An employee has made payments towards a better car, is that a Private Use Payment or a Capital Contribution?

*** Please note that we are not tax advisers and can only help with the use of the software. ***

If an employee has made payments solely to get a better or upgraded car, that payment should probably be disregarded - as it is really only a payment the employee is making towards getting a better car it should not attract a tax benefit.

If you look at this HMRC page (EIM25261 - Car benefit calculation Step 8: payments for private use: examples) this is covered in Example 5.

Example 5

Before the employee was provided with a new company car, the employer held discussions with the employee. The agreement that the employer and employee entered into stated that the employee could choose any car they wanted as a company car, but the employee had to make a financial contribution for some cars and if the employee wanted to use the car for private use, she had to pay £150 per month (£1,800 in the tax year).

The employee chose a car where she had to pay an extra contribution of £175 per month (£2,100 in the tax year); she also decided that she wanted to use the car for private use and private mileage. She paid a total of £3,900 in the tax year.

Is this a private use payment?

The £1,800 is specifically for being able to use the car for private use and no other reason, so it qualifies as a private use payment. However, the additional payment of £2,100 for the car she wanted is not a private use payment, as it is for the availability of a more expensive car.

The provisional sum is (£16,659 x 17%) is £2,832

The cash equivalent of the car benefit (£2,832 - £1,800) is £1,032

Explanation

Sometimes this can be made clearer via a small illustration...

If an employee's contract allowed them to get a £30,000 EV (for example), they'd be paying tax based on 2% of the value (£600) as they were getting the car in lieu of salary - that should always remain the case. If the employee decides to contribute more money to get a better car (which is fine), that £600 used for tax purposes should NOT be reduced, as the benefit they have received has not changed (they still have a benefit based on £30,000), they are simply wanting a better car, which should be paid for out of taxed income.

As an extreme example, if the employee above contributed £600 over the year to get a £50,000 car instead, and that £600 was entered as a private use contribution, the employee would actually pay no tax on the car at all as the cash equivalent would be reduced to zero - but would still have the £50,000 car!

Summary

To reaffirm, we are not tax advisers, so obviously you can enter the data into the system as you see fit but you ought to seek tax advice on this matter if you think there may be issues.