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Electir car treatment in books

Director has purchased a company car through the company - accounting treatment and tax efficiencies

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A director has purchased an electric car through the company. The Car has a lease agreement and a monthly payment. Having already checked the lease agreement and come to the concolusion that is more like a finance lease then a contract hire/rental agreeement. I believe the correct treatment to be:

DR Motor vehicle Balance/Sheet for list price of car

CR Hire purchase Balance/Sheet for full liability of car 

Then each time a payment is made I would split this payment between capital element and DR Hire purchase and interest and CR interest expense.

However the car is also a p11d benefit for the director and as such we want to set up a salary sacrifice through the payroll. The double entry would be 

DR salaries (gross cost of salary)

CR net wages (net pay)

CR PAYE/NIC 

CR salary sacrifice (deduction amount)

My question therefore is how does the salary sacrifice amount get cleared. The payment of the vehicle itself is reducing down the hire purchase liability, so it therefore wouldn't DR the salary sacrifice to clear that?

Can someone provide some clarification?

Thanks,

Rachel

 

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By Truthsayer
22nd Dec 2020 09:58

In your shoes I might clear the salary sacrifice CR balance by posting it to motor expenses. After all, it is effectively a recharge of such expenses to the employee. Alternatively, just have it as a CR balance its own nominal ledger account as a negative expense to the P&L.

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By rslinger
22nd Dec 2020 15:11

The cost is booked as a capital item so there is no cost other than a depreciation cost for the motor vehicle in the P&L- so I'm not sure booking the other side of the salary sacrifice makes sense as a credit in the P&L when the original cost isn't in the P&L?

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By rslinger
22nd Dec 2020 15:12

The cost is booked as a capital item so there is no cost other than a depreciation cost for the motor vehicle in the P&L- so I'm not sure booking the other side of the salary sacrifice makes sense as a credit in the P&L when the original cost isn't in the P&L?

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By Truthsayer
22nd Dec 2020 18:06

The depreciation charge is the cost of the vehicle spread over its life charged to the P&L. Thus the cost does appear in the P&L. So I don't understand your objection.

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A Putey FACA
By Arthur Putey
22nd Dec 2020 11:57

Isn't the BIK on electric cars is 0% this year?

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By Truthsayer
22nd Dec 2020 12:34

Yes, but that doesn't change the OP's question.

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A Putey FACA
By Arthur Putey
22nd Dec 2020 14:46

It might on the salary sacrifice bit

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Replying to Arthur Putey:
Psycho
By Wilson Philips
22nd Dec 2020 12:59

That doesn't affect the employee's tax position.

As far as booking the salary is concerned, I would book whatever the reduced salary is. He's given up part of his salary, so that should be reflected in the P&L charge. There's no need, in my view, to get involved with salary sacrifice accounts.

And re the initial part of the question, what is meant by a credit to the tune of the full amount of the liability? Including interest? (I don't follow the CR interest expense bit.)

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A Putey FACA
By Arthur Putey
22nd Dec 2020 15:09

The OPs wording was "However the car is also a p11d benefit for the director and as such we want to set up a salary sacrifice through the payroll", the as such bit suggests they are only setting up a SS to mitigate BIK, which made me wonder if it was worthwhile given the 0% BIK this year and low rates in the following years.

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By rslinger
22nd Dec 2020 15:15

Yes the BIK is 0% this year, but I am not sure that changes the position of using the salary sacrifice to get the tax saving and NI saving....

To the point about the deduction of salary the salary needs to match his contract, for audit purposes as opposed to anything else.
Am still lost as to how to clear the CR left in the salary sacrifice

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Replying to rslinger:
Psycho
By Wilson Philips
22nd Dec 2020 15:21

As I noted above, I don't understand why you should have a CR in 'salary sacrifice'.

If the (amended) contract says that he is going to be paid £x (bearing in mind that £x should reflect the sacrifice) then £x is what should appear in the P&L. Job done.

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Replying to Arthur Putey:
Psycho
By Wilson Philips
22nd Dec 2020 15:17

I have no idea what it is that the OP is wanting to do here - some clarification of the thinking behind it would be helpful.

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By rslinger
22nd Dec 2020 15:30

childcare vouchers are a type of salary sacrifice that you can have and just because you decide to enter into an agreement to sacrifice that element of the salary doesn't mean your gross salary is recorded any differently. when you deal with salary sacrifices for childcare you do the following:
DR salary cost (gross salary)
CR net pay
CR pay/NI
CR childcare vouchers control account

You then post the invoice for the childcare vouchers to clear down the childcare vouchers control account to zero, recognising the small admin charge in the P&L.

Therefore you would imagine the logic would be the same here... except the payment is already being posted against the HP liability to clear down the liability so how does the DR in the salary sacrifice account get cleared down?

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Replying to rslinger:
Psycho
By Wilson Philips
22nd Dec 2020 15:50

I disagree. If a salary sacrifice is to be effective the contract needs to be amended to reflect the reduced salary payable. Your starting point is then to record the salary actually paid. So I disagree with your 'gross salary' line. Other monetary items, such as childcare, can of course be treated as a part of employment costs, via a control account or otherwise. In this case, the 'cost' element is the depreciation of the vehicle - so you might want to reallocate that to staff costs (I wouldn't). The point that I keep returning to is that salary costs should be just that - the amount paid to employees in accordance with their (amended) contract. Other staff costs can then be included as necessary/appropriate.

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Replying to Wilson Philips:
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By rslinger
22nd Dec 2020 15:24

the cost of the car was £36500 list price
there is an interest expense element on top of £5000
the liability in the books is £36500 and the interest expense is being written off to the P&L as we make each payment so if the first payment is £500, £100 interest and £400 capital then we are bringing the balance down by £400 on hire purchase liability account to £36100 and recognising £100 of interest expense

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Replying to rslinger:
A Putey FACA
By Arthur Putey
22nd Dec 2020 15:51

Is the director obliged to make a salary sacrifice in order to be provided with a car?

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By Paul Crowley
22nd Dec 2020 18:25

Came late to the discussion
Agree o% if car qualifies
Why discuss salary sacrifice further?

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A Putey FACA
By Arthur Putey
23rd Dec 2020 09:45

Because the OP mentioned it. If its contractual they are stuck with it, but no point otherwise.

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Replying to rslinger:
Psycho
By Wilson Philips
22nd Dec 2020 15:51

Thanks. That makes sense - your opening post did not ;¬)

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Routemaster image
By tom123
22nd Dec 2020 13:15

Why the phrase "director has purchased through the company",

Either the company has purchased or the director has as an individual.

Whose name is on the lease?

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Replying to tom123:
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By rslinger
22nd Dec 2020 15:13

the company has purchased the vehicle for the directors use as a company car

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By tom123
22nd Dec 2020 16:00

IIRC it used to be the case that, under salary sacrifice, the top line of the payslip had to be the 'reduced' salary with the benefits (like pensions) not going anywhere near the payslip.

However, that changed some years back, and you can now have payslips showing the full salary, followed by a deduction for the sacrificed amount.

Admittedly I have only done this for pensions rather than any other type of arrangement.

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By Hugo Fair
31st Dec 2020 15:31

Just to be clear ... there is no legal definition (and never was) of exactly how salary sacrifice MUST be shown on a payslip. The legislation focuses on the need to a) show gross earnings, and b) any deductions from this. The only recent change being that the first part should now show how the gross amount has been made up if it is based on variable pay per hours worked.

The key point that keeps being missed is that, in the words of my old lecturer, "Salary Sacrifice is a contractual Reduction in Salary ... NOT a Deduction from it"! So long as the payslip makes this status clear there is no problem, but anything that indicates the previous salary as the Gross figure with subsequent deduction is misleading - and will confuse both HR and the employee.

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Replying to Hugo Fair:
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By tom123
31st Dec 2020 18:00

I get your thinking, however, in practice, my staff like to be able to keep track of their official gross pay (before pensions).

You can imagine a circumstance in a few years time where an employee wanted to opt out of pensions or something, and needed to 'prove' what his salary was.

Also, the full top line is useful for mortage applications.

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Replying to tom123:
Psycho
By Wilson Philips
31st Dec 2020 18:36

Sorry but the ‘official’ gross salary is the contractual gross salary, which should be the reduced amount reflecting the sacrifice.

(I agree that payslips may nevertheless be presented in such a way as to show the amount sacrificed.)

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By Paul Crowley
22nd Dec 2020 18:27

Time for me to post Anon
Might get some replies

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