How is the car benefit charge affected if a replacement car is provided while a company car is unavailable?

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The Income Tax (Earnings and Pensions) Act 2003 (s.143) requires an employer-provided car to be unavailable for 30 days or more if the car benefit charge is to be reduced proportionately.

• A car is considered to be "unavailable" if it is incapable of being used by the employee because it has broken down or because the employee has no possible access to the keys.
  
  
• However, a car is not considered to be "unavailable" if
  
  
  • the car continues to be available but the employee is unavailable to use it, for example, while the employee is abroad, in hospital or banned from driving, or
    
    
  • the only reason it cannot be used is because there is no current road tax, MOT certificate or car insurance.

If an employee is given a replacement car while the normal car is unavailable, there are two possible situations:

1. If the normal car is unavailable for 30 days or more and a replacement car is provided, a car benefit charge arises on both cars. The reportable charge for the normal car is reduced in proportion to the number of days it was unavailable; the charge for the replacement car is based on the number of days it was available.
   
   
2. If the normal car is unavailable for less than 30 days and a replacement car is provided, there is, in principle, a full charge on both cars. As the normal car is still treated as being available, the employee has two cars at the same time.

Although the second of these two situations sounds unreasonable, it ensures that a charge is raised on both cars where, for example, the employer withdraws a small company car during the employee's holidays and, as a benefit, gives the employee use of a larger, luxurious car. The reportable charge for the normal car cannot be reduced, and the larger car would have to be reported separately.

However, the legislation makes specific provisions to cover the common arrangement where an employee is given the use of a hire car or a pool car while the normal car is off the road. The situation is covered by section 145 of the Income Tax (Earnings and Pensions) Act 2003.

For the special provisions to apply, all of the following circumstances must exist:

• the normal car is unavailable for a period of less than 30 days,
  
  
• a replacement car is provided for some or all of the period in order to replace the normal car,
  
  
• both cars would otherwise be chargeable to tax, and
  
  
• the replacement car meets one of two specific conditions.

The two specific conditions are

1. the replacement car is not materially better than the normal car, or
   
   
2. the replacement car is not provided, in whole or in part, to give the employee the benefit of a car which is materially better than the normal car, e.g. where the only courtesy car available is a better quality car.

A replacement car is treated as being "materially better" than the normal car if it is

• materially better in quality, or
  
  
• the taxable value of the replacement car, if it were to be reported, would be materially higher than the taxable value of the normal car for the same period.

If one or other of the two conditions is met in full, the replacement car is treated as being unavailable during the period that it replaces the normal car, with the effect that a car benefit charge does not have to be reported for the replacement car. Therefore, in terms of reporting the car benefit charge, the normal car is treated as if it had continued to be available throughout the period that the replacement car was provided.

However, if one or other of the two conditions is not met, for example where an employer provides a large car in place of the employee's normal small car for the two weeks of a family holiday, the availability of the small car would not be reduced and an additional tax charge would arise for the period that the large car was available.

When providing a replacement car in such a situation, employers are advised to keep sufficient records to show that the replacement was not "materially better" than the normal car.

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