April could be a good month to snap up a second-hand luxury car. Hundreds of expensive models might have to be put up for sale by company directors and business owners after a change in the law that removes a tax perk worth potentially tens of thousands of pounds a year.
The change was announced by Alistair Darling when he was chancellor in 2009, but only comes into effect next month. It removes a price cap used to calculate the income tax paid for company cars by their users. This applies if the cars are ever used privately, which counts as a benefit in kind.
Currently, owners of luxury models have to pay tax, based on a sliding scale determined by the level of CO2 emissions, on the first £80,000 of the value of their car. This can be up to £14,000. From April 6 the tax will be calculated on the car’s full list value when new, however old it is. Baker Tilly, the business advisory firm, says that individuals who use high-end cars such as Ferraris and Rolls-Royces could now find them unaffordable.
Anyone who has a company car worth more than £80,000 and ever uses it privately is affected and, if they wish to avoid the extra tax, will either have to opt for a less lavish vehicle or buy privately and claim back business mileage.
“There has not been much publicity about the law change, but it will be a big issue for people who are chauffeured around the country in big limousines, or who drive a company-owned supercar,” says Mark Collins of Baker Tilly.
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“Thousands of people are likely to be affected — owners of businesses who would put their luxury car through the books, or very senior executives.”
Take, for example, anyone who drives, or is driven in, a company-owned Rolls-Royce Phantom for business and private use (Lord Sugar, you should look away now, if you are one of those affected). With the car costing £336,700, the user would have to pay £58,922 in income tax, if paying at the 50% rate — a rise of almost £45,000. A driver of a Mercedes CL 63 AMG company car costing £115,620 would pay £20,233 — that’s more than £6,000 extra.
Second-hand owners could also be caught out. A 2005 Ferrari 612 Scaglietti F1A can be bought for £65,000 but the tax is based on its list price of £177,000 when new, resulting in an income tax bill of £31,000: almost half the car’s value.
“It will not be efficient to have an expensive company car,” says Collins. “Employees will either have to buy their car themselves and charge the company for mileage, or accept a cheaper car.”