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I have a client who is having problems with car benefits which will only become worse after 5 April 2002. He operates through a limited company, travelling approximately 50,000 to 60,000 business miles each year. Because his customers are large companies, disincorporation is not an option – they would not like dealing with a sole trader or partnership.
I have a client who is having problems with car benefits which will only become worse after 5 April 2002. He operates through a limited company, travelling approximately 50,000 to 60,000 business miles each year. Because his customers are large companies, disincorporation is not an option – they would not like dealing with a sole trader or partnership.
In order to keep the mileage within reason and to cover servicing, breakdowns, etc., he uses two 'luxury' cars, a Jaguar and a Mercedes. These will be top of the scale for CO2 emissions and his car benefits will be in the region of £30,000 plus fuel benefits. He works from home and there are cars outside the company in which all private motoring is done. Even so, benefits have to be declared, as the Revenue would argue that the two large cars are available for private use.
Ideally one or both cars should be taken out of the company, but then there would be the cost of financing the purchase personally. This would mean increasing the salary/dividends, so it seems that the choice is paying 40 per cent on the car benefits or on the increased salary/dividends (ignoring National Insurance).
There does not appear to be any mitigation of the new scale charges for genuine business use, or do readers know of any other solution?
(Query T15,842) – PHG.
If the client uses the two cars equally, he is guilty of tax unplanning and there is little that can be done for him. If, on the other hand, he genuinely uses one car as the main business car while the other, as stated by the querist, is there to cover servicing, breakdowns, valeting, etc., it appears there is a solution for one of the two benefits involved.
The client should form a separate car hire company in which he is the sole shareholder but the director and secretary are unconnected employees of his business (not family members or dependants). The new company should take over all costs and finance payments for the lesser-used car, and should charge the main company a daily rate, invoiced monthly on the basis of specific days' use, at a rate which will cover all costs and show a small profit. There may even be a balancing allowance on transfer.
The client now has the use of only one car, including its temporary replacement, for each year. – Pertinax.
It is true that the new scale charges will severely penalise someone in this client's position. Removing the car from the company may give rise to one-off charges to income tax on the basis of current market value, which may be 'good value' in comparison to an annual charge on 35 per cent of the original list price. If the cars have already depreciated significantly, it might not be such a bad thing to give the cars to the employee at the very beginning of 2002-03, or else sell them to the employee for their market value at that time.
Removing the car from the company allows the payment of fixed profit car scheme rates without a tax charge, which could be reasonably beneficial on such high levels of business mileage, but in 2002-03 the rates will be fixed at the same level for any engine size. So the fixed profit car scheme allowances may not fully cover the cost of running such an expensive car.
It is arguable that the logic of the fixed profit car scheme should allow the higher rate of mileage to be paid for the first 10,000 miles in each of two cars (because the higher mileage rate is intended to cover depreciation and fixed charges). However, the Inspector is likely to argue that the total mileage should be considered, regardless of the number of cars. Although the Revenue manuals contain examples of employees changing from one car to another, there does not appear to be any discussion of the possibility of having two cars at once. The total tax-free mileage allowance on 60,000 miles will therefore be either:
* 20,000 x 40p + 40,000 x 25p = £18,000; or
* 10,000 x 40p + 50,000 x 25p = £16,500.
The only other alternative is to argue that the cars are not 'made available for private use', and are therefore not within section 157, Taxes Act 1988. This succeeded in the case of Gilbert v Hemsley [1981] STC 703. The employee was forbidden by the terms of his employment contract from using the 'company car' for private purposes, and did not in fact do so (having a private car of his own for private mileage). Because he was based at home, driving the company car home did not constitute 'private use' of the company car, and keeping it garaged at home was considered to be important for the protection of a company asset.
The difficulty with applying that case to the present circumstances is that the client appears to control the company. The Revenue might argue that it is artificial for him to set up an employment contract that forbids him from doing something, because he is in a position to 'turn a blind eye' to his own misdemeanours. However, it is worth considering. – Gardener.
