Common “finance” issues in the Motor Trade

Birketts offers an insight from Tim Humphries, an independent consultant for the Motor Trade and former Finance Director of Motorline and Beadles Group. 

During my time as a Finance Director and consultant in the Motor Trade, I often see the same issues occurring.  This article explores some of the most common issues and how to avoid them.

Private fuel

Any private fuel (even just £1) provided to an employee is a benefit in kind calculated using a car’s CO2 emissions and a fixed HMRC annual value. The fuel benefit is becoming increasingly expensive for the employee and the employer. As a result, most dealers now do not provide private fuel for their employees.  Dealers must demonstrate to HMRC that there are adequate processes and controls to ensure employees don’t use private fuel in error or due to employee fraud. 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? 
• if a courtesy car is fuelled by the business, but a sales executive borrows it over the weekend, how do you identify this private fuel?

The simplest solution is that employees buy all fuel and reclaim it for business use. It is important to explain this clearly to employees as it does place the admin burden on them instead of the business.

Partial exemption (and Capital Goods Scheme)

Most dealers will have an element of their sales that are exempt from VAT. Typically, this is commission from finance but could include other VAT exempt income. Under the VAT rules, this means the business is partially exempt. As a result, the amount of input VAT on overheads that can be recovered is restricted as a proportion to the non-exempt income. If a business is partially exempt, it must complete and retain a calculation every quarter and an annual full-year calculation. The amount of exempt income is calculated as a percentage of total income, and if this percentage is over 1% it is applied to any input VAT not wholly attributed to non-exempt sales. If this calculation exceeds the de-minimis (currently £7,500/year), then this VAT cannot be reclaimed, and an adjustment must be made to the VAT return. 

Whilst partial exemption seems to be more widely understood in our industry, there is still a lack of understanding around the capital goods scheme. This is a method of adjusting the amount of input tax you can claim on a capital purchase in line with its taxable use (i.e. if the business is partially exempt, then not all the input VAT on the capital purchase can be reclaimed). The scheme applies to capital expenditure on land and buildings (including dealership refits) of £250,000 or more. This element of partial exemption is often forgotten about as records have to be maintained for each eligible spend for five or ten years and recalculated on an annual basis.

Cyber security

Although not technically “finance”, IT often falls under the Finance Director’s remit. Firstly, I should say that I am not a cyber security expert and I would suggest all businesses get expert advice on how to protect themselves from cyber fraud.  There is an increasing risk to businesses relating to cyber fraud that has already been seen in several high-profile cases in the press. Whilst it is never possible to eliminate the risk in full, there are things you can do reduce the risk or mitigate the costs if you are attacked.

• There has been an increasing number of businesses experiencing CEO fraud. In CEO fraud, a criminal poses as a senior person in the business in order to persuade staff to make an urgent payment. The request is often made via email, sometimes when the senior person is out of the office. Finance departments should be trained on the risks of CEO fraud and have appropriate procedures in place for verifying new suppliers. It is also important senior management understand these procedures and do not try to work around them.
• Another example is where a customer’s email is hacked and the fraudster replicates an email from the dealership asking for payment but changes the bank details. These emails are convincing and often look identical to previous emails the sales executive has sent to the customer. Whilst this is not the dealer’s fault, it creates a major customer issue and the likely loss of sales and potential reputational damage. To help reduce this risk, businesses can:
  • ensure teams notify customers that they will never email them with a change to bank details;
  • ask the customer to call their sales executive prior to making payment to confirm the bank details verbally;
  • include a statement on the order form saying that you will never send an email with a change in bank details; and
  • if possible, provide bank details to the customer on a physical branded document  (this can be designed to be harder to amend electronically) or call the customer with the bank details.
• No matter how good your cyber security software is, you are always at risk from human error e.g. an employee clicking a link in an email or plugging in a USB drive with a virus. There is extensive training online that can educate staff, and USB ports can be disabled to reduce this risk. Some companies will now also send staff fake phishing emails or provide USBs that can be left on desks to see if the correct procedures are followed.
• Ensure backups are taken regularly and are stored securely off-site if an attack does occur.  The backup restore process should also be tested regularly.
• Having a tested data breach plan in place is very important and should be a priority if one is not already in place.

Tax requirements

There are a couple of tax requirements that can sometimes get overlooked.

Senior Accounting Officer Regime

The Senior Accounting Officer (SAO) legislation was introduced in 2009 and requires SAOs to take reasonable steps to ensure that they establish and maintain appropriate tax accounting arrangements to allow tax liabilities to be calculated accurately in all material respects.  All UK businesses with a turnover over £200m and/or a balance sheet total of more than £2bn must comply with this regime. If a business falls under this requirement, HMRC must be informed who the SAO is. Each year, the SAO must provide a signed certificate to HMRC that states the company had appropriate tax accounting arrangements throughout the financial year (‘unqualified certificate’) or that the company did not have appropriate accounting arrangements throughout the financial year and give detail about the respects in which the arrangements were not appropriate (‘qualified certificate’). Auditors should be aware of this requirement and can advise and assist with the certificate preparation. There are penalties of up to £5,000 (for both the company and the SAO personally) for not complying with this requirement.

Corporate Criminal Offence (CCO)

CCO applies to all companies, LLPs and partnerships regardless of size. Affected entities are legally obliged to actively prevent tax crime. The offence, introduced by the Criminal Finances Act in 2017, can impose an unlimited fine and a criminal conviction on companies and partnerships that fail to prevent anyone acting on their behalf from facilitating a third party’s tax evasion. This may include the evasion of PAYE in a labour supply chain (cash payments, gifts, employees paid as self-employed or via a limited company) or the failure to operate or pay over to HMRC the appropriate level of VAT.

CCO is a strict liability offence, meaning that it applies even if the organisation is unaware of the facilitation. A company can therefore be subject to a criminal charge for being ‘asleep at the wheel’ while someone associated with it knowingly helped another individual or entity to commit tax evasion. The only defence against a charge under CCO is having ‘reasonable prevention procedures’ in place. This requires a business to, at the very minimum, conduct a risk assessment to:

• identify activities and processes which could be exploited to deliberately assist a third party to commit tax evasion; and
• address the gaps in existing controls.

As usual in these circumstances, you will need to keep evidence of all risk assessments and work completed to comply with the CCO requirements in case you need to defend your position at some point in the future.

About the author

This article has been authored by Tim Humphries, an independent consultant to the Motor Trade and former Finance Director of Motorline and Beadles.  For more information on the contents of this article, contact Tim via LinkedIn at www.linkedin.com/in/tim-humphries or call 07740717201.