Does a payment to obtain a better car qualify as a private use payment?

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Employees who are provided with a company car are liable to pay tax on the car benefit charge reported on form P11D each year. The calculation of the car benefit charge involves a number of specific steps, as defined in the Income Tax (Earnings and Pensions) Act 2003, section 121. After determining the "price" of the car, the employer calculates a percentage of that price, related to the car's CO2 emissions. The resulting value may then be reduced, first in respect of any periods of unavailability, and then, as set out in section 144, in respect of any "private use" payments.

The total amount paid to the employer as "private use" payments may be offset against the car benefit charge, pound for pound, if the employee is required to make such payments as a condition of a company car being made available for the private use of the employee or members of the employee's family or household. It does not matter whether the payment is made by deduction from wages or in some other way.

The taxable value of the car from the previous step of the calculation is reduced by the total of the private use payments made by the employee, to give the reportable cash equivalent. If the private use payments equal or exceed the taxable value from the previous step, the cash equivalent is nil. However, no tax relief is available in respect of any excess private use payments.

Care must be taken not to treat payments made by the employee for other purposes as private use payments. Any payments that are made for purposes other than private use do not count and may not be used to reduce the cash equivalent, even if the employee is required to make them as a condition of having the car available for private use. Examples of such payments are:

1. deductions made through the payroll as the employee's contribution towards the cost of fuel provided by the employer for private use
   
   
2. a contribution made by the employee towards the additional cost of insuring the car for private use or towards the maintenance of the car
   
   
3. "private choice" payments, i.e. payments made in order to obtain a better car than is normally provided at the employee's status level
   
   
4. capital contributions, which are used to reduce the car benefit charge at an earlier stage of the calculation.

In the case of contributions of a kind listed at 1, 2 and 3 above, there is nothing wrong in the employer taking into consideration such costs as fuel, insurance, road tax, servicing, additional lease costs (in the case of the provision of a better car) or any other relevant factor when deciding how much to charge for private use. But, such payments can only be considered if they are made to the employer or to the person providing the car. They cannot be considered if they are paid direct by the employee to someone else, e.g. the garage that services the car or supplies the fuel.

Therefore, as long as only a single payment is made for private use (even though it may be paid monthly) and the terms and conditions for the provision of the car, as set out in the car policy, make it clear that the payment is

• subject to a requirement in the year to make payments as a condition of the car being available for private use, and
  
  
• for that private use,

the payment is a private use payment, even though the factors referred to above, or just one of them, have been used to calculate its value.

However, if two or more payments are made by the employee, an inspector would consider the purpose of each and disqualify any payment that appeared to be for a purpose other than private use.

Consequently, if the only payment made by an employee is made in order to obtain a more expensive car than would otherwise be provided, the payment may be treated as a private use payment and used to reduce the taxable value of the car even if the additional leasing cost is the only factor used to fix the amount that the employee is required to pay for private use. The terms and conditions under which the car is provided should include wording similar to that shown above.

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