How to avoid a tax charge on your company car
As the new registration number plates come out next month, you might be tempted to purchase a new company car for your business.
However, a recent tax tribunal case involving a company run by Mr & Mrs Holmes (no relation to Sherlock), serves as a timely reminder as to what can go wrong when your company car policy goes awry.
- Mr & Mrs Holmes were the director and employee respectively of KMS Logistics (UK) Ltd. The company's trade was supplying and distributing up-market hairdressing products to professional hair salons.
- As part of the company's overall marketing strategy it owned 7 prestige cars. Namely a BMW, Mercedes E55, Mercedes 180, Audi TT, Volkswagen, Toyota and Ford Fiesta. These cars were used to visit clients/potential clients, take them to lunch etc. Given that the company's target market was the top 10% of hairdressing salons in a specific area this would not appear to be an unreasonable approach. However we're not quite sure how the Ford Fiesta fitted in with the company's brand image (apologies if there are any Ford Fiesta drivers reading this.).
- Up to 2002, these cars had always been declared as benefits in kind on the company's P11D's and Mr and Mrs Holme's tax returns because they had been used privately. However rather curiously they suddenly disappeared from the company's P11D's (and their tax returns) for the 2003/04 tax year onwards.
So the case of the company cars being hair today and gone tomorrow (sorry we couldn't resist another bad joke!), caused consternation with HMRC. Because of this and a number of reported inconsistencies, HMRC decided to take action by raising tax assessments on Mr and Mrs Holmes for the private use of the company cars. Mr and Mrs Holmes appealed against the assessments and this resulted in their case being heard before the tax tribunal.
So why had the company and Mr & Mrs Holmes not declared the cars to HMRC?
Well Mr Holmes mentioned at the tribunal that he and his wife had received advice from their accountant that it would be more tax efficient if they did not use the company cars for private use. He did not stipulate when this advice was received, though you don't have to be a master sleuth to guess that it was allegedly around the time the company car benefit(s) ceased to be reported to HMRC.
Whilst it is possible to avoid a company car tax charge for private use, it is essential to structure matters correctly from day one.
So how could a company car tax charge have been avoided?
Well in order to avoid a company car tax charge you must actually be prohibited from using the car for private use. The problem was that a number of inconsistencies came to light during the hearing. For example:
- It appeared that Mr Holmes had failed to understand the necessity to actually prohibit private use in order to avoid the tax charge (rather than just saying that they weren't used privately). In fact he believed that his accountant had the matter in hand and at one stage even admitted to HMRC that the cars had been used privately.
- The company owned the cars, though at one stage Mr Holmes was convinced he owned them privately.
- Mileage logs were kept for 2 of the cars which indicated they were used by 2 other employees - not Mr & Mrs Holmes.
On balance the tribunal found that there had been no effective prohibition of private usage of the company cars for the years assessed and that, on balance of probabilities, there had been private use of 5 cars by Mr and Mrs Holmes whilst the other 2 cars were company cars of other employees.
Once again this underlines how important it is to carry out tax planning properly (i.e. having an effective company policy prohibiting private use) to achieve the desired result - in this case no company car tax charge.
So if you really must have that new Ferrari or Maserati as a company promotional tool, make sure you take advice beforehand from a suitably qualified professional so you don't get hit with a nasty tax bill. Better still, why not contact our friendly tax adviser [email protected] or give us a call on 01202 048696.