Case study Company Provided Electric Car - Tax Workings Review

[thumbelina]

Hi,

I've been considering the purchase of an electric vehicle (eg: VW ID.4) through my company and have been crunching the numbers to see if there is any benefit going through the company versus paying down the money from the company as usual and buying it from after-tax income.

Assumptions:

• Cost price of car is €50,000 and you want to own it through the company from 2022-2025, then sell it 'out' to yourself in 2026 when the BIK benefit goes back to normal.
• BIK allowance against Original Market Value (OMV) is €50,000 in 2022, €35,000 in 2023, €20,000 in 2024, €10,000 in 2025 and €0 onwards
• BIK is calculated as 22.5% from 2023 onwards using the tables here (p28-29) : https://www.revenue.ie/en/tax-profe...ins-tax-corporation-tax/part-05/05-01-01b.pdf
  • Vehicle is Category A (zero emissions) and assume there are no business miles
• Accelerated Capital Allowance means that a car costing above €24,000 in Year1 is charged as Corporation Tax to the company. You're allowed write off up to €24,000 in Year 1 (or €3,000 per year over 8 years). The remaining €26,000 is charged to the company at 12.5%
• After 4 years the book value of the car is 65% of the OMV. When selling out to myself personally we need to pay paye+prsi+usc on the book value.
• The effective tax rate of 52%, assume that the €100,000 company profit is after paying a salary of €100,000, so all of it is taxed at higher rate and incurs S1 prsi + usc for director.
• The company pays an extra €5,000 for the car because it cannot avail of the VRT rebate

The following table shows what I think the costs are when the company buys the EV:

	Year 1	Year 2	Year 3	Year 4	Year 5	Closing
	2022	2023	2024	2025	2026
Company Profit	€ 100,000	€ 100,000	€ 100,000	€ 100,000	€ 100,000
Car Purchase	€ 50,000	€ -	€ -	€ -
Corporation Tax (Accelerated)	€ 3,250
Charging Point	€ 750
Servicing	€ 300	€ 300	€ 300	€ 300
Insurance	€ 1,000	€ 1,000	€ 1,000	€ 1,000	€ -
Company Costs	€ 55,300	€ 1,300	€ 1,300	€ 1,300	€ -
Profit Remaining for Salary	€ 44,700	€ 98,700	€ 98,700	€ 98,700	€ 100,000
Effective Tax Rate on Salary	52.00%​	52.00%​	52.00%​	52.00%​	52.00%​
BIK Allowance on Electric Car	€ 50,000	€ 35,000	€ 20,000	€ 10,000	€ -
BIK Due On	€ -	€ 15,000	€ 30,000	€ 40,000	€ -
BIK @ 22.5%	€ -	€ 3,375	€ 6,750	€ 9,000	€ -
Profits Deduction for PAYE/PRSI/USC at Effective Tax Rate - BIK	€ -	€ 1,755	€ 3,510	€ 4,680	€ -
Electric Car Book Value (65% in Year 5)					€ 32,500	€ 32,500
Profits Deduction for PAYE/PRSI/USC - Sale to Director					€ 16,900
Director Salary after BIK / Purchase Taxed	€ 44,700	€ 96,945	€ 95,190	€ 94,020	€ 83,100
Tax on Salary at Effective Rate	€ 23,244	€ 50,411	€ 49,499	€ 48,890	€ 43,212
Director Salary Net	€ 21,456	€ 46,534	€ 45,691	€ 45,130	€ 39,888	€ 198,698
Net Salary After Car Costs	€ 21,456	€ 46,534	€ 45,691	€ 45,130	€ 39,888	€ 198,698

Workings:

• Company Costs are the costs for the purchase + running of the EV, these reduce the amount of profit that can be paid out to the director
• Profit Remaining for Salary - this is the amount remaining after paying the EV costs which is then taxed at 52%
• BIK Allowance on Electric Car - this is the amount that can be deducted from the OMV to arrive the Cash Equivalent amount which then incurs BIK. In 2022 Revenue allow €50,000 but this tapers off then down to €10,000 in 2025. So in 2025 you'll be paying BIK on €40,000
• BIK is charged at 22.5%on an EV according to https://www.askaboutmoney.com/threa...-car-tax-workings-review.225206/#post-1742933
  • So in 2023 there is zero BIK to be paid since they allow up to €50,000 against the OMV
  • But in 2025 there is 22.5% of €40,000 due as BIK, this is €9,000 and then needs to be taxed as usual with PAYE/PRSI/USC applied at 52%
• The amount due to be paid as PAYE/PRSI/USC on the BIK is taken away from company profits since it must be paid to Revenue - this gives the figure Director Salary after BIK / Purchase Taxed
  • Normal PAYE/PRSI/USC (Tax on Salary at Effective Rate) applied to this figure to get the Director Salary Net
• The ultimate question for me was really, after the 4 years how much net pay + car have you earned

Alternatively you could pay the profit out as salary and pay for the car personally:

	Year 1	Year 2	Year 3	Year 4	Year 5	Closing
	2022​	2023​	2024​	2025​	2026​
Company Profit	€ 100,000	€ 100,000	€ 100,000	€ 100,000	€ 100,000
Profit Remaining for Salary	€ 100,000	€ 100,000	€ 100,000	€ 100,000	€ 100,000
Effective Tax Rate on Salary	52.00%​	52.00%​	52.00%​	52.00%​	52.00%​
Director Salary	€ 100,000	€ 100,000	€ 100,000	€ 100,000	€ 100,000
Tax on Salary at Effective Rate	€ 52,000	€ 52,000	€ 52,000	€ 52,000	€ 52,000
Director Salary Net	€ 48,000	€ 48,000	€ 48,000	€ 48,000	€ 48,000	€ 240,000
Car Purchase (Personal)	€ 45,000					€ 45,000
Charging Point	€ 500	€ -	€ -	€ -	€ -	€ 500
Servicing	€ 300	€ 300	€ 300	€ 300		€ 1,200
Insurance	€ 750	€ 750	€ 750	€ 750		€ 3,000
Personal Car Costs	€ 46,550	€ 1,050	€ 1,050	€ 1,050		€ 49,700
Net Salary after Car Costs	€ 1,450	€ 46,950	€ 46,950	€ 46,950	€ 48,000	€ 190,300
Personal Car Value						€ 29,250

In the company purchase scenario you end up having earned €198,698 and the car in your own name at the end of the 4 years
In the company purchase scenario you end up having earned €190,300 and the car in your own name at the end of the 4 years

Is there an error in the calculations above or is the rolling back now of the BIK over the next few years taking the benefit away of doing this?

Apologies for the long post and thanks for any help.

 

[RedOnion]

I find your post very difficult to follow. You might get more responses if it was easier to read.

You've calculated the BIK incorrectly. You don't pay BIK on the full OMV of a car, just on 30% of it.
So in year 2, assuming it was only personal mileage, it would be (50,000-35,000)*30%*22.5% = 1,012 Error;

Average effective tax rates don't matter - you're a higher rate tax payer so only your marginal rate matters when comparing.

You seem to be completely ignoring company tax (paying for the car in year 1 doesn't reduce the P&L by 50k).

I've no idea how you expect a car to retain 65% of its OMV after 4 years.

Note, you've also got company law considerations for transferring company assets to yourself.

 

[Zenith63]

You can also reclaim 20% of the VAT (up to a limit) where the car is primarily used for work purposes - https://www.revenue.ie/en/tax-profe...AT-on-qualifying-passenger-motor-vehicles.pdf

Not sure about your €1000 insurance policy figure. I got a personal policy (to maintain my NCD) with FBD on my company EV and expense it back to the company for about €700.

Motor tax missing? I’d also factor in a new set of tyres towards the end of the 4 years, or is that factored into the servicing line, which is quite high for an EV (I pay €120/year on mine).

Your charger cost is much higher within the company than personally. SEAI made a change to allow the grant for company car drivers, if that’s the reason?

Have you considered financing the car in the company scenario? The interest rates are a little less painful when they happen pre-income tax, and it would leave the cash free to pay out to yourself and maybe use to clear down some of your mortgage or do something else to earn a few quid on it.

 

[8till8]

Not sure about your €1000 insurance policy figure. I got a personal policy (to maintain my NCD) with FBD on my company EV and expense it back to the company for about €700.

How can you insure a car that you don't directly own? Doesn't the insurance policy have to be held by the company, if its a company car?

 

[Zenith63]

How can you insure a car that you don't directly own? Doesn't the insurance policy have to be held by the company, if its a company car?

I’m not sure the exact criteria they use to permit this, but once I confirmed I was a director and owner (though only a minority shareholder) of the company there was no problem. It was actually @RedOnion that pointed out it is possible in another thread, which I’m very grateful for!

 

[RedOnion]

expense it back to the company

Ah. I didn't realise you were doing this too! That's an extra step I didn't think of when we looked at this last year.

 

[thumbelina]

I find your post very difficult to follow. You might get more responses if it was easier to read.

You've calculated the BIK incorrectly. You don't pay BIK on the full OMV of a car, just on 30% of it.
So in year 2, assuming it was only personal mileage, it would be (50,000-35,000)*30%*22.5% = 1,012

Average effective tax rates don't matter - you're a higher rate tax payer so only your marginal rate matters when comparing.

You seem to be completely ignoring company tax (paying for the car in year 1 doesn't reduce the P&L by 50k).

I've no idea how you expect a car to retain 65% of its OMV after 4 years.

Note, you've also got company law considerations for transferring company assets to yourself.

RedOnion - Thanks for taking the time to look at it, I know there is alot there to go through. I've tried to annotate the table better now and I've made a few updates to the original posting based on the comments above.

I am assuming that the BIK is applied and then taxed as notional pay as outlined here (p28-29): https://www.revenue.ie/en/tax-profe...ins-tax-corporation-tax/part-05/05-01-01b.pdf and here: [broken link removed]

• Example 4 seems to be a good reference:

Average effective tax rates don't matter - you're a higher rate tax payer so only your marginal rate matters when comparing.

Thanks - that was incorrect in my original post alright, fixed up now.

You seem to be completely ignoring company tax (paying for the car in year 1 doesn't reduce the P&L by 50k).

I think I have accounted for that correctly with the piece about the accelerated capital allowance in Year1 but if not could you explain where I'm going wrong please.

I've no idea how you expect a car to retain 65% of its OMV after 4 years.

Agreed - I was just picking a figure there based on a rule of thumb for depreciation on a new car being 33% after 3 years. I'm not sure how to actually get a valid estimate there.

Thanks again for looking at this.

 

[RedOnion]

I am assuming that the BIK is applied and then taxed as notional pay

Correct, error on my part.

Agreed - I was just picking a figure there based on a rule of thumb for depreciation on a new car being 33% after 3 years.

Who's rule of thumb? Up to 33% in 1st year, and 60% over 3 would be a better rule of thumb for a normal car. UK data suggests EV's lose 50% over 3 years, but battery improvements influence that a lot. I'd say keeping 40% after 4 years would be realistic.

 

[RedOnion]

Without doing a full table, I think you're overall direction is correct. The change to BIK rules make this less attractive.

The company can only claim capital allowances on 24k on a passenger vehicle, regardless of how much it depreciates. Net, you're only saving tax on this amount (there's a cashflow timing difference - let assume for simplicity that the company borrows 26k to buy the car so that the full profits can be paid to director), plus the tax on the other costs associated with the car.

But over 4 years you will be charged tax on BIK of 19,125

The company selling to you at the end of year 3 might make more sense, assuming the value is 26k.

 

[thumbelina]

You can also reclaim 20% of the VAT (up to a limit) where the car is primarily used for work purposes - https://www.revenue.ie/en/tax-profe...AT-on-qualifying-passenger-motor-vehicles.pdf

Not sure about your €1000 insurance policy figure. I got a personal policy (to maintain my NCD) with FBD on my company EV and expense it back to the company for about €700.

Motor tax missing? I’d also factor in a new set of tyres towards the end of the 4 years, or is that factored into the servicing line, which is quite high for an EV (I pay €120/year on mine).

Your charger cost is much higher within the company than personally. SEAI made a change to allow the grant for company car drivers, if that’s the reason?

Have you considered financing the car in the company scenario? The interest rates are a little less painful when they happen pre-income tax, and it would leave the cash free to pay out to yourself and maybe use to clear down some of your mortgage or do something else to earn a few quid on it.

Thanks Zenith, I had completely forgotten the road tax, looks to be €120 for an EV.

You're also right about the insurance, I was being conservative there but it looks like I can get a policy in my name to cover the company car since I'm a director, cost is around the €700 mark for me also.

On the cost for the charger - correct again, I thought there was no allowance there if the company purchases but it looks fine and acceptable which is great news.