BIK: Company Cars versus Mileage

If an employer provides a benefit to an employee, there will be extra PAYE, PRSI and USC to be deducted from the employee’s net pay at the marginal rate of tax. This article will assume that you know little about BIKs. A company car provided by your employer may seem fantastic but what will be the impact on your net pay? Perhaps you should use your own car and claim mileage instead? Depending on your circumstances, mileage may not be available to you. The chief aim of the writer is to get you to take a moment to consider what might actually work best for you whether you’re an employee or a business owner.

To take a BIK or not to take a BIK, that is the question

Let’s first start with a distinction between BIKs and perks. A BIK is something provided by an employer to their employee or something owned by the employer that the employee is given free use of. The classic example is a company car provided to an employee for use in their role with the business and which is also made available to the employee for their personal use outside business hours. There are special rules for valuing a company car which I’ll discuss shortly. A perk or perquisite is also a benefit provided by an employer to an employee which is almost the same as money in that it can easily be converted to money. A good example being a voucher or an annual membership of a gym provided by an employer to an employee.

A BIK or perk is something you receive on top of your salary, bonus or employer pension contribution. Just like salary, you pay tax, PRSI and USC on the benefit. But unlike salary, you don’t get extra cash, in fact you lose cash. What actually happens is that the tax cost of the BIK is deducted from your net take home pay and nobody likes that.

Before your employer offers you a benefit, find out how it’s going to hit your bottom line, without coming across as ungrateful! You need to figure out, can I afford this “free thing”? If your employer agrees to contribute to your private pension or PRSA, did you know that this contribution will probably be treated as a BIK? It’s still probably worth it, e.g. €1,000 contribution to your pension fund but it will cost you €400 if you’re earning above €35,300 per annum.

Closely related to BIKs and perks is the whole area of salary sacrifice. These are Revenue approved schemes whereby you and your employer agree to reduce your pay in return for your employer buying you a travel pass or the cycle to work scheme. These schemes are popular as you get the travel cost or bike at a lower net cost than you would if you had received your net salary and bought it for full price yourself.

Be careful though, Revenue are on the watch for unapproved salary sacrifice arrangements, for example, where an employer bumps up your mileage rates in return for a lower salary. This is usually a cash win for the employer and a cash win for the employee and if Revenue discover you’re doing this there will be unpleasant consequences for both employer and employee. Be smart, don’t do it.

Not all BIKs are taxable. There are many free of tax consequences such as mobile phones (as long as personal use is small or incidental), computer equipment, some pension contributions (occupational schemes), Christmas parties, car parking (for now) and provision of newspapers/periodicals. 

The methods of calculating the taxable BIK and the taxable perquisites are calculated are different too. A BIK is calculated by assessing the cost the employer of providing the benefit. A perquisite is the market value of the benefit in the employee’s hands. BIKs are different to perquisites in that they can’t be readily converted into cash in the employee’s hands. There are special rules for company cars and employer provided accommodation so let’s get into the BIKs arising on the provision by an employer of a company car to an employee.

Company cars

As stated above, where an employer makes a company owned car available to an employee and the employee is granted personal use of the car, the employee will have received a taxable benefit. Now there is a bit of jargon here but try and stay with it. The taxable benefit will be calculated as the sum by which the cash equivalent of the benefit exceeds the amount that the employee contributes towards the cost of the car, i.e. refunds or reimburses the employer. Usually an employee won’t contribute anything to their employer and so we’re interested in the cash equivalent of the benefit.

The cash equivalent of the benefit of a car is 30% of the original market value. The original market value of the car is the list price when it was first registered. If the car has been bought second hand, it is not the open market value of the car that is used in working out the BIK, rather it is the original market value. Cars depreciate in value quite rapidly in the first few years. If you’re being offered a company car, ensure you ask if the benefit is based on the list price. This applies equally to an employer or payroll operator reading this car.

An example can illustrate this. TechCo acquire a second hand car to be used in the business by a salesman, John. TechCo bought the car second hand for €10,000. The original market value or list price was €30,000 five years ago. The employer gets this wrong and operates PAYE/PRSI/USC on John’s salary, valuing the benefit at €3,000 (€10,000 x 30%) per annum based on the cost of the company purchasing the car. When in fact the correct position was an annual BIK of €9,000 (€30,000 x 30%). During a Revenue audit, it is likely that the Revenue officials would enquire as to whether the correct treatment had been applied. Now imagine the company had been applying the incorrect treatment on 15 cars for 5 years. This would be a very painful adjustment to have to make. If the list price, in the example above €30,000, is high, you may be far better off with mileage.

30% of the original market value is high and where the employee has exceeded 24,000 business kilometres, there is a gradual tapering down, all the way to a level of 6% if the employee does 48,001 kilometres or more. Only business miles are allowed and so an accurate record must be kept of the business kilometres done. The drive to your office and back home is considered private and are not to be included. It will also be assumed that in any 12 month period, 8,000 kilometres will be personal.

In 2009 a new system involving CO2 emissions was proposed but never introduced involving higher charges for those cars with CO2 emissions of 155 grams/kilometre. A new system penalising higher CO2 emissions has been introduced but will not begin till 2024. That won’t impact you now, but it should certainly inform any future decisions, on the part of owners and employees, of purchasing vehicles with high CO2 emissions. Employees will have higher BIKs and employers will have reduced deductions from their corporation tax, indeed this is the case for employers already.

BIK’s for cars are not once off events, you will be hit with a BIK every year. I think it’s important to repeat that. You will be hit with the same BIK charge every year when you avail of a BIK. Now, if you’re an employer who bought the car for under €10,000 on the second hand market you may not really care. However, for employees, comparing the tax cost to you of a BIK must be compared with the benefit to you of mileage. The calculation will be similar for an employer and that’s why its best that a conversation between an employer and employee is well worth having before making a decision on the acquisition of a new vehicle.

In a post Covid 19 world, it’s difficult to know the extent to which business travel will be effected. I imagine anyone reading this has had their fair share of Zoom meetings, but I suspect Zoom is here to stay. Those employees carrying out business travel may in the future be doing less than 24,000 kilometres a year and so the BIK being faced is likely going to be 30% of the original market value. So, having established that the BIK on a company car is high, is there an alternative. There is, it’s called mileage and we’ll look at that now.

Mileage

The alternative to a company car is using your own. Now any business will want their employees making a good first or even second impression with a prospect. If you’re driving an old and run down car, you don’t want to be driving to west Cork and back in one day in a car not fit for purpose. Let’s assume that your employer is happy for you to present at client premises in the car you own yourself.

In recognition of the cost to you of providing your car to your employer, the cost of fuel, motor tax, insurance and most importantly wear and tear will be recognised by your employer and the Revenue in providing an allowance to you per business kilometre travelled. If your car has an engine capacity of 1,200 cc, then assuming 10,000 business miles per annum, an average of just under 200 per week, will net you a tax-free payment of €4,609. The payment will be about 5% higher if your car has an engine capacity between 1,201 and 1500cc and an additional 5% if the engine capacity is over 1,501 cc. 

You will have little difficulty finding the full mileage rates on Revenues website but make sure to use the current rates. Mileage is available to employees. It’s not available to sole traders (all they can do is recover costs such as petrol/diesel). In Section 4.6 of Revenue’s Tax and Duty Manual Part 05.01.06, updated in August 2020, Revenue state that company directors, even those that own the company, are officers of the company and are subject to the same rules as employees and so can avail of mileage.

A really important feature of mileage is that you can only claim for business journeys from your office to a clients premises. If you live in Greystones, work in Rathmines and are travelling from your home in Greystones to a prospect/client premises in Drogheda, you can only claim for the part of the journey from your office in Rathmines to Drogheda. Business journeys effectively start from your office. Now there are quirks to this system but essentially this is the general rule of thumb. You must keep accurate records of your journeys and in the example above, if you travel from Drogheda back to your home in Greystones, the journey back will cease when you get to the office in Rathmines.

One final point I’d like to address is that where your employer is not in a position to offer you mileage for use of your car or at a reduced rate from the civil service rates, you can make a claim for the cost of running your car and capital allowances of the car. I have met very few people who have even heard of this allowance and the link is below.

https://www.revenue.ie/en/employing-people/documents/claim-car-expenses-capital-allowances.pdf

There are two important points I would raise. Firstly, if you have received an allowance from your employer, this allowance will be taxable so make sure you carry out the calculation first to see if it’s going to be worthwhile for you. Secondly, if you’re struggling to work out the benefit and you’d like some help, message me on Linkedin or send me a Linkedin invitation and I will help you at no cost in making this claim for yourself.

Conclusion

The decision to accept a company car carries with it a BIK liability. You need to discover what this cost will be for you. Mileage may work better for you but it’s only right that you consider the position of your employer, a reduced mileage rate may be fairer to both of you. Don’t try to be clever and tweak your mileage rates up, accepting a lower salary as Revenue algorithms or a Revenue audit will expose an unapproved salary sacrifice regime. If you are receiving little or no mileage allowance from your employer and using your car in the performance of your duties, i.e., incurring business travel rather than just driving to and from the office every day, the *Claim for Car Expenses & Capital Allowances” may be an attractive option for you.