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My sole trader client had difficulty obtaining credit; so when the car used in the business was changed, the new vehicle was financed by a hire purchase agreement, which was taken out by an employee who was also the long-term female partner of my client.
Capital allowances were claimed on the car and the business paid the hire purchase instalments and all the running costs. Average annual business mileage is about 25,000 miles per year and the employee has not used the vehicle.
My sole trader client had difficulty obtaining credit; so when the car used in the business was changed, the new vehicle was financed by a hire purchase agreement, which was taken out by an employee who was also the long-term female partner of my client.
Capital allowances were claimed on the car and the business paid the hire purchase instalments and all the running costs. Average annual business mileage is about 25,000 miles per year and the employee has not used the vehicle.
It was clear from the outset that the vehicle's primary use would be in the business and the employee/female partner regarded herself as a 'proxy' for my client.
The Inspector is now seeking to disallow the capital allowances claim and apply a benefit in kind to the employee as the employer is settling her personal liability. The Inspector considers that who actually incurred the expenditure is the paramount issue.
Readers' views on the best way out of this situation, assuming that there is one, would be gratefully received.
(Query T16,584) — Barnard.
Reply from Hodgy
Where a taxpayer acquires an asset for use in his business and wants to claim capital allowances on it, CAA 2001, s 11(4) requires that the taxpayer must own the asset as a result of incurring the expenditure.
In this case, the asset has been acquired under hire purchase. With such arrangements, the asset does not become the property of the hirer until the last payment is made and so special rules apply. CAA 2001, s 67(1)(b) states that the contract must provide that the person entering into the contract will become the owner of the asset on performance of the contract.
Of course, the problem is that the client will not become the owner of the car, his partner will.
This issue was covered in a previous query from Disowned ('A question of belonging'), the replies to which were published in Taxation, 1 June 2000, p240. Unfortunately, the replies were not hopeful.
An area of possible use to Barnard could be the rules for contributions allowances under CAA 2001, s 537, where contributions towards another person's expenditure can be eligible for plant and machinery allowances. Three conditions must be met which are as follows.
1. A person must have contributed a capital sum to expenditure on the provision of an asset.
2. The expenditure must have been wholly incurred by another person and it must have entitled that person to claim capital allowances on that expenditure.
3. The two persons must not be connected persons within the meaning of TA 1988, s 839.
The first and third conditions would seem to be met, but the problem lies with the second condition. No indication is given that there are any circumstances in which the partner could have claimed capital allowances on the expenditure.
A possible way out of this problem is to argue that the payments by the client to his partner effectively represent car hire and so, subject to the application of the formula if the list price of the car is more than £12,000, those payments are deductible expenditure.
The amounts received by the partner are income in her hands against which she can set capital allowances on the car and hire purchase interest.
