Client who is a director of a Ltd Co likes to drive big gas guzzling cars but doesn't like the lage BIK charge that goes with it has come up with the following:
Company buys the car and then charges him (the director) a market rate for contract hire charge for use of the car thus avoiding the benefit in kind charge to the director and keeps the income in his own company rather than paying a contract hire firm or tax to HMRC.
Can anyone see any obvious pitfall that I have missed or is this a viable idea?
Thanks in advance.
Replies (8)
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Charging over the hill
Of course there's an obvious pitfall.
The company owns the car and is making it available to an employee. This gives rise to a chargeable benefit - period.
The benefit can of course be reduced by way of contribution by the director, but if the hire charge is not sufficient to cover the value of the benefit a charge to tax will remain.
It's a BIK either way!
Hi,
Whichever way you look at it (contract hire or outright purchase by the company) a BIK surely applies. The BIK can be reduced if the user makes a capital contribution (subject to a £5K maximum) which is deducted from the list price or by any payment the user is required to make for private use of the car (which is essentially what you are referring to when your client proposes to pay "a market rate for contract hire charge").
Nice try by your client - I hope he pays you well for keeping him out of trouble!
Best regards,
Gary
won't work
as previous posts the benefit remains as mitigated.
There was a nasty example recently of how such things can go pear shaped.It involved a case where the cars were in the business name however the leases were funded entirely by the employees.The ruling was that despite the fact that the arrangement was entirely privately funded the normal car benefit still arose however being reduced by the lease rentals paid by the employees.
It gets worse.The employees in this case were reimbursing fuel at 40p per business mile that a fair minded person would say is quite correct under the rules. HMRC argued and won that although the cars were entirely funded by the employees they were still technically company cars and such mileage reimbursement should be at the lower advisory rate (that is an average 15p). They then assessed the difference as a benefit and went back 6 years.
Heads HMRC win tails they do...
VAT
A few years ago the company that I worked charged employees with company cars £20 per month as a contribution towards the cost of the cars. It transpired that this contribution was subject to VAT and the company received only £17.02 of the contribution. I assume that the VAT treatment has not changed.
Alternatives
Run a partnership and tandem, that can own the car and there is no BIKs for partners.
Virtual Tax Support for accountants: www.rossmartin.co.uk
Company Cars and payments for private use
I agree with the comments posted already.
The car is being made available by the company for private use and so unfortunately is assessed as a benfit in kind - see Whitby & Anor (2009) tax case.
If payments are being made by the Director to the Company these payments can be used to reduce the value of the benefit in kind.
If you are thinking of doing this it is important that you demonstrate that the payments are being made for the private use of the car.
It would be a good idea to have a written agreement between Director and Company stating that the payments are being made as a condition of the car being made available for private use. I have seen instances where HMRC have challenged the availability of a deduction for payments made by Directors, having a written agreement should avoid challenge by HMRC.