for the private use of the car.
If an employee is charged for the private use of a car or other vehicle that was bought under the second hand margin scheme no output tax will be due on those charges. This is because no input tax will have been incurred by the business on the purchase of that vehicle.
Simplified method for accounting for private use
HMRC have agreed simplified schemes for calculating the VAT due on the free private use of the stock in trade cars for motor manufacturers and dealers. There is also a similar scheme agreed with the British Vehicle and Leasing Association (see VIT56600)
Scale charges are intended to make it simpler to identify and apportion the private use of road fuel in motor cars provided by VAT registered persons either:
- to themselves (in the case of sole proprietors and partnerships); or
- to their employees.
The scale charge imposes a fixed charge to output tax. It is designed to cover the supply which arises from the business providing and funding road fuel for private use in cars. Initially the scale charge was based on the engine size and type of fuel used but it is now based on carbon dioxide (CO2) emissions.
VAT Act 1994 Sections 56 and 57 set out the UK legislation in respect of fuel purchased for business purposes which is then diverted to private usage. The UK has a derogation (Council Decision 659/2006/EC) from the EC Sixth Council Directive (77/388/EEC). The derogation authorises the UK to fix, on a flat rate basis, the proportion of VAT relating to expenditure on fuel used for private purposes in business cars. The derogation specifically only refers to cars, and therefore the scale charges are only applied to the private use of fuel in cars.
Scale charges are normally changed each year. Details of the scale charge tables can be found on the H M Revenue and Customs website.
You should then choose the year in which you are interested, for example Budget 2008, and select Budget Notes from the sidebar. The Budget Note with the scale charge table will usually be called VAT: Changes in Fuel Scale Charges.
The scale charge for a particular vehicle is determined by its CO2 emissions figure. Where the CO2 emissions figure is not a multiple of 5 the figure is rounded down to the next multiple of 5 to determine the level of the charge.
The lower of the two figures should be used for a bi-fuel vehicle which has two CO2 emissions figures. HMRC have set a level of emissions by reference to the vehicle’s engine size only for cars which are too old to have a CO2 emissions figure. A business should use the published tables for either monthly, quarterly or annual returns depending on the frequency of its VAT returns.
A business must account for output tax on each car to which it has applied the scale charge. So if a business has chosen to pay the scale charge for a fleet of ten cars it would account for ten scale charges.
The total amount of VAT to be accounted for on the scale charges is to be added to the output VAT figure on the relevant VAT return.
How to determine the CO2 emissions figure for a vehicle
For vehicles registered after 2001 the CO2 emissions figure will be stated on the Vehicle Registration Certificate.
For vehicles registered before 2001 the vehicle emissions figure can be obtained from the Society of Motor Manufacturers and Traders Limited. This website contains information on CO2 emissions for vehicles from 1997.
For vehicles which do not have a CO2 emissions figure businesses should identify the CO2 band based on engine size as follows:
- if its cylinder capacity is 1,400 cubic centimetres or less use CO2 band 140 or below;
- if its cylinder capacity is more than 1,400 cubic centimetres but is not more than 2,000 cubic centimetres use CO2 band 176;
- if its cylinder capacity is more than 2,000 cubic centimetres use CO2 band 240 or above.
Scale charge if a vehicle is changed during the return period
The business should apportion the scale charge for the two categories if:
- a car is changed during a tax period; and
- the new car is in a different category.
This might be necessary if for example a CO2 band 210 car is changed for a CO2 band 150 car. Alternatively the business may choose to account for VAT on the higher of the scales instead of apportioning.
Record requirements for scale charges
Businesses that apply the scale charges must keep records to show:
- the number of cars for which free or below cost fuel is provided;
- the CO2 band of each car;
- the cylinder capacity of each car where the car is too old to have a CO2 emissions figure; and
- if a car is changed, records must show the date of the change and the CO2 emissions figures. If the car is too old to have a CO2 emissions figure records must include details of the cylinder capacity.