Company car lump sum contribution agreement

The taxable benefit in kind for a company car can be reduced if the director or employee the car is made available to contributes to the cost of its purchase.

Capital contribution

A capital contribution made by a director or employee towards the cost of either the car itself or accessories is taken into account in determining the taxable amount of car benefit. The capital contribution is deducted from the list price of the car on which the taxable benefit is worked out.

Example. If a company car’s CO2 emissions mean that the annual benefit in kind is equal to 24% of its list price, making a capital contribution of £5,000 will reduce the taxable amount by £1,200 (£5,000 x 24%).

Maximum contribution effective for tax purposes

There is a ceiling of £5,000 on the amount of any capital contribution which may be taken into account for tax purposes.

On or before provision of the car

HMRC expects the payment to be made on or before the provision of the car or it may argue that a later payment relates to a contribution towards private use of the car instead. In that instance the contribution can only reduce the taxable benefit for the year the payment is made.

Contribution agreement

To be effective in reducing the taxable benefit there’s no requirement for the contribution to be written into the company car agreement. However, it’s good practice to make it contractual as this provides evidence that the payment relates to provision of the car rather than for private use by the employee.

when the car ceases to be available to the employee

Tax legislation says nothing about returning all or part of the capital contribution when the employee ceases to have use of the car. However, HMRC’s view is that any amount repaid to the employee which is disproportionate to the value of the car at the time may be taxable as income or disregarded as a contribution to the cost of the car.

Example. John contributes £5,000 towards a company car provided by his employer. The full price of the car was £30,000. Four years later John ceases to have use of the car. At that time its value is £15,000, i.e. 50% of the purchase price. John’s employer repays John £3,000 of his £5,000 contribution. This is £500 more than 50% of John’s contribution. The £500 is either taxable as income or retrospectively reduces John’s contribution to the cost of the car.