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We act for a company B which is associated with company A. The parents are the directors and shareholders of company A, while the son and the father are the majority shareholders (together) of company B. The son is company secretary of company A.
Company B pays rental income to company A (at market rate) for the use of a building owned by company A. Company B provides both father and son with company cars.
We act for a company B which is associated with company A. The parents are the directors and shareholders of company A, while the son and the father are the majority shareholders (together) of company B. The son is company secretary of company A.
Company B pays rental income to company A (at market rate) for the use of a building owned by company A. Company B provides both father and son with company cars.
It is proposed to transfer the car provided to the son at market value from company B to company A. This would cancel out the benefit on the son but would create a deemed distribution to the parents, the value of which is calculated in the same way as the benefit. The argument is that the car is not provided to the son by reason of his employment. The tax consequences are:
* The son saves tax on car benefit and higher rate tax on dividends.
* Company B saves the Class 1A National Insurance.
* The son claims business mileage rates from company B for use of the car for business.
* Company B increases the rent payable to company A, grossed up to cover the corporation tax increase. This will also make up for the running cost of the car incurred by company A and not allowable to be set off against the profits.
* The increased rent paid by company B will alleviate the loss of the running cost of the car and the written down allowance claim against profits.
* While the father is a higher rate taxpayer and will pay 25 per cent higher rate tax on deemed distribution, the mother is a basic rate taxpayer and no further tax will be due by her.
* The son would make a gift to the father using his inheritance tax annual exemption of £3,000 to compensate him for additional tax due.
Readers' comments on the above would be welcome.
(Query T15,995) - Herbie.
The general charging provision in section 154, Taxes Act 1988 states that where any benefit is provided for an employee or for members of his family by reason of his employment, then the employee will be taxed on the cash equivalent of that benefit.
I fear that this scheme (aside from being dramatically over-complex in paperwork for all concerned) will be nipped in the bud by any Inspector worth his salts, and a benefit assessed on the father, plus the resultant Class 1A and interest on company B.
The simplest option would be to declare a dividend on company B, after executing the necessary waivers to other shareholders, so that the son, on receipt can then buy the car at market value from the company. The downside to this is that many practitioners are slightly wary of dividend waivers, and it may be impractical if there are other groups of shareholders in any case.
Another option would be to declare a dividend on company A, mother and father could then lend the son the money to buy the car, and he could repay them, plus the tax suffered. Rent due from company B could be increased to make up for the depletion of reserves. The son then claims agreed mileage rates for his mileage. - Perpetue.
Unfortunately 'too good to be true' sums up this scheme which whilst outwardly attractive has no real prospect of success. Irrespective of any merit that it may have, in our experience this sort of scheme attracts the Inland Revenue's attention and often costs as much in professional fees to defend, as the tax that it hoped to avoid.
If company A provides a car to the son, a Schedule E taxable benefit will still arise. The benefit will either be assessed directly on the son as remuneration for being the company secretary of company A (assuming that the value of the benefit plus any salary exceeds £8,500); on the son as a benefit provided to him by a third party by reason of his employment with company B; or alternatively on the father as a second car provided by reason of the father's employment with company A. As a result there will also still be a Class 1A National Insurance charge.
If the car continues to be assessed as a benefit provided by virtue of the son's employment with company B, then excess of the mileage allowances over the fuel cost will be employment income.
The reference to a deemed distribution is presumably under section 418, Taxes Act 1988. Such a charge is calculated in the same way as a Schedule E benefit in kind charge. However, it will only arise where the participator in the close company receiving the benefit is not otherwise chargeable on the benefit as an employee or director. As indicated above, there will be a Schedule E charge and consequently these provisions will not apply.
The 'gift' of the tax by the son to the father will effectively be a contractual payment to his father and not a gift, because to be a gift it must be gratuitous. As such, there is no transfer of value for inheritance tax purposes. Since the payment to the father is contractual, there is the possibility that the Inland Revenue would attempt to treat the receipt by the father as taxable income.
We are told that company B is paying a market rent to company A. Since it is paying market rent which is by definition the only expense that the company must incur wholly and exclusively for the purposes of its trade, it is hard to see how the additional 'rent' will qualify for a corporation tax deduction. The underlying reason for the additional rent appears to be a contract between company A and company B whereby company B will pay increased rent in consideration for company A providing the car to an employee of company B. Whilst this would then give company B a corporation tax deduction for the expense, it would also clearly demonstrate the true transactions taking place.
'Herbie' would therefore be well advised not to recommend the scheme to his clients. At best, there could be substantial professional costs attempting to defend a complex scheme which, even if it worked, would only offer small tax savings. At worst, it could result in a challenge that the entire scheme was simply designed to defraud the Inland Revenue. Any correspondence between 'Herbie' and his client setting out the scheme in the detail given in the query would provide the Inland Revenue with plenty of ammunition to challenge it successfully. - Wentworth.
