Car-related tax and National Insurance contributions are now linked to carbon dioxide (CO2) emissions rather than to business mileage or the car's age. This benefits businesses that use cleaner, fuel-efficient cars. There's even a calculator that does all the hard work for you.

This guide explains what you need to do to meet tax requirements for company cars, vans and fuel and takes you directly to the forms you have to fill in.

Which forms do I need to fill in?

Form P46(Car) applies whenever:

• a new or existing employee gets use of a company car
• an employee no longer has use of a company car
• an employee gets use of a different or an extra car
• you provide fuel free of charge to your employee where none was provided before

Pooled cars are not classed as a taxable benefit because they are not available for private use. You therefore don't need to include them on your form P46(car).

You need to download and complete form P46(car) from the HM Revenue & Customs (HMRC) website (PDF), and send it to your local tax office within 28 days of the end of the quarter in which the change in arrangement takes place - this will be 5 July, 5 October, 5 January or 5 April. To find out where your local tax office is, call the HMRC Established Employers Helpline on Tel 08457 143 143.

You can file form P46 online through the HMRC website. Read about and enrol for PAYE Online for Employers.

You must download and complete the section of form P11D that relates to company cars and car fuel from the HMRC website (PDF). You need to:

• complete and send this form - for each employee - by 6 July, following the end of the tax year
• give a copy of the form - or details of the information - to the relevant employees

You can also file form P11D online through the HMRC website. Read about and enrol for PAYE Online for Employers.

Download Class 1A NICs return form P11D(b) for expenses and benefits from the HMRC website (PDF). There is one for every employer.

You can get regular reminders of important tax dates with our Tax deadline email alerts.

Calculate the taxable benefits for company cars

To find the taxable benefit of the car and the car fuel you just need to enter the car's details into an online calculator. The calculations will be done for you.

Follow these steps:

1. When using the calculator you will need to supply details of the car's approved CO2 emissions figure. This chart explains:

2. Calculate your company car and fuel benefit at the HMRC website. You will need to enter the car's details and select "calculate". You'll get two results:

• car benefit charge
• company car fuel benefit

3. Enter these results on HMRC form P11D alongside your details.

The calculator will save you time but if you'd rather do the calculations yourself, you can download working sheet P11D WS2 from the HMRC website (PDF).

You can file form P11D using PAYE Online for Employers at the HMRC website (registration required).

Company vans: what do I have to do?

There is a taxable benefit on company vans. As an employer, you have to report and pay National Insurance contributions (NICs) on the taxable benefit of a company van made available for an employee's private use.

The taxable benefit is as follows:

• £500 for vans less than four years old at the end of the tax year
• £350 for vans four or more years old at the end of the tax year

You need to report this benefit - download form P11D from the HM Revenue & Customs website (HMRC) (PDF). You can also download form P11D(b) from the HMRC website (PDF).

You can file forms P11D and P11D(b) using PAYE Online for Employers at the HMRC website (registration required).

If the van was not available for the whole of the tax year you can download the working sheet P11D WS3 from the HMRC website (PDF) to help you in calculating the benefit as a percentage of the standard charge.

Pooled vans are not available for private use, so they don't count as a taxable benefit.

The rules are more complicated for company vans that are shared by more than one employee. In this case the HMRC Employers Helpline on Tel 08457 143 143 will be able to give you the best guidance.

New rules for taxing employees on their use of company vans have been in force since 6 April 2005. Employees will pay no tax if:

• the only journeys made in the van are work journeys, eg delivering goods or making calls to customers
• all the journeys are work journeys and travelling between home and work

Employees only pay tax if they use their van for private journeys - unless this private use is insignificant, eg taking rubbish to the tip once or twice a year.

If there is tax to pay because of private use, employees will be charged tax on the following amounts:

• 2005/6 - £500 - reduced to £350 if the van is over four years old
• 2006/7 - £500 - reduced to £350 if the van is over four years old
• 2007/8 - £3,000 - with an extra tax on £500 if they have free or subsidised fuel for private use

Employers will pay Class 1A NICs on the same amounts.

If your employees are affected by these changes, contact HMRC so that their tax codes are changed to make sure they pay the right amount of tax.

You can read further information about company vans and tax at the HMRC website.

Fuel for company cars: when is it not taxable?

There are circumstances when you do not have to pay National Insurance contributions and your employee will not have to pay tax on the benefit of the fuel for a company car.

These are when your employee:

• buys their own fuel and you repay them for business mileage only
• repays you for all fuel they have used privately
• replaces the fuel they have used privately

You may find it helpful to use HM Revenue & Customs (HMRC) advisory fuel rates as a guide to how much you repay your employee and how much they should pay you.

Find detailed information about these advisory fuel rates at the HMRC website.

Fuel for your employees' private use

As an employer, you need to pay National Insurance contributions (NICs) on fuel provided for an employee's private use. This includes journeys to and from work in all company cars and in chargeable company vans.

What do I need to do?

If you provide "free fuel" for an employee, you have to advise HM Revenue & Customs (HMRC) of the arrangement by completing and returning the following forms:

• P46 (car) - download form P46 (car) from the HMRC website (PDF)
• P11D - download form P11D from the HMRC website (PDF) 
• P11D(b) - download form P11D(b) from the HMRC website (PDF)

Send these to your local tax office - if you are not sure of the address, contact the HMRC Employers Helpline on Tel 08457 143 143.

You can also file these forms using PAYE Online for Employers at the HMRC website (registration required).

You can calculate your company car and fuel benefits at the HMRC website. This will help you complete form P11D.

VAT on business vehicles

There are special rules for VAT on business vehicles and the fuel used in them.

You can't normally reclaim the input tax (VAT on purchases) you have to pay on a new car. However, VAT-registered businesses can claim it back if they can show the car is used 100 per cent for business purposes - a pool car kept on site, for instance. You must then charge output tax (VAT charged on a sale) if the car is sold later.

VAT incurred on the purchase of a commercial vehicle - a van, lorry or tractor, for example - can be reclaimed in full subject to the normal rules.

If the business pays for both private and business fuel, a fixed VAT charge is applicable based on the size of the vehicle - this is called the fuel scale charge. This allows the business to reclaim VAT on both the business and private elements of the fuel.

If the business does not pay for private mileage, a scale charge does not apply and VAT may be reclaimed on fuel bought for business provided you keep a detailed record of business mileage.

If you lease a car for business purposes, VAT may be reclaimed on 50 per cent of the lease charge.

See our guide on when you can reclaim VAT and when you can't.

Here's how I arranged for my employees to have company cars

Sadik Pothiawala
Samarind Limited

Sadik's top tips:

• "Read the small print in any lease contract and be clear of the return date of the car, mileage, agreed condition and any penalties."
• "Assess the overall cost of a company car on your business."
• "Check the value your insurance company puts on the car compared to the finance company, and beware of any shortfall."

Sadik Pothiawala is managing director and co-founder of Samarind Limited, which designs, supplies and supports off-the-shelf and bespoke computer packages for SMEs. Today, the company employs 15 people and has six company cars. Sadik believes offering company cars has helped the company attract top staff.

What I did

Consider different ways of obtaining the cars

"Whether we opt for a contract-hire or leasing agreement, or an outright purchase, depends on the circumstances.

"For cars that do very high mileage we've tended to go for contract-hire agreements as these include maintenance. We also lease two of our cars, so we're responsible for the sale at the end of the deal. This is a good option if there is the possibility that we need to keep the car for another year at the end of the agreement. If we've got a surplus of cash, it's more cost-effective to buy the car outright.
 
"There's no right or wrong way, it's just a matter of judgement in each case."

Fill in form P11D

"Every tax year we complete form P11D for each car we provide, because HM Revenue & Customs (HMRC) essentially views a company car as a salary increase for the employee, so we have to pay more National Insurance. The amount is related to the car's carbon emissions and value.

"Calculating the emissions is straightforward, and can be done online or using a chart from the HMRC website. The point is we need to do it accurately otherwise we're liable. It's also important to note that the value of a car includes any extras it might have and is based on the full list price, not what we paid for it."

Pay for employees' private mileage

"We have some employees who commute long distances and we pay fuel for all their journeys. Paying for private mileage is a heavy burden on our company from a tax perspective, but we believe it contributes to reduced staff turnover."

What I'd do differently

Set out a formal policy for employees

"We've been fortunate in that all our employees have looked after their cars but some people can abuse them. I'd formalise a company car policy in my employment documents from the start, covering what the company pays for and what the driver is expected to do in return. We didn't do this at first."

Download this case study and 20 like it in our free book, "Here's how I run my business" (PDF)