How are car and fuel benefit charges calculated when a company car is made available for the use of two employees?

View the next Payroll Tip
View the previous Payroll Tip

Although this question is phrased so as to apply to a company car that is made available for the private use of two employees concurrently, the following notes apply in the same way if the car is made available to more than two employees concurrently.

Assuming both employees are earning at a rate of £8,500 or more, each of them incurs liability for a car benefit charge and, if fuel is provided for private use, a fuel benefit charge, under the provisions of sections 120 and 149 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA).

The car and fuel benefit charges could be calculated by simply splitting the charges for one car between the two employees, but that may not be appropriate. The car charge may relate to factors relevant to each employee, thereby creating a different car benefit charge for each of the employees sharing the car. One of the employees should not benefit or lose out due to circumstances relating to the other employee.

Section 148 of ITEPA overcomes this problem by defining a requirement for a full car benefit charge to be calculated initially for each employee sharing the car. The individual charges are then reduced "on a just and reasonable basis", rather than being apportioned. The total of the resulting charges at this step of the car benefit charge calculation should add up to the charge that would apply if there were only one driver.

The factors that should be taken into consideration in performing this reduction are not defined but they might include a capital contribution paid by an employee, the number of days that each driver used the car or the relative differences in the extent of the private use. It is likely that, in the event of an audit, a tax inspector would expect to see the details of how the reductions were performed.

Note, however, that the reductions may not take into consideration "private use" contributions made by one or other of the drivers. The step-by-step rules for calculating the car benefit charge require that reductions for "private use" contributions are made after the charges have been reduced for shared use.

A special rule applies if one of the employees sharing the car is a "lower-paid employee", i.e. an employee who has an earnings rate of less than £8,500. The provision of a shared car does not create a car benefit charge for such an employee and, as a result, the use of the car by that employee may not be used to reduce the charge for the other employee.

As provided by section 153 of ITEPA, if fuel is provided for private use for one or both of the drivers, the fuel benefit charge that would apply if there were only one driver is reduced in the same manner.

Example: A company car is made available for the private use of three employees concurrently. Driver A is a "lower-paid employee" and occasionally uses the car for private use during the working day. Driver B takes the car home on Monday, Tuesday, Wednesday and Thursday nights. Driver C has use of the car on Friday night and each weekend. All three drivers are provided with fuel for private use. Drivers B and C each pay £40 per month towards the private use of the car.

The employer calculates what would be the car benefit charge if there were only one driver. The reportable benefit would be £3,000 (20% (say) of £15,000) for the car and £2,880 (20% of £14,400 for the fuel).

In the case of Driver A, the employer calculates the car and fuel benefit charges but finds that, after reducing them to reflect the small usage of the car, the employee's earnings rate would still be below £8,500. As a result, there is no reportable benefit and Drivers B and C must share the car and fuel benefit charges between them.

In the case of Drivers B and C, the employer considers that they have equivalent usage in respect of the time the car is available to them, so decides it would be "just and reasonable" to base the reduction on their relative private mileage. Driver B travels 3,000 private miles in the tax year; Driver C travels 9,000 private miles in the tax year.

The charges for Driver B are

• £270 for the car, i.e. (£3,000, reduced to 25%) - £480 private usage
• £720 for the fuel (£2,880, reduced to 25%).

The charges for Driver C are

• £1,770 for the car, i.e. (£3,000, reduced to 75%) - £480 private usage
• £2,160 for the fuel (£2,880, reduced to 75%).

Note that the two car benefit charges, plus the two private usage payments, add up to £3,000, the charge (before private use payment) that would have applied if there had been only one driver.

...UK Payroll News - Latest

The UK Payroll News is sponsored by HRD & Payroll Solutions

Discuss this news item in the PayPerShop Forum