Claire Davey, Tax Director, looks at the changes to benefit-in-kind (BIK) rules for company-provided vehicles in 2023, and what actions employers need to take to ensure compliance.
With effect from 1 January 2023, benefit-in-kind (BIK) on company-provided vehicles is calculated based the vehicle's CO2 Emissions. In line with the government’s Climate Action Plan 2021, this change introduces an environmental rationale to the vehicle BIK regime to encourage employers to provide vehicles with lower CO2 emissions to their employees.
These changes were announced as part of Finance Act 2022. However, in a March announcement, the government introduced temporary amendments to the new rules which backdate to the start of the year.
What was the position up to 31 December 2022?
The BIK of an employer provided vehicle was calculated based on the Original Market Value (OMV) of the car and the amount of business kilometres (KM) travelled by the employee during a tax year.
By using the OMV and annual business KM driven, a “cash equivalent” was determined by reference to a percentage value of the OMV, as per the following table:
| Up to 31 December 2022 | |
|---|---|
| Annual Business Kms | % of OMV |
| Up to 24,000 | 30% |
| 24,001 - 32,000 | 24% |
| 32,001 - 40,000 | 18% |
| 40,001 - 48,000 | 12% |
| 48,001 + | 6% |
For example, if an employee drove 49,000 KMs in a year and the OMV of their company provided car was €65,000, the value of their annual company car BIK was €3,900 (i.e., €65,000 * 6%). Assuming they paid tax at the marginal rate of tax of 52%, their annual tax liability in respect of the company car would be €2,028.
What are the tax changes from 1 January 2023?
With effect from 1 January 2023, there is an extra component in determining the cash equivalent for company-provided vehicle BIK purposes. The CO2 emission rate of the vehicle now has a major impact in the calculation of the BIK, in addition to the OMV and annual business KMs driven.
Revenue confirmed that Worldwide Harmonised Light Vehicle Testing Procedure (WLTP) as opposed to the New European Driving Cycle (NEDC) CO2 testing methodology should be used to determine the CO2 emissions per KM for the purpose of calculating the BIK due.
The BIK cash equivalent on the use of an employer provider car is now determined based on a percentage of the vehicles’ OMV, as per the amounts included in the following table:
| From 1 January 2023 | |||||
|---|---|---|---|---|---|
| Annual Business Kms | Vehicle Categories | ||||
| A | B | C | D | E | |
| CO2 Emissions - CO2g per km | 0 - 59 | 59 - 99 | 100 - 139 | 140 - 179 | 180 + |
| % of OMV | |||||
| 0 - 26,000 | 22.50% | 26.25% | 30% | 33.75% | 37.50% |
| 26,001 - 39,000 | 18% | 21% | 24% | 27% | 30% |
| 39,001 - 48,000 | 13.50% | 15.75% | 18% | 20.25% | 22.50% |
| 48,001 + | 9% | 10.50% | 12% | 13.50% | 15% |
Temporary measures introduced on 7th March 2023
For the 2023 tax year
In recognition of the negative financial impact of the new BIK rule on employee's net pay, the government announced in early March a temporary change to the 2023 rules.
While the CO2 categories have not changed, the temporary rules provide a reduction of €10,000 to the OMV of the vehicle in A to D categories. There is no reduction to OMV s for cars in the E emissions category. Another helpful temporary measure will see the upper limit of the highest mileage band (originally set at 52,00KM) reduced by 4,000KM to 48,001KM for 2023.
As the temporary measures are effective 1 January 2023, employers may need to make a once-off payroll adjustment to reflect the backdated temporary measures announced in March 2023.
While the changes are expected to remain in force for the 2023 year, it remains to be seen whether the government will agree to any further changes to the company car BIK rules from 2024 onwards.
Electric vehicles
Finance Act 2022 extended the application of the special BIK rules on electric vehicles to 2025 which permit a fixed reduction in the OMV for the purposes of the calculation. These rules apply for fully electric vehicles only, i.e., hybrid vehicles are not covered by these favourable BIK rules.
However, a tapering applies from the 2023 year of assessment, such that in calculating the company vehicle BIK, the OMV exemption threshold for electric vehicles will decrease to €45,000 in 2023. When the new rules originally took effect on 1 January, the OMV discount was set at €35,000, but an extra €10,000 was added to the reduction under the temporary announcement which brings the total OMV discount on electric company cars to €45,000 for 2023.
As things stand for subsequent years, a reduction of €20,000 from the OMV is permitted in 2024, and finally reducing to €10,000 for 2025.
For example, an electric vehicle acquired on 1 January 2023 with an OMV is €70,000, performing annual business mileage of 24,000 KM, the BIK is calculated for the years 2023 to 2026 is summarised in the table below:
| Year | 2023 | 2024 | 2025 | 2026 |
|---|---|---|---|---|
| OMV | 70,000 | 70,000 | 70,000 | 70,000 |
| BIK reduction for electric vehicles | -45,000 | -20,000 | -10,000 | |
| Taxable OMV | 25,000 | 50,000 | 60,000 | 70,000 |
| BIK Rate - Category A | 22.5% | 22.5% | 22.5% | 22.5% |
| Cash Equivalent | 5,625 | 11,250 | 13,500 | 15,750 |
In addition, no taxable benefit arises where an employer provides facilities for the charging of vehicles on its business premises provided all employees can avail of the facilities.
It should also be possible for an employer to reimburse home electricity costs relating to charging the employer provided EV without tax consequences. This could potentially cause some practical difficulties in measuring this usage and more so, where the individual is also charging another privately owned vehicle. It is a requirement for the employer to obtain sufficient supporting documents to verify the tax free reimbursed amounts and so we can foresee some challenges in providing the necessary evidence to support such claims.
Company vans
There has also been a change introduced with effect from 1 January 2023 to the rate applicable in calculating the cash equivalent for company provided van. This rate has now been increased from 5% to 8% of the OMV of the van.
The favourable BIK rules which also apply to electric vans now operates on a tapered basis with these special rules set to be abolished from 2026 onwards.
So what action should employers take in 2023?
- Employers should liaise with the payroll operator to ensure that the correct BIK rate is being charged for 2023 based on the CO2 emissions of company cars provided. A once off payroll adjustment may need to be made in the next payroll period to ensure cumulative BIK levels reflect the temporary changes announced in March 2023.
- Ensure adequate travel records are maintained for all employees/directors. These records should be updated at least on a on a monthly basis, thereby ensuring the correct BIK is charged through payroll on a real time basis and is reflective of actual business KMs travelled.
- If it is the intention to provide an employee/director with a company vehicle, we recommend careful review of the specification of the asset and seek advice if necessary. Very often cars which are advertised as commercial vehicles can be subject to the BIK rates applicable for passenger motor vehicles.
- Review whether it is appropriate to offer “greener” vehicles as company car options to help the environment whilst also taking advantage of reduced tax and social security charges.
Get in touch
For additional information or assistance, please contact Claire Davey of our Tax team. We'd be delighted to hear from you.
Claire Davey
Director, Tax
KPMG in Ireland
