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How best to proscribe personal use of company car?

Is there a way around the Catch 22 whereby a Contract of Employment negates Minimum Wage exemption?

Hi all

An impetuous Ltd Co Contractor client has landed herself with an annual Benfit in Kind tax liability of £7,500 after taking out a 4 year business car lease on a CO2 monster before consulting me.  She is hoping I can persuade HMRC that the vehicle will only be used for business purposes because a) she will keep her private car that she had intended to sell, and b) she asked me to draw up an Employment Contract which contains the magic clause "no personal use of car allowed".  Sadly, yesterday I came across the Minimum Wage exemption problem: my client's current remuneration strategy is NIC threshold level salary, and dividends thereafter.  In putting in place the Emplyment Contract I understand she will have to pay herself a salary at the Minimum Wage level, approximately £8k more than now. 

Is there a way around this?  And if we are succesfull in proving exclusive business useage, do we automatically become entitled to 100% input VAT claims on the lease payments?  Many thanks

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26th Aug 2018 16:07

Do you need a contract of employment to proscribe personal use of a car?

Where is this car that isn't used privately kept? Who is insured to drive it and what is the cover?

I'd have thought you would really struggle to convince HMRC if questioned on the point. As a question of fact, is it really likely to be unavailable for private use?

EDIT: I would resist any request to draft any kind of contract. Leave that sort of thing to the lawyers

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By PJ30
to Accountant A
27th Aug 2018 08:35

Thanks A

The Contract of Employment route is HMRC.com advice.....

Her father’s business premises has room for the car overnight/weekends.

Insurance cover - thank you; at least I will know how genuine she is if she refuses to remove Personal Use cover. She is forgoing some £5k by not selling the current personal car.

I WOULD struggle!

I used my LawDepot subscription to download a template contract. So the lawyers are involved, just cheaply and one step removed.

Many thanks, Paul

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to PJ30
27th Aug 2018 11:35

PJ30 wrote:

Her father’s business premises has room for the car overnight/weekends.

Where is this in relation to where she lives? Is the intention that she will drive in her own car to pick up the lease car and then the drop it off on the way home?

I still don't believe that you need a contract of employment to forbid personal use. HMRC presumably mention it in the context of a "normal" employee. I can't see a contract of employment carries any more weight than, say, a board minute where a one person company is involved.

At the end of the day, you need some pretty convincing evidence of what happens in practice to support the paperwork.

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26th Aug 2018 02:36

I bet she also keeps the car at home? Re trying to convince HMRC, I wouldn't even bother, at the end of the day, the car is almost certainly 'available' for private use. It doesn't matter a jot how many one line clauses she slips into a contract of employment.

An expensive lesson - I'm sure she'll seek your advice before she changes her car next time!

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By PJ30
to Manchester_man
27th Aug 2018 08:39

Thanks

No she understands she can’t keep it at home and I will follow up the suggestion above that she excludes personal use from her insurance.

Yes, I think she has learned her lesson!

Thanks, Paul

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26th Aug 2018 11:37

Best way to avoid the benefit is to sell the car.

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to lionofludesch
26th Aug 2018 11:48

lionofludesch wrote:

Best way to avoid the benefit is to sell the car.

It's on a 4 year lease.

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to Accountant A
26th Aug 2018 11:51

Bad luck.

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By PJ30
to lionofludesch
27th Aug 2018 08:41

I advised her to pay the £5k penalty and break the lease but ... deaf ears!

Thanks, Paul

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26th Aug 2018 17:02

Post the car lease payments to her DLA. Best you can hope for to just remove it from the accounts. No CT relief, no BiK

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to atleastisoundknowledgable...
26th Aug 2018 17:47

atleastisoundknowledgable... wrote:

Post the car lease payments to her DLA. Best you can hope for to just remove it from the accounts. No CT relief, no BiK

Is that correct or am I just getting bogged down in the detail? If the lease and insurance are in the name of the company, it's a company car, isn't it? The suggested DLA route might not even give a private use deduction from the BIK charge. Mind you, we are told there is no private use.

EDIT: https://www.accountingweb.co.uk/any-answers/company-cars-and-p11d

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to Accountant A
26th Aug 2018 22:03

You’re probably technically correct , but if all payments are going to the DLA, no harm no foul in the my eyes.

Or better still, change the DD payment to coming out of her personal bank account. Company doesn’t even see the expense then, so it can forget about it.

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By PJ30
to atleastisoundknowledgable...
27th Aug 2018 08:51

I was dissuaded from recommending the “personalisation” of the lease, treating the Co’s action as an agent only, by posts on this site (and elsewhere) that said essentially if it walks like a duck, quacks... it is a duck. Would be very appreciative of views for and against. especially the suggestion of paying from personal account. The VAT reclaim and CT offset foregone would be a little over 15% of BiK. A Good return!

Thanks, Paul

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to atleastisoundknowledgable...
28th Aug 2018 08:29

Wouldn't do it, unless the lease payments are equal to or greater than the BIK. Any contribution is deducted from the BIK, and not the cost of providing the car, so whilst the BIK would be reduced, there would still be a residue assessable.

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By PJ30
to SteLacca
28th Aug 2018 23:28

I agree if we were talking of personal contributions to the cost but what I think was being suggested (here and in earlier posts) was that the business lease costs could be 100% excluded from the P&L by using the DLA and therefore it becomes a personal lease and therefore no BiK. Replies to historical post said no, HMRC would not accept that; if it walks like a duck, quacks like ...

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27th Aug 2018 09:02

You might want to check your own legal position. I have no idea what the rules/consequences are, but it doesn't sound good if you've advised about and provided a contract and then she commits a driving offence, or you advised her to change her insurance and she has an accident on her way home.

Badly put, but you get the drift.

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By PJ30
to Tax Dragon
27th Aug 2018 11:12

Understood. Thanks

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By PJ30
to Tax Dragon
27th Aug 2018 11:13

Oops duplicate

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27th Aug 2018 09:51

Pay the tax and write it off to experience would be my advice.

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By PJ30
to lionofludesch
27th Aug 2018 11:16

If it was a few £thousand, I agree, but £27k is a hell of an expensive experience. If our clients were all as clever and patient as us none of them would need us? But thanks - My wife agrees with you!!

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to lionofludesch
27th Aug 2018 11:22

You mean, let the client pay the tax.

I agree completely. You want your clients to value your advice enough to be happy to pay for it. Getting a tax bill for not taking advice in advance might just encourage this one to take advice next time.

Having a parking space available at dad's work place doesn't stop her tax charge and sounds like a potential tax issue for him. Stop multiplying the iniquities.

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By DJKL
27th Aug 2018 10:55

Can you not vary the employment contract re expected hours of work; in effect the director goes part time?

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By PJ30
to DJKL
27th Aug 2018 11:20

And this would mitigate the Minimum Wage level salary? As a Contractor her Co bills clients by the day and I suspect HMRC would not accept they were less than full days...?

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to DJKL
27th Aug 2018 11:28

DJKL wrote:

Can you not vary the employment contract re expected hours of work; in effect the director goes part time?

Not sure that would assist the substantive point about the car benefit, would it?

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By PJ30
27th Aug 2018 11:17

I perhaps should have made clearer that my client has said she will NOT use the car privately - my worry is how best to enable that to be a successful/ believable claim.

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to PJ30
27th Aug 2018 11:25

Do YOU believe her?

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By PJ30
to Tax Dragon
27th Aug 2018 11:59

Dragon by name, dragon by question!

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to PJ30
27th Aug 2018 12:17

Fair comment... but my point was if you don't believe her then you obviously have to abandon this approach. If you do, what persuaded you?

Plus AA is absolutely right - it's availability for private use that matters. Andy's comment shows how hard we all expect it to be to stop the vehicle being available for private use. (Sorry I don't mean to sound like I'm speaking for everyone but I for one agree with Andy.)

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By PJ30
to Tax Dragon
27th Aug 2018 13:51

I'll reply to all your recent posts in my reply to the 3rd

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to PJ30
27th Aug 2018 11:42

PJ30 wrote:

I perhaps should have made clearer that my client has said she will NOT use the car privately - my worry is how best to enable that to be a successful/ believable claim.

The benefit arises where the car is available for private use. Actual use is irrelevant.

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to Accountant A
27th Aug 2018 12:29

More precisely, mere availability is enough for the tax charge to arise.

Actual use is relevant if the car is supposedly not available to be used privately but nevertheless is so used. Then you get the tax charge plus a whole heap of other potential (and potentially more serious) issues e.g. driving uninsured.

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to Tax Dragon
27th Aug 2018 14:51

Tax Dragon wrote:

More precisely, mere availability is enough for the tax charge to arise.

Actual use is relevant if the car is supposedly not available to be used privately

Fair point, I expressed myself badly.

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27th Aug 2018 11:50

Whatever she says now, once the pressure is off she will use it privately. Mark my words.

It's like clients who have a company debit card or credit card and swear they will never use it personally. They do, either for convenience or because they become complacent.

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to andy.partridge
27th Aug 2018 13:54

andy.partridge wrote:

Whatever she says now, once the pressure is off she will use it privately. Mark my words.

This.

Plus - if HMRC pick up on it, it'll be up to her to prove there was no private use.

Her records won't stack up.

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By PJ30
to lionofludesch
27th Aug 2018 14:52

I have told her she would need a Business Usage mileage logbook that equals total miles on the mileometer.

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to PJ30
27th Aug 2018 15:11

OK - give her a month or two and see how she goes.

It's her risk - you can only advise. You said earlier that there's £27000 at stake - how would she feel if she got a bill for that in four or five years' time ?

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By PJ30
to lionofludesch
27th Aug 2018 15:43

Yes thats a better / more impactful way of expressing her risk. Thanks

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27th Aug 2018 12:08

I'm curious as to why this has surfaced now. It's not P11d season. Just how far through the 4-year lease are we?

Clearly there's nowt can be done re tax already accrued. Maybe your immediate focus should be on reduction of penalties?

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By PJ30
to Tax Dragon
27th Aug 2018 14:48

Hi Dragon

Thanks for continuing contributions.

My "Dragon" comment was not meant to be unfriendly or critical, just referring to the temperature under my collar reading your to-the-point question.

I WANT to believe her but I am not sure I do. Human nature as others have posted.

And it's all rather academic now it seems as I hadn't fully distinguished in my mind between "availability" for private use versus "actual" private use. (Although reading the responses makes me wonder in what circs HMRC would accept a company car was exclusively for business use - presumably when the person to whom the car is provided is not the sole shareholder/Director?)

The lease was only taken out last month; I provide her with a Xero based book-keeping service together with tax advice that I feel falls within my competence. I am an ex-Collector of Taxes and a retired public sector finance professional.

I AM concerned about the potential for penalties and that will feature prominently when I repeat my earlier advice later today. My initial advice was cancel the business lease, pay the lease co £5k break penalty (and take out a personal lease if that's the way you want to buy a new car). Presumably the potential for HMRC Penalties arise when she/I prepare the P11D next year? Can I quote her a % penalty that would apply - i.e. her annual BiK liability is circa £7.5k, and if she knows the penalty might double that hopefully she would then see sense.

My client would need to keep the car over 10 years to break-even max. Capital Contrib.; am I correct in viewing the Private Use Contributions are really just paying the BiK in advance, yes? Presumably there is a NIC1a benefit to the Co. relating to the reduced BiK following a Capital Contribution? And do the PUC contributions reduce the employee's NIC? I am concerned that at least for 1st year of lease she will lose these savings if she persists in her No Private Use stance and then fails.

Sorry for such a long post. Paul

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to PJ30
27th Aug 2018 15:01

I'm not sure what penalties have to do with it? Aren't you giving your client the opportunity to consider the financial risk and come down on the side of flouting the system?

If you are sure of your ground and you communicate that to the client either your client takes your advice or she doesn't. If she doesn't you will be faced with money laundering and disengagement issues.

The penalties might be an issue if you were considering a grey area, for example, where there was case law on either side of the argument.

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By PJ30
to andy.partridge
27th Aug 2018 15:45

My response lost in the ether ... that's certainly not my intentions. Will write again shortly.

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By PJ30
to andy.partridge
27th Aug 2018 16:42

If I Knew she was not intending to use the car exclusively for business use your comment " Aren't you giving your client the opportunity to consider the financial risk and come down on the side of flouting the system?" would apply. She may or may not be telling me the truth but as others have said a) she may mean it now but the reality will be different and b) the availability for private use is different to actual use. As I propose to reiterate my initial advice - pay the penalty and cancel the lease - I don't see how I am in jeopardy. She is naive enough to believe that perhaps HMRC won't look. Hopefully after I spell out the P11D process AND LiondeF's point above about being faced with a BiK assessment at end of year 3 or 4 in the £20k range, that will bring her to her senses. But given her current stance I am only repeating to her what I have read ON HMRC's own web pages about Employment Contract clauses

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to PJ30
27th Aug 2018 16:36

PJ30 wrote:

But given her current stance I am only repeating to her what I have read ON HMRC's own web pages about Employment Contract clauses

Trouble is there's a world of difference between a major employer telling an employee that a car is only for business use and a one woman company telling herself that!

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to Accountant A
27th Aug 2018 16:44

This road is clearly signposted to Disaster.

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27th Aug 2018 17:03

Does the 5k charge apply if she transfers the lease to her own name? Worth her finding out, maybe?

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to Tax Dragon
27th Aug 2018 17:06

Tax Dragon wrote:

Does the 5k charge apply if she transfers the lease to her own name? Worth her finding out, maybe?

Definitely worth asking. The thought had occurred to me. However (and I don't understand car leasing) there is usually a distinction between "business" and "non-business" agreements which might be a sticking point.

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By PJ30
to Tax Dragon
27th Aug 2018 17:11

Sadly she chose a Lease co that doesn't do Personal leases!! That was indeed my first shock horror reply/advice!

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to PJ30
27th Aug 2018 17:35

PJ30 wrote:

Sadly she chose a Lease co that doesn't do Personal leases!! That was indeed my first shock horror reply/advice!

To be fair, she does sound a bit of a muggins.

What sort of car is this ?

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By PJ30
to lionofludesch
27th Aug 2018 17:49

That's a bit of an understatement .... very young for her age

Wait for it... Range Rover Evoque. 2 million grams CO2...

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to PJ30
27th Aug 2018 17:55

PJ30 wrote:

That's a bit of an understatement .... very young for her age

Wait for it... Range Rover Evoque. 2 million grams CO2...

Ach, well, anything over 160 is on the top notch anyway.

If she can afford a Range Rover, she can afford the tax. I wouldn't worry.

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