Anonymous
28

# Provision of plane - benefit charge

• ### VAT on cancellation Fees

My corporate client has purchased, for a lump sum, 100 hours per year (8,760 hours) flying time in a private plane during the life of the plane .  The plane's mv at time of this purchase was £5 million and the client has paid £700,000 for the flying time and will also pay annually the costs relating to the each flight, say £50,000 a year.  An employee of my corporate client will be able to use the plane for private use.  My initital thought was that the benefit (before any deduction for business use by any employees of my client) should be £700,000 x 20% = £140,000 + 50,000 = £190,000.  It has been suggested to me that the legislation supports an analysis which takes (£5,000,000 + 700,000) x 20% = 1,140,000 x (100/8760) = £13,013 + £50,000 = £63,013 as the benefit.  Views please?

### Replies (28)

By paul.benny
04th Nov 2019 10:05

You've effectively bought a time-share for £700k plus expenses, giving you limited usage. Compare with a company apartment which is more likely to be available 365 days a year. On that basis, I wouldn't include the value of the plane itself.

I read your post as meaning the £700k is the total figure for the life of the plane -whether that's another 5 years or another 50. I would hope that the contract is less vague: how long is the owner obliged to keep the plane airworthy; what happens if a storm destroys it; etc. I'd be looking to spread the £700k over a reasonable and supportable period.

I would then calculate an hourly rate and make the bik £x per hour of private use.

Thanks (0)
By The Dullard
04th Nov 2019 10:30

paul.benny wrote:

I would then calculate an hourly rate and make the bik £x per hour of private use.

You mean rather than apply the legislation?

Thanks (0)
By paul.benny
04th Nov 2019 12:32

With respect, I disagree with your interpretation. The company doesn't have exclusive rights to the plane - it's a time share. On that basis, the annual use value as per s205(3)(b) doesn't relate to the market value of the plane, but the MV of the right to use it for a specified number of hours (presumably if not already reserved by someone else). Further, as the £700k covers a number of years, it should be spread over those years. (If the company had just bought rights for one year, it would presumably have paid less - say £100k).

Whether that stands may well depend on the detail of the 'timeshare', and in particular how flying time is allocated between the company and other sharers. If we have some priority enabling us to get our flying time and bump other sharers, the timeshare argument is harder to sustain.

Thanks (0)
By Wilson Philips
04th Nov 2019 12:45

Does it matter that the company doesn't have exclusive rights to the plane?

Is an asset being made available for private use? Yes (so it would appear)

Does that availability arise from the employment? Yes (so it would appear)

Thanks (0)
By The Dullard
04th Nov 2019 12:55

Where in s 205 does it say that the employer has to have exclusive rights to the asset?

There is an asset that is being made available to an employee of the employer, by reason of that employee's employment, without transfer of property in that asset.

S 205 specifically anticipates that the employer might lease the asset and that the asset might belong to somebody else. The employer has purchased 100 hours of use, but the asset is the aircraft that is actually being made available for the employees use.

Your timeshare argument carries no weight. A lease is just the right to an asset for a continuous period of time. It is only the lack of continuity that differentiates here.

The legislation poses a simple test. Is the asset available to the employee in the tax year, by reason of the employment, without transfer of property. And the aircraft is so available. Relief is then given for non-availability under s 205A.

It is your own (personal) interpretation that has no support from the statute. And, to be fair, you had then gone on from that personal view to just make up your own set of rules (the hourly rate) completely independent of the taxing statute.

Thanks (1)
By paul.benny
04th Nov 2019 15:12

Agree that s205 is silent on the question of exclusive rights, and indeed that the legislation clearly allows for leased assets.

Nevertheless, the rights over the aircraft only exist for 100 hours a year. It's not just lack of continuity of the period of the lease: even the could be used hours at any time over the year, once those 100 hours have been used, there are no more hours (subject to any provisions about additional hours).

s204 requires "a proper apportionment". And as EIM21201 points out, this is not statutorily defined. It goes on to refer the case of Westcott v Bryan where the judgement mentions that apportionment is a rough and ready matter without a precise formula.

It is my personal interpretation. I don't believe it's inconsistent with statute.

I would also suggest that your calculations result in illogical conclusions: year1 bik is more than the actual cash cost to the employer. We don't know the likely duration, but over five years, year 2 amount would result in the bik being close to 100% of the cash cost (£700k + 5 x£50k =£950k vs 5x £186k = £930k).

Thanks (0)
By The Dullard
04th Nov 2019 15:24

S 204 doesn't get touched, because s 205 applies. That's what s 203(3) says.

The benefit (to the employee) is the availability of the aircratft for the employee's private use, and there is a statutory formula for calculating the "cost" of that benefit.

Thanks (0)
By Wilson Philips
04th Nov 2019 15:26

Quote:

I would also suggest that your calculations result in illogical conclusions: year1 bik is more than the actual cash cost to the employer.

So what?

Company buys an old Aston Martin with a list price of £145,000 for £20,000. What is the BIK?

Thanks (0)
By paul.benny
04th Nov 2019 15:47

Not really relevant. As you probably know better than me (a) there are specific rules for classic cars and (b) car bik arises from being "made available" and the only apportionment is for time when the car is not available.

Thanks (0)
By The Dullard
04th Nov 2019 15:53

It is relevant, because the special rules for classic cars don't operate to prevent an illogical conclusion. The £145,000 list price prevails, because the rule only operates if market value is higher than the original list price. Ooh, that's what s 205(2) does...

Thanks (0)
By The Dullard
04th Nov 2019 10:28

The flying hours pro-ration is not supported be the legislation. The benefit claculated in s 205, is restricted to the extent that there are days in the period that the asset is not available to the employee, or is available but is only used for business purposes.

My guess would be that the employee can only use is for perhaps 1 to 3 hours at a time and so 100 hours equates to maybe 50 days of availablility (and thus 315 unavailable days, in a 365 day tax year.

What the the legislation says that the benefit is, and it is the only available option, is::

In year 1: £5 million x 20% - £5 million x 20% x 315/365 + £700,000 + 50,000 = £886,986

In subsequent years: £5 million x 20% - £5 million x 20% x 315/365 + 50,000 = £186,986

Thanks (0)
By Lone_Wolf
04th Nov 2019 11:21

Quote:

The flying hours pro-ration is not supported be the legislation. The benefit claculated in s 205, is restricted to the extent that there are days in the period that the asset is not available to the employee, or is available but is only used for business purposes.

My guess would be that the employee can only use is for perhaps 1 to 3 hours at a time and so 100 hours equates to maybe 50 days of availablility (and thus 315 unavailable days, in a 365 day tax year.

What the the legislation says that the benefit is, and it is the only available option, is::

In year 1: £5 million x 20% - £5 million x 20% x 315/365 + £700,000 + 50,000 = £886,986

In subsequent years: £5 million x 20% - £5 million x 20% x 315/365 + 50,000 = £186,986

Should the Year 1 calculation include the £700,000?

I presume you're adding this as an "additional expense", but would the £700,000 not be excluded excluded by s205(4)(b).

The £700,000 is covered by "any rent or hire charge payable for the asset by those providing the asset.", in my opinion at least.

Therefore the benefit is £186,986 each year provided.

Thanks (0)
By Lone_Wolf
04th Nov 2019 11:28

Quote:

The flying hours pro-ration is not supported be the legislation. The benefit claculated in s 205, is restricted to the extent that there are days in the period that the asset is not available to the employee, or is available but is only used for business purposes.

My guess would be that the employee can only use is for perhaps 1 to 3 hours at a time and so 100 hours equates to maybe 50 days of availablility (and thus 315 unavailable days, in a 365 day tax year.

What the the legislation says that the benefit is, and it is the only available option, is::

In year 1: £5 million x 20% - £5 million x 20% x 315/365 + £700,000 + 50,000 = £886,986

In subsequent years: £5 million x 20% - £5 million x 20% x 315/365 + 50,000 = £186,986

Should the Year 1 calculation include the £700,000?

I presume you're adding this as an "additional expense", but would the £700,000 not be excluded excluded by s205(4)(b).

In my opinion, the £700,000 is covered by "any rent or hire charge payable for the asset by those providing the asset." May be paid upfront, but it is paid to hire the plane for those 100 hours pa.

That would mean the benefit is only £186,986 per year.

Thanks (0)
By The Dullard
04th Nov 2019 12:25

I think that what is excluded by s 205(4)(b) should correspond with what is considered in s 205(2)(b), and I had, therefore, not excluded it.

If one were to take the view though that the £700,000 represented a premium for, say, seven years use, you might include £100,000 in the s 205(2) comparison (which is definitely less than the £1,000,000 in ss a, and so not relevant), with the effect that it might then be excluded by s 205(4)(b), I suppose.

EDIT: I suppose that one could take the view that the £700,000 is for renting the aircraft in year 1, with the annual amounts for years 2 onwards being nil. The £700,000 is still less than £1,000,000 (£5,000,000 x 20%), so that the £1,000,000 prevails, but the £700,000 is then excludable under s 205(4)(b). I'm swayed towards the £186K figure, I think.

Thanks (0)
By Lone_Wolf
04th Nov 2019 12:42

Quote:

EDIT: I suppose that one could take the view that the £700,000 is for renting the aircraft in year 1, with the annual amounts for years 2 onwards being nil. The £700,000 is still less than £1,000,000 (£5,000,000 x 20%), so that the £1,000,000 prevails, but the £700,000 is then excludable under s 205(4)(b). I'm swayed towards the £186K figure, I think.

That was roughly my thinking. The £700,000 is either the year 1 rent, with nil payable onward, or the £700,000 is a hire charge for an unknown time period. Either way, the hire charge is always going to be less than the £1m, and so that would always be the basis for the charge.

Whether, as paul.benny suggests, there is any argument for using the £700,000 figure as the MV of the assets (as opposed to £5m), I've not really considered, but am willing to be convinced.

Thanks (0)
By Tax Dragon
04th Nov 2019 17:31

The Dullard wrote:

My guess would be that the employee can only use is for perhaps 1 to 3 hours at a time and so 100 hours equates to maybe 50 days of availablility (and thus 315 unavailable days, in a 365 day tax year.

If you are right about the asset that is being made available, and it seems to me that you are, then your logic as to the availability of that asset is important. There's not enough information (IMO) in the OP to form a view. The sentence "an employee of my corporate client will be able to use the plane for private use" tells us nowt of use. However, as the question is from our old friend Unjustified Anonymous, we may get no more and the OP will just have to consider the point for themselves.

At face value though (what else is there to go on?)… if I can use something for 100 hours in a year whenever I want, then, potentially, the asset is available to me at every moment until the 100 hours is used up, which may be 5 days, 11 months or some other period into the year. £5 million x 20% - £5 million x 20% x (say) 1/12 + £50,000 = £966,667.

Thanks (0)
By The Dullard
04th Nov 2019 17:35

Indeed. My feeling is that the points made by LoneWolf (above) and KT2 (below) are where all the wriggle room is, and it cincides nicely with where all the detail in the OP is way too woolly.

Thanks (0)
By Tax Dragon
04th Nov 2019 17:56

I'd missed KT2's point (sorry, KT2).

It looks a good one to me and in consequence it appears that the taxable BIK is 0, £1,050,000, or somewhere in between - but neither of the figures given by the OP except by extraordinary coincidence.

Thanks (0)
By David Heaton
04th Nov 2019 14:58

The asset being made available to the employee is surely the right to use the plane for 100 hours per year, which has a market value of £700,000 at the outset - that's what the employer paid in the open market for the right. The right entails access to the plane, under the terms of the 'timeshare' contract, but it's not the plane itself. For that, the employer would have paid £5m.

That being so, the annual BIK is surely [(£700,000 × 20%) + £50,000] × (ratio of private to total use in the year)? You don't need to adjust for unavailablity because the unavailability is inherent in the contract, limiting use to 100 hours per year. Resist when HMRC tells you the plan must be available for 100 hours of private use simply because the the company has a right to use it, and the director can control the usage.

Many years ago, I agreed with a local inspector (remember them?) that the BIK on a mixed use plane (worth ~\$7m, I recall, and long-leased outright by the employer company) would be reported and taxed on the basis of the hourly cost to the employer. Timing of usage can be easily established from the flight log. Hourly cost was established by asking the company that leased the plane to the company how much it charged for hourly rentals for that model. Private hours × open market hourly rate was a sensible approach, that effectively gave the answer required by s 205(2)(b), and automatically varied the BIK proportionately to actual private use over the life of the lease.

Thanks (1)
By The Dullard
04th Nov 2019 15:05

Quote:

...but it's not the plane itself. For that, the employer would have paid £5m.

But the legislation does not require the asset to be owned by the employer, only that the asset is available by reason of the employee's employment, without transfer of property in it. The asset that is available to the employee for his/her private use is the aircraft itself. The right is just the means by which the employer has secured that availability for the employee.

Thanks (0)
By paul.benny
04th Nov 2019 15:52

How would you calculate the benefit if the lease was just for January every year, and the owner of the plane leased to others the rest of the year? Would you only take 1/12 of the annual amount?

Thanks (0)
By The Dullard
04th Nov 2019 15:54

Bing! That is what the legislation (s 205A) does!

Thanks (0)
By KT2
04th Nov 2019 16:59

Ref 205A - it says

"For the purposes of this section an asset is "unavailable" for private use on any day if ....... for more than 12 hours during the day the asset .... could not lawfully be used .....". There are others eg "is in the possession of a person who has a lien over it ....".

Is it possible that most (possibly all) the days should be treated as "unavailable" for private use because the asset can only lawfully be used under the terms of the contract between the owner of the plane and the employer?

Thanks (0)
By The Dullard
04th Nov 2019 17:13

Yes. I agree that s 205A could substantially reduce the amount of benefit chargeable, and could, arguably, extinguish the 20% of X element.

Thanks (0)
By paul.benny
04th Nov 2019 16:43

That's what have been trying to get at.

It all depends what you think the asset is. Conventionally whether you own or lease an asset, you have a more or less unfettered right to use the asset as you see fit. Here our rights are limited to 100 hours a year (and presumably the owner can and does rent out the plane the rest of the time).

Thanks (0)
By The Dullard
04th Nov 2019 16:50

That's what I've been trying to get at too!

The test is not what asset the employer has, but what asset is being made available to the employee for his/her private use.

Thanks (0)
By paul.benny
04th Nov 2019 17:07

I will admit that my initial response was made without reference to the legislation. And you're almost certainly more of a tax expert than me (a low bar, btw)

I've enjoyed the debate; since it is hypothetical for both of us, let's agree that we have a different interpretation and go back to real work.

Thanks (0)