Limited company and a car

A sole trader had a car and is now a limited company

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Hi

I just looked at the first self assessment for a client for their first year of trading. In that year they bought a car via a loan and wanted the sole trading business to pay for it. There was 60/40 usage. So 60% of the value of the vehicle is listed in the balance sheet and 18% CA is applicable to the car.  60% of fuel costs have been put in the business etc. 60% of the loan is listed. 

Firstly... Is this correct? I believe it is but I'm beginning to question everything these days. 

Then... 

During the year they became limited. The loan is in the sole trader 's (now a Director) name and I believe no changes occurred to the log book so the Director owns the car and the corresponding loan.

I've told the Director that I'd prefer they went to a different accountant for this transition to ascertain a value for the business (they traded for 10 months only, buying a car by loan, and not making many sales) and if they wanted to use me going forwards then I'd be happy to help.  I've told them in the meantime that I don't believe the car belongs to the business (loan repayments are coming out of the business account). Am I wrong in this assumption?

They want me to do their last sole trading self assessment. Do I work out Capital Gain  (market value for the car on cessation) on the car when the Limited company was formed?

I'd like to know (out of interest) what would be the case if the car could be transferred into the Limited company (I can't help but worry on behalf of the client). Could it go in via Director Loan and the physical loan be paid off via extracting funds from the Director Loan account  (this seems too simple and too good to be true).

Also out of interest in establishing a value on such a business (barely trading for that long) how does someone establish how much to value it for? Would it be simpler to treat the sole trading as ceasing and starting the Limited company from scratch and then the Director transfer assets in via Director Loan (and have no Goodwill).

Like I say I don't want to meddle in that but I'd just like to know the approaches. 

Much as I love this forum I really feel nervous of asking questions (I feel I'm outing my knowledge gaps). I feel there's always so much I know but it's good to get a full spectrum and concensus.

Thanks

Replies (30)

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RLI
By lionofludesch
22nd Jan 2018 13:55

60% of the car on the Balance Sheet ? It's not how I'd do it but I suppose it comes to the same thing.

The car is probably incapable of being sold to the company without the permission of the finance company (unlikely to be forthcoming).

There's no Capital Gains Tax on cars. There may be a balancing charge, though.

For the time being, the director is probably stuck with claiming a mileage rate of 45/25p a mile, which may or may not be a good thing.

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Replying to lionofludesch:
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By MrsLadyWoman
22nd Jan 2018 15:11

How would you have valued the fixed asset and loan? And allowances to expand on that?

Thanks

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Replying to MrsLadyWoman:
RLI
By lionofludesch
22nd Jan 2018 15:23

I would value the car at what it's worth. I can't value a car I've not seen. That's down to you.

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By Ruddles
22nd Jan 2018 14:02

Credit for acknowledging your weaknesses.

When the business was incorporated there ought to have been a business transfer agreement, even if drawn up informally by the owner, to set out exactly what was and was not being transferred to the company - and for how much.

The car either belongs to the company or it doesn't - that will depend on the intentions of your client and the extent to which those intentions are supported by documentation. The V5 is evidence only of the registered keeper's identity, not of ownership.

If the car is, or was, transferred to the company then there is nothing to prevent the company paying the loan repayments, being debited to the loan account (this could happen whether or not the car is transferred). Transfer to the company may be dependent upon the lender having no interest in/security over the car.

There is, generally, no capital gains tax payable on cars. There would, though, be implications for capital allowances and the value to be brought into the cessation tax comps will depend on exactly what happened to the car and when. Bearing in mind that there are also elections that may or may not be in point depending on what was done with it.

If you're not comfortable with valuation of goodwill etc, refer it to someone that is (assuming that the costs of a formal valuation are justified).

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Replying to Ruddles:
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By MrsLadyWoman
22nd Jan 2018 14:18

How much would it cost? And are accountants happy to do a valuation (in retrospect in guessing ) but not have them as an ongoing client.

I'm guessing they'd want to keep it cheap and do it themselves. What can and cannot go in a valuation (I'm guessing balance sheet value would be the way forward. The car loan would be excluded?).

Could they cease and restart and transfer assets in? I doubt any agreements are in place. They became limited because a client puff theirs needed them to be.

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Replying to MrsLadyWoman:
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By MrsLadyWoman
22nd Jan 2018 15:11

Any thoughts on this?

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Replying to MrsLadyWoman:
By Ruddles
22nd Jan 2018 15:15

Yes - but I've wasted enough time. The cost of a valuation is as subjective as the valuation itself. Will depend on what's involved and who does it.

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By MrsLadyWoman
22nd Jan 2018 15:59

Thanks Riddles.

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By MrsLadyWoman
22nd Jan 2018 16:00

Auto correct... Ruddles

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By Chipette
22nd Jan 2018 14:12

Remember also that if the car belongs to the company a benefit in kind will arise on the individual -this may not be the most tax efficient (compared to claiming mileage).

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Replying to Chipette:
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By MrsLadyWoman
22nd Jan 2018 14:15

I know. I've told them this. I do wish they'd get advice first before doing these things.

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By MrsLadyWoman
22nd Jan 2018 14:14

Thank you.

I would prefer they went with 45p a mile as it's simpler. I think the reason they bought the car and let the business pay for it was that of cash flow. They've (until now) not kept records of mileage.

Re the business paying for the loan what did you mean?

E.g. Dr Fixed asset with car value
CR Director Loan with car value

DR director loan with loan repayment
CR Bank with loan repayment (e.g. physical loan for the car remains the directors but the Director Loan effectively pays for it)

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Replying to MrsLadyWoman:
By Ruddles
22nd Jan 2018 14:27

The second journal is correct, and applies whether or not the first does - ie the director could retain ownership of the car, but allow the company to make the loan payments.

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Replying to Ruddles:
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By MrsLadyWoman
22nd Jan 2018 14:36

So Dr Fixed asset CR Director loan completely incorrect?

But DR Director Loan / CR Bank is ok??

I'm completely confused now.

How can the Limited company pay the loan and there not be an issue? What are the accounting entries that would set this up?

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Replying to MrsLadyWoman:
By Ruddles
22nd Jan 2018 14:55

No, the first journal entry is not incorrect. If the car has been transferred to the company then it is the appropriate entry. What I was alluding to was that if the car is not in fact transferred to the company, the first journal is not required.

If the car is retained by the director, and the company pays the loan, you've already identified the accoutning entries - your second journal entry!

Do you not realise that a company can pay ANY liability on behalf of its director? Whether or not there are issues will depend on, for starters, whether the loan account is overdrawn.

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Replying to Ruddles:
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By MrsLadyWoman
22nd Jan 2018 15:10

Oh yes!

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By MrsLadyWoman
22nd Jan 2018 14:59

Hello again. Would you be able to reply? Thank you. Very much appreciated.

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Replying to MrsLadyWoman:
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By lionofludesch
22nd Jan 2018 15:15

Jeez - you're a bit impatient .......

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Replying to lionofludesch:
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By MrsLadyWoman
22nd Jan 2018 15:21

I'm sorry. Intrigued is more like it.

So... going to the idea that the company doesn't own the car but pays the loan... What about fuel and insurance etc? How would you record that?

DR cost
CR Bank?

And then ask the Director to contribute to costs to reduce and tax implications? I'd be confused that the company could pay for those costs... I've not come across it before. I've heard of 45p per mile and company owning a vehicle and paying for fuel.. have I grasped this wrong?

Your contributions are all very much appreciated. Thank you again.

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Replying to MrsLadyWoman:
By Ruddles
22nd Jan 2018 16:32

You seem to be grasping ... but missing every time.

If the director owns the car, then the 'correct' treatment, if the company pays for any related costs, be they loan repayments or new tyres, is to debit the expense to the director's loan account - they shouldn't go near the P&L (in my view). Charging to P&L is an alternative, but brings with it potential P11D issues and I'd steer clients away from that treatment. The director can then claim from the company (ie credit to his loan account if appropriate) business mileage at the relevant rates.

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Replying to Ruddles:
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By MrsLadyWoman
22nd Jan 2018 17:07

I've never come across this.

So...

If director owns the car...

DR Director Loan (obvs ensuring it doesn't go into overdrawn etc)
CR Bank (to pay the loan)

Car costs are (fuel, insurance, tyres etc)

DR director loan
CR Bank

Mileage is 45p a mile entered as

DR travel
CR Director loan

And no p11d issues...

Or...

Company owns the car as an asset
DR Asset
CR Director loan

DR Director Loan
CR Bank to pay for the bank loan that the Director has

Fuel etc charged to P&L but subject to P11d

Or keep the car out of the business entirely and charge mileage and no p11d issues.

Please tell me I've got it..

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Replying to MrsLadyWoman:
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By Cheshire
22nd Jan 2018 17:23

[quote=MrsLadyWoman]

''DR Director Loan (obvs ensuring it doesn't go into overdrawn etc)''

what then when you cannot stop the DLA going overdrawn?

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Replying to Cheshire:
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By MrsLadyWoman
22nd Jan 2018 17:27

I was thinking about avoiding any tax on loans to the Director...

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Replying to MrsLadyWoman:
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By lionofludesch
22nd Jan 2018 17:35

MrsLadyWoman wrote:

I was thinking about avoiding any tax on loans to the Director...

Easily solved.

The director needs to pay the fuel, licence and insurance for what is, after all, his own car.

If he doesn't - not your fault. Just explain to him what the consequences will be.

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Replying to MrsLadyWoman:
By Ruddles
22nd Jan 2018 17:19

You've got some of it (and by the way, your third option is the same as your first).

With respect, this is all pretty basic stuff and the fact that (a) you've never come across this and (b) you don't know how to deal with it suggests that you'd be better passing the whole lot on to someone that does.

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Replying to Ruddles:
RLI
By lionofludesch
22nd Jan 2018 17:22

Ruddles wrote:

You've got some of it (and by the way, your third option is the same as your first).

With respect, this is all pretty basic stuff and the fact that (a) you've never come across this and (b) you don't know how to deal with it suggests that you'd be better passing the whole lot on to someone that does.

I'd echo that. Relying on an interweb forum for your CPD isn't a great idea.

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By MrsLadyWoman
22nd Jan 2018 17:33

I do keep up to date on my CPD.

This, believe it or not, has never been discussed in any of it.

I appreciate what you are telling me and thank you for not being rude.

If you think I'm lacking can you recommend any courses where this type of thing comes up? I think experience deals you these cards. I was an accountant in a busy company for 10 years dealing with expenses, payroll all the way through the annual audits. Maybe things were just done differently in that business.

You guys have been great. Thanks

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Replying to MrsLadyWoman:
RLI
By lionofludesch
22nd Jan 2018 17:42

This is just about recognising who owns the car and who ought to be paying for its costs.

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By MrsLadyWoman
22nd Jan 2018 18:02

I know. But so many ways. I would have thought the Director owned the car unless the loan and paperwork said different. Surely that's logic.

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By andy.partridge
22nd Jan 2018 18:29

Perfectly acceptable medium for the institutes.

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