Traditionally, driving a company car has always been regarded as being cost efficient to an employee because the employee will only have to suffer the tax element of the benefit whilst the acquisition, repairs and maintenance, fuelling, insurance, licensing etc costs are all borne by the employer. Furthermore, being able to use a company vehicle provides an employee with greater transport flexibility and helps them avoid the need to rely on public transportation. However, the recent increase in motoring benefits through Finance Act no 3 of 2019 and cost of running the motor vehicle is making both employees and employers reconsider whether the motoring benefit is still cost efficient. Nevertheless, a company car remains a cheaper option to an employee. Our law has made it clear that anything granted to the employee that saves him from an out of pocket expense is deemed a taxable benefit. Where an employee uses a company motor vehicle for private business or uses company accommodation at no cost, such benefits are deemed taxable because the employee is saved from expenses such as paying rentals and transport costs. The benefit is not restricted to use but extends to acquisition of such assets as houses and motor vehicles from the employer. The focus in this article is the possible disposal of motor vehicles in light of these developments and the associated taxes thereof.
The current economic environment has not made it easy for both the employer and the employee to enjoy the traditional benefit of use of company vehicles. For some employees, the recent increase in motoring benefits has resulted in them being in an unfortunate predicament where their salaries and wages have not been increased by the same proportion as the motoring benefits such that their net earnings are being eroded by the tax applicable on the motoring benefit. Employers are the most affected by the use of company vehicles because the running and maintenance expenses, such as licences, fuel and insurance have also since increased and they are also required to pay extra taxes in the form VAT on motoring benefit. As a result some employers are opting to dispose their existing fleet to employees so as to cut down on costs.
It is apparent that use of company vehicles brings insurmountable convenience to both the employer and the employee despite the recent motoring benefit cost increases that have been triggered by the Finance Act No. 3. To the employer the company car can be used as motivation tool, allows employees to come early and stay extend their working hours, which can result in increased productivity. The benefits to the employee include flexibility, prestige and cost efficiency among other conveniences. .
The disposal of existing fleet to employees has tax consequences depending on whether the employee acquires the vehicle through cash settlement or a loan. Where the employee makes a cash settlement the benefit to the employee would be the difference between the market value and actual sale value for the particular vehicle. The market value should be obtained from motor vehicle dealers recognised by the Commissioner General. Although not specifically provided for in terms of our law, it has become standard practice for the ZIMRA to require three quotations of the market value and to use the highest market value when determining tax payable in the sale of a motor vehicle by the employer. Employers will be required to present these quotations when the ZIMRA conducts its audit. In terms of our law employers should retain documents for a period of six (6) years. In the event that the employer fails to present these quotations, the ZIMRA is empowered in terms of the law to make an estimate of the market value.
Where the employee is offered an option to pay for the purchase price over a long time, this may result in taxable benefit. The option will be regarded as a loan advance to the employee. If the loan or advance is for free or is below LIBOR plus 5%, the benefit is deemed to accrue to an employee and will be processed through the payroll.
Elderly persons who are 55 years of age and above can buy motor vehicles from their employer and no tax is charged. This is another class of persons to whom employers may sell their fleet to and minimise costs on motor vehicle benefits. Notably, employees who are 55 years and above are not restricted to enjoy this benefit when they leave their place of employment, instead they can enjoy the benefit whilst they are still employed.
In the event that the employee decides to use his vehicle on the business of the employer, such use does not attract tax to the extent the business mileage shall be recovered by employee using the automobile association of Zimbabwe rates (AA rates). Any expenses borne by the employer on the vehicle of the employee, including payment for employees’ private mileage constitutes a taxable benefit to the employee which should be processed through payroll.
In a nutshell, employers are left with little option but to sell their fleet to employees so that they do not incur the high maintenance and running costs that come with providing company cars to employees. On the other hand employees can enter into financing arrangements to buy motor vehicles from their employers and avoid the current predicament whereby motoring benefits are now higher and resulting in negative net salaries.