On the road
We act for a client (a limited company) which deals in buying and selling cars at preferential rates from main dealers.
The company has recently acquired a BMW for £30,000, which is leased back to the director/shareholder by the company at a full market rent plus VAT.
The director insists that there is no benefit in kind because of this and intends to apply the principle to several other employees.
On the road
We act for a client (a limited company) which deals in buying and selling cars at preferential rates from main dealers.
The company has recently acquired a BMW for £30,000, which is leased back to the director/shareholder by the company at a full market rent plus VAT.
The director insists that there is no benefit in kind because of this and intends to apply the principle to several other employees.
We are concerned whether this will stand up to scrutiny by an Inspector and wonder whether any other readers have come across this.
(Query T16,179) - Beemer.
'Beemer' is hoping that his client's director can escape a tax charge on the basis that the car leasing arrangement confers no benefit-in-kind on the director. Whilst such a view may be justified from a commercial perspective, the tax position depends on the legislative provisions.
The relevant legislation can be found in sections 114 to 172 (Part 3, Chapter 6) of the new Income Tax (Earnings and Pensions) Act 2003 which will replace the identical provisions in Taxes Act 1988 with effect from 6 April.
Chapter 6 provides that a tax charge will, in general, apply if a car (or van):
* is made available to an employee (or director) without ownership being transferred to the employee;
* is made available to the employee by reason of the employment; and
* is available for the employee's private use (section 114(1)).
It appears clear that these conditions are met and so a tax charge can arise notwithstanding the absence of any commercial benefit to the director.
As a result, it will be necessary for the tax charge to be calculated (using the appropriate percentage and the car's list price) in accordance with section 121(1)). However, step 8 of the calculation in section 121 and section 144 together provide that any taxable benefit in respect of the car is reduced pound for pound if the employee makes any payment in respect of private use of the vehicle. The fact that the director makes lease payments to the client will therefore reduce (or eliminate) the tax charge that would otherwise arise. The amount of the reduction will include the VAT element of the lease payments.
It should be remembered, however, that if private fuel is provided to the director, a tax charge will arise - even if the main car benefit is eliminated by the lease hire payments (sections 120 and 149(1)). - Kalonymous.
Section 157(1), Taxes Act 1988 applies where a car is made available (without any transfer of the property in it) to a relevant employee (inclusive of private use) by reason of his employment. The cash equivalent of the benefit is to be treated as emoluments of the employment.
From Schedule 6 to the Taxes Act 1988 the cash equivalent is identified as a percentage of the prescribed price. What matters here is paragraph 7, which reduces the charge by reference to amounts recovered from the employee. A comparison is required between the measured cash equivalent and the amount of the employee's payment, resulting either in a measured taxable excess or an absence of liability.
Accordingly, it is necessary to follow the usual procedures for identifying the cash equivalent for the particular vehicle in question (with appropriate adjustments for part of a year). It seems that these rules require the comparison to be made with the full amount recovered from the employee, inclusive of VAT, since the object of the exercise is to measure the employee's advantage, not the commercial outcome.
In the present instance, the most favourable position would flow from a carbon dioxide emissions figure below the lower threshold (for 2002-03) of 165, leading to a 15 per cent figure. Figures for 2003-03 and later years can be found in 'Got a Car? Take a Train' by Allison Plager in Taxation, 22 July 1999 at pages 420 to 422. - Elder.
Editorial note. The critical wording of the legislation is that the car is made available 'by reason of his employment' (section 157(1)(a), Taxes Act 1988). Some respondents felt that if it could be shown that the terms of the lease of the car to the director or employee were exactly the same as would be made to a member of the public, there was an argument that the benefit in kind provisions would not apply because section 157(1)(a) was not satisfied.
The problem with this argument seems to be the provision in section 168(b), Taxes Act 1988 which deems a car made available to an employee by his employer to be made available to him by reason of his employment, subject to an exception which cannot apply where the employer is a company.
More information on the 'deeming' nature of this subsection can be found in the Revenue's Schedule E Manual at paragraph SE 23060.
