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 1st
January 2004 that will mean higher tax bills for employees like
Roger, and their employers.
The main changes are as follows: