We're just in the process of encouraging one of our Ltd companies to buy a brand-new car for their daughter. And it all seems ludicrously like a gift-horse.
Buy a £10K car with CO2 emissions of say 100, give to daughter. BiK assessable on company director is therefore 10% - so £1,000. Car's running costs claimable on a revenue basis and car purchase available for 100% FYA's on the purchase, despite the fact that the use of the car's got no business relevance.
I know that's what the rules say, so am I missing something? And if I'm not, why is this so ludicrously generous?
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Restriction of capital allowances for personal use
Wouldn't that mean a restriction of 100% therefore leaving no CA or FYA to claim?
No private use restriction in a limited company
Rebecca Benneyworth was pushing this scheme when she used to lecture for Quantum a couple of years back. I beleive her children have cars through her company so presumably there is no catch.
I assume the daughter has already passed her test?
Otherwise there's also a work-related training angle here too.
Just employ her and decide that you need her to be able to drive to properly/better perform her duties, pay for her driving lessons as work-related training and you can throw the car in as a training-related asset. No car benefit until she passes her test!
@ Cirius
The benefit will be taxable in the director, so the daughter does not need to be an employee. And even if she was, it would probably still be taxable on the director.
@Taxhound
Well done! You successfully missed the [somewhat flippant] point that I was making that would have:
necessitated her being an employee, ensured that it was her benefit, and then exempted the benefit (for a time).
Thanks
Mainly for the reassurance. It just seems too good a deal to be overlooked (even allowing for the potential Class 1a's). It still doesn't solve the puzzle of why there should be such a taxpayer-subsidised route to buying a car. After all these years of don't-go-there as regards company cars, it just seems a total reversal.
My theory is that it's a kind of scrappage scheme thing designed to subsidise the purchase of new low CO2 emissions cars. It's just so unnecessary, but we all know what to do with a gift-horse, don't we?
Is there not supposed to be ...
... a business purpose for the purchase in order that it qualifies for Captial allowances?
With kind regards
Clint Westwood
That's what I thought
But apparently not. Makes sense if you think about it - a health-club sub paid for an employee is taxable on the employee as a benefit but is deductible by the company as a part of the remuneration package. Provision of a second car used to attract a scale charge that was 1½ times the normal rate. But that was back in days of business mileage getting you a scale charge reduction.
My point is ...
... that remuneration of employees is accepted as a business purpose. Employees may be remunerated by provision of benefits. Provision of benefits may require capital expenditure on plant and machinery. Hence the business link is established and CAs claimable.
However, at the commencement of that link is that it is for the remuneration of employees. The benefit in kind is chargeable on the director, rather than the person in receipt of the benefit, by reason of a statutory construction. Does this mean that the provision of the car to the daughter is part of the director's remuneration package? If so, then I agree that you should be safe. Not sure about that, is all.
With kind regards
Clint Westwood
@ Cirius
I would shy away from trying to escape a BIK altogether. First of all you may have difficulty satisfying condition B of s.169(4) ITEPA 2003, and secondly you run the risk of an attack under s.1064 CTA 2010 (formerly s.418 ICTA 1988)
With kind regards
Clint Westwood
@ Clint
I'm not sure I agree with you. What I was suggesting had at its heart the work-related training exemption of S.250 ITEPA 2003.
It matters not a jot who the benefit would otherwise be chargeable on. If it arises out of the provision for an employee of work-related training, including the provision of a training-related asset (as defined in S.254(2) - which can include a car), then S.250(1) says that no liability to income tax arises in respect of it.
The S.1064 CTA 2010 issue is the flipside of losing a wholly and exclusively argument (for the revenue expenditure and/or not having a business purpose for the capital expenditure), which shouldn't arise if the training in question (and the provision of the training-related asset) satisfies the definition of work-related training in S.251 ITEPA 2003.
As I say though, my suggestion was flippant, because I doubt that it could be demonstrated to be genuinely work-related training, in reality.
If it's good enough for Rebecca Benneyworth and Mike Steed then
We have been doing this for years.
It works.
VAT
One further thought on this subject. Since the daughter's car isn't going to be used for actual business purposes at all (one assumes), it would be incorrect to reclaim the VAT on servicing costs and the like. It's not going to change the analysis, but it's a potential bear trap.
Very interesting...
This thread is all about if we gift the car to the daughter.
Do the same benefits exist if the director purchases the same car for him/herself or an employee?
Thanks
Peter
Seems to good to be true!
If everything is a valid "business expense", would the vat on the running cost not be allowed in full. Assuming it wasn't a "green car" the capital allowances would be restricted at 20% (capped at £3k)?
Remember its company
Companies are allowed a deduction for remunerating directors/employees. They then pay Income Tax on the benefit in kind. It's taxable on the director in this example, and private/business use is irrelevant here, and calculated under BIK rules. The company then gets tax relief under Corporation Tax rules.
Simples!
As an aside, both the BIK and Corporation Tax systems are kind to low emission cars as a matter of policy - so its not an abuse to use them. The reverse is the case for cars at the other end of the spectrum - your choice, and you live with the high BIK and restricted capital allowances.
Don't forget...
The car will be taxed on its original list price, plus any optional extras, which is usually a couple of grand more for a new car than what you would pay for it. That can make quite a big difference when you are being taxed on it every year. Having said that, if you are only paying £10k for a brand new car the difference will probably just be a few hundred.
Also, if the car runs on diesel the BIK will be 3% higher, so you could be paying 13% not 10%.
When the car is sold in a few years, there will be a balancing charge on the sale proceeds if it originally qualified for 100% ECA. Therefore, you need to compare the cost of the BIK over the whole period of ownership against the tax saving on the net capital cost (after sale proceeds) and running costs.
If you would have had to pay for the car yourself out of extra dividend or bonus, you could also factor in the tax saving on that, although to compare like with like you would have to do the same (in reverse) on the sale proceeds. If you would have paid for the car out of savings, you could factor in opportunity cost or bank interest instead, although the company would have an opportunity cost on the funds too so this would probably offset it.
The 10% band will be restricted to cars up to 99 g/km next year by the way, so anyone driving a 120 g/km car this year will be getting a 50% tax hike on their BIK in 2012.
Company cars work better for bigger firms with high marginal tax rates than they do for most owner managed companies paying just 20% (from this April). However, you can make them tax-efficient for small companies with personal contributions towards the original cost (up to £5k) and for private use (although the latter must be formally required by the employer so don't forget the board minute). That way you can minimise the BIK whilst saving tax on the capital allowance and the running costs.
Paradoxically, the more business use you make of a car the less tax efficient it is to be owned by the company, as the 40p per mile you can claim for business mileage is still much higher than the advisory fuel rates you can claim as expenses (although probably not for much longer the way fuel prices are going up). I know the mileage rates are in lieu of capital allowances and running costs too, but the difference can be enough to sway the decision against a company car when business mileage is high.
Chris
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