Replies To Queries 3

Replies to Queries 3

A car plan

The tax saving advantages of providing company cars with carbon dioxide emissions of less than 120g/km have been fairly well publicised. In particular, it is now possible for a business to provide a company car to a non-working spouse or a child away at college with the company paying all running costs, leaving the director with a tax liability of only 6 per cent of the list price of the car (this being 40 per cent tax on the 15 per cent benefit charge).

My question is whether a sole trader or partnership business can provide a car to a non-working spouse or child at college, claim all the running costs and finance costs and merely add the 6 per cent charge of the list price as an add back on the Schedule D business tax computation.

Readers' views would be appreciated.

(Query T16,134) Nuvolari.

In the case of a limited company providing such a car to persons who only use the car by reason of their relationship with the director, the tax charge will be levied on the working director.

For a sole trader or a partner in a partnership, those persons are not employees and so a car benefit cannot apply to them. The expenditure is a sum expended for a domestic or private purpose distinct from the purposes of the trade, profession or vocation and so is disallowed by virtue of section 74(1)(b), Taxes Act 1988.

The extent of the disallowance will be determined by the facts as to how the car is used. If it is not used in any way for the business, all of the expenditure is disallowed. If there is an element of business use, an apportionment of the expenditure will be permitted, although evidence in support of the allocation should be maintained. This is confirmed in the Inland Revenue's Inspector's Manual at paragraph IM601e.

Turning to case law, I would refer 'Nuvolari' to Copeman v William Flood & Sons Limited 24 TC 53. This case concerned remuneration to family members that the Inland Revenue considered to be excessive. The court held that only remuneration laid out for the purpose of the trade was deductible and the question of how much had been so laid out was a question of fact to be determined by the Commissioners.

The use of the car benefit cannot be sanctioned as a reasonable method of determining the amount of the expense to be added back. The rules for determining the benefit associated with being provided with a car for private use bear no relation to the actual usage of the car and so are inappropriate. The fact that 'perk' car drivers gained on the switch to the current system as compared to high mileage sales representatives is testament to this fact.

I am afraid that this is just another example of how the tax legislation favours limited companies as opposed to unincorporated businesses, but 'Nuvolari's' proposal is not to be recommended. Hodgy.

Benefit in kind legislation depends on the existence of an employer/employee relationship. An employer can confer a benefit on his employee either directly or by giving it to someone who, though not personally in the donor's employ, is a dependant or relation of someone who is. In such cases, the benefit is assessed on the employee. In this context, directors, even if unsalaried, are defined as employees of the companies of which they are officers.

Non-corporate principals, i.e. sole traders or members of partnerships, are not assessed to benefits. If they enjoy private use of business assets or resources, the easement is taxed by disallowing the private portion of the expense(s) involved. An exception can arise in the case of 'salaried' partners, i.e. partners whose share of profit is a fixed amount, win or lose, together, possibly, with a performance-related bonus. If these individuals use drawings accounts, they are treated like equity partners but, if they elect to be assessed under Schedule E, they are treated as employees as respects benefits. Given that accounts are at times shown to prospective lenders to, or buyers of, the business, a canny trader will not wait to suffer the computed disallowance. Instead he will reimburse the business, via a transfer from drawings account to the expense account, so increasing the accounts profit to match the fiscal one. In that way, a cosmetic benefit is salvaged from the situation.

If the spouse or child of the non-corporate trader is not employed in his business, the table benefit will not apply and the full expense will be disallowable, but do those have to be the facts? A business might employ its owner's wife, or it might be a 'married' partnership. In either case, one of the pair attends to production, be it manufacture, selling or services, while the other keeps the books and deals with correspondence, etc. and generally handles chores that would otherwise invade production or ostensibly leisure time. Likewise, business circumstances may allow part-time employment of the trader's teenaged children during scholastic holidays.

Thought should, therefore, be given to part-time work that the spouse or child could do. Once established as employees of the firm in their own right, both can receive the contemplated benefit. Clients in the queried position should be advised to review the facts critically. Man of Kent.

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