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Benefit In Kind - The Death of the Company Car ?

A company car has long been a valuable perk and status symbol for many Irish employees. However times are now changing and recent tax measures are now causing both employers and employees to wonder whether a company car is still a worthwhile incentive.

Having a company car can bring many useful benefits for an employee, not least the prestige attached to driving a new or almost-new car, with the entire fuel and other bills paid by their employer.  They can also be especially useful for those who drive long distances in their work.

For employers, company car have traditionally been seen as a tax-efficient way of paying executives or senior employees, and a cheaper alternative to pay increases or cash bonuses. Some years ago, the Benefit in Kind tax rules were introduced to collect tax on such deals.

The Benefit in Kind system operates by charging income tax on the “cash equivalent” value of company cars, vans and other non-cash pay benefits. Under current rules, this “cash equivalent” is calculated on cars at the rate of 30% of the Original Market Value of the car. The employee is normally taxed on this amount in the same way as if he/she had received this sum in extra pay. Partial relief is available where the employee pays some of the running costs, has high business mileage, or works for long periods away from their employer’s premises.

For example, Roger Yuppie drives a 1999 luxury Toyota owned by his employer. The car originally cost €32,000 and is now worth €15,000. Roger is taxed on 30% of the €32,000 original value, i.e. €9,600. If Roger pays 42% tax, his annual tax bill increases by €4,032. If Roger drives 30,000 business miles per year, this bill is reduced by 75% to just over €1,000. Under existing rules, Roger must contact his local tax office to pay this sum each year, either directly or by reducing his monthly tax credits.

New rules are to be introduced on 1^st January 2004 that will mean higher tax bills for employees like Roger, and their employers.

The main changes are as follows:

These new rules will obviously mean increased costs for employers and employees, and greater amounts of paperwork will be necessary to comply with them. As a result, we are likely to see a trend where many companies decide to scrap or revise their existing company car arrangements. Employers and employees with company cars and other similar benefits such closely examine their own situation in the coming weeks to decide the best course of action to take.