Following on from my article in the spring edition of Motor Matters on common VAT issues, I thought it would be useful to take a look at the other area of taxation that HMRC will focus on. Like VAT, employment taxes are a complex area and can result in substantial penalties if not managed and treated correctly.
There are three main ways we tend to provide cars to our employees.
Car lease scheme
Where the car is leased at an arm’s length for a commercial rate. No fuel is provided to the employee (or their family member). There is no tax due on this type of scheme.
Traditional company car
The employee is provided with a car but usually makes no contribution to the cost. Fuel may be provided free of charge (sometimes up to an agreed limit). This car (and fuel) is treated as a benefit in kind and is reported annually to HMRC through the P11D. Employers NI is due of the benefit value. This value is calculated using the cars list price and CO2 rate. Normally, every time a car is changed, HMRC has to be updated with the cars details, the benefit value recalculated and a new tax code issued. The motor trade, however, has an agreed scheme for averaging the value of the typical car provided throughout the year. This is only an option where there is a frequent change of car. There is no definition of what ‘frequent change’ is and HMRC has quoted anything from every couple of days to once a quarter! It is unlikely, however, that a demonstrator allocated to someone for six months would be classed as a frequent change.
Employee Car Ownership Scheme (ECOS)
These schemes take the car outside of the company car regime and, therefore, removes any benefit in kind (and NI) due. The company sells the car to the employee (usually at cost). The employee funds the purchase with a loan from the employer or a third party. At some point in the future, the employee sells the car back to the employer for the amount outstanding on the loan. The employee is able to claim back business mileage use from the employer at up to 45p/mile without it becoming a benefit. Any loan with interest below the government approved rate will also be classed as a benefit of the employee.
They key areas to watch out for on an ECOS scheme are:
- evidencing what the cost price is (including all bonuses?)
- can the car be funded (and ‘count’) as a demonstrator and also be owned by the employee?
- can you insure the employees personal car (what benefit in kind for the employee?)
- ensure the buyback price is the market value of the car (otherwise it is a benefit)
- make sure you maintain and retain all the relevant paperwork!
Any private fuel (even just £1) provided to an employee is a benefit in kind and calculated using the cars CO2 emissions and a fixed HMRC annual value. Fuel benefit is increasingly being seen as expensive for both the employee and the employer. If private fuel is not provided (e.g. the employee is recharged for any fuel purchased) then it is important to retain the records showing how this is achieved. For example, if you operate a sales department fuel card or keep fuel cans onsite, how can you be sure there is no private use? How will you evidence this?
The motor trade will often have people who are self employed working on a regular basis. This may include valeters, cleaners, drivers and even the odd consultant! HMRC will want to understand whether these workers are truly self-employed or should be treated as employees. Currently this is not an issue if the worker operates through a limited company but the recent budget announcement extending IR35 to the private sector from 2020 may change this. You should review all your off-payroll labour (including currently approved schemes) to examine your potential exposure now or in 2020.
HMRC has a useful online employment status tool you can use and then print out the results to evidence your approach.
Entertaining and sponsorship
The three main types of entertaining/sponsorship.
Any expenditure is not allowable for Corporation Tax and you must not recover the VAT on this expenditure. You may be able to class the expenditure as a promotion or advertising which would be allowable. The key point is to maintain records of what you actually get for your money and you may have to separate out the entertaining element from the advertising.
Expenditure is usually allowable for Corporation Tax and is VAT recoverable. There is an exemption of £150/year for an annual event per employee. Anything outside of this (including meals etc.) should be included on the employees’ P11D unless covered by a PSA (below).
This is an area that HMRC will look at very closely. They will want to see what benefit the business is getting from the sponsorship or is it a personal project of the owner/director?
One area that seems to be on the increase is the lending of vehicles to third parties (either to celebrities/sports people or in return for a service, e.g. gym membership). In these circumstances there may be tax and NI issues for the motor dealer if the person who uses the car is an employee of another business. What tax is due will depend on who decides who can use the car. There is a fine line between providing a benefit and promotion/advertising so tax advice should always be obtained before entering into a contract.
PAYE Settlement Agreements (PSA)
PSAs are used where you want to provide a benefit to employees but also want to pay the tax on their behalf. Typical examples would be incentive awards or trips, minor gifts or shared benefits. A PSA cannot be used for cash, vouchers or regular benefits. If a PSA is agreed with HMRC then these benefits do not appear on the employees P11D but instead are reported annually. The employer will make a single payment to HMRC to cover income tax, class 1 NI and class 1B NI. You can apply for a PSA at any time and it must be renewed annually if you wish to continue to use it.
Some more VAT?
Whilst this article is principally about employment taxes, there are a couple of VAT matters that I cannot ignore.
HMRC has recently written to a number of motor groups requesting copies of their partial exemption calculation for the last four years. It is likely that if they discover issues (and, therefore, potential income), they will want to expand this review. If you are not 100% sure that your calculations will pass scrutiny, now is the time to review and revise them.
You are probably aware of the term ‘making tax digital’. This is HMRC’s approach to ultimately having access directly in to the DMS. There is a phased approach but the key date is April 2019. From this date, unless you qualify for deferral, your VAT return must be submitted electronically (not typed into the HMRC website) and it is likely you will need additional software to complete this.
Tim is an independent consultant to the motor trade and former Finance Director of Beadles Group Ltd. Contact Tim, [email protected], if you would like further information about a finance and compliance health check.
This article is from the winter 2018 issue of Motor Matters, our newsletter for those working within the motor industry. To download the latest issue, please visit the newsletter section of our website. Law covered as at November 2018.
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