5.5. What is a car for tax purposes?

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1 Transfer of part ownership The argument that there is no car benefit-in-kind where the vehicle is transferred to an employee or director, in part or in whole, was argued in the High Court (Christensen (HMIT) v Vasili, 76 TC 116) but the Taxman won. The court confirmed that there is a taxable benefit which is equal to the difference between the original value of the car less the amount of benefit-in-kind that has been charged to tax during the period it was made available for private use. So, don t try this scheme! 5.5. What is a car for tax purposes? For tax purposes there are different definitions of a car depending on whether you re considering taxable benefits and expenses for PAYE and NI, or VAT consequences Definition of a car for PAYE and NI For PAYE and NI purposes you need to look at the nature of the vehicle s construction, not its intended use. A car is a mechanically-propelled road vehicle which is not: a van or lorry, i.e. a vehicle primarily suited to carrying goods etc. a motorcycle an invalid carriage a vehicle which is not commonly used and is unsuitable as a private vehicle. This means that vehicles such as taxis, buses, ice cream vans, ambulances, military vehicle, tractors, and construction vehicles are not cars If you modify a car will the tax treatment be different? It is possible to modify a car so that it conforms to the definition of not commonly used and unsuitable as a private vehicle. Whilst this will ensure that a car benefit charge will not arise if the vehicle is used privately, you may not want to drive the modified vehicle privately in any case. The following modifications have been treated as permanent: the fitting of dual controls to a car for driving instruction the permanent removal of seats (and fastenings) to create load space the permanent removal of rear windows to be replaced with panels the fitting of fixed, flashing blue lights the addition of a rooftop sign or loud speaker. 46 Avo i d i n g Ta x o n Co m pa n y Ca r s a n d Bu s i n e s s Tr av e l,

2 A car will remain a car if the modifications are only temporary. Sign writing is not accepted as a permanent modification that affects use Why modify a car? Cars are generally modified because that makes them more useful for the owner, the added advantage is that you may also succeed in making it exempt from any car benefit charge. Trap. If you modify a car so that it becomes a van, there may still be a benefit-inkind charge for any private use of the van and for its fuel Double-cab pick-up: car or van? A van is described as a vehicle that s primarily suited for carrying goods etc. (not people). It follows that if a vehicle is designed to have a dual purpose, i.e. to do two things at once, then it can t be primarily suited for one use or another. In other words, if it has dual use, it s probably a car after all. As some vehicles are just too big to fit the description of a being a car, the Taxman has his own rule of thumb to work out if a double-cab pick-up is a car or a van: providing that the double cab is not primarily designed to carry people, and if the unladen weight is more than one tonne, it s a van. Trap. When you are considering the vehicle s weight, it should be the manufacturer s stated figure, subject to a deduction of 45kg if the vehicle has a detachable hard top (of any size). The actual weight of the detachable top is irrelevant for tax purposes Is there a special rule for recreational vehicles (RVs) and motor homes? The Taxman treats RVs and motor homes as cars as they are mechanicallypropelled road vehicles and not primarily suited to carrying goods etc. Therefore, the benefit-in-kind is calculated in the usual way by reference to list price and CO 2 emissions What is private use of a vehicle? There s a tax charge for car benefit purposes only if a car is available for private use. The big tax trap here is that the Taxman automatically assumes that a company car will be available for private use unless you: Avo i d i n g Ta x o n Co m pa n y Ca r s a n d Bu s i n e s s Tr av e l, 47

3 specifically prohibit private use, and the director/employee doesn t actually use the vehicle privately. Private use includes home-to-work journeys and any use other than for the employee s business travel. There are rare exceptions to the home-to-work rule in respect of pooled cars (see 5.7.) How can you ensure the Taxman accepts there s no private use? To make a ban on private use effective for tax purposes you need to put your terms of use to your employee, in writing. If possible, try to insure the vehicle exclusively for business use. Tip Check with your insurer whether you can restrict the cover to business and incidental private use only. If you can do this, it will strengthen your case with the Taxman that there s no private use and so no benefit-in-kind. Remember to tell the employee/ director that they re not insured for private motoring. The Taxman is usually suspicious of employers who claim that private use is forbidden, particularly so if the car is one used by a director. So, you ll need to be able to prove that this is true if he comes to visit you. Measures that you could take to prove there s no private use include: locking the keys away outside working hours ensuring that the car is parked in the employer s locked car park outside working hours. Remember that if the Taxman does discover there s private use, your employee will be hit with a tax charge, and you could be charged a penalty. Trap. Don t assume that because your vehicle is treated as a car for direct tax (income tax, PAYE, Corporation Tax) that this carries over to VAT. There are separate and even stricter rules for VAT (see 7.3.). The best way to prove to the Taxman that there s been no private use is to have a policy that all company car drivers must log the reason for, and details of, all journeys undertaken in the car, plus the mileage travelled. 48 Avo i d i n g Ta x o n Co m pa n y Ca r s a n d Bu s i n e s s Tr av e l,

4 In summary: private use Ensure that you satisfy both parts of the condition: you must have an express, legally enforceable ban on private use, and you must be able to demonstrate as a matter of fact that there was no private use What is the tax treatment of pooled cars? Pooled cars can be provided to your employees tax-free. The Taxman accepts that there s no personal benefit for your employees provided: the car can be used by more than one employee any private use of the car is incidental to business use, this means that private use accounts for no more than 5% of its annual mileage on an irregular basis (he will also allow it to be used in medical emergencies) the car is not normally taken to an employee s home at night. The Taxman concedes that a car is not normally kept overnight at employees homes if the total number of nights on which it is taken home by employees, for whatever reason, is less than 60% of the total number of nights in the period under review the Taxman won t accept that a car is pooled if it is taken to an employee s home to avoid vandalism, but he will let chauffeurs do so to be in a position to collect or deliver passengers or to allow employees to make an early start on a business trip Car benefit: how to calculate the tax charge Step 1: manufacturer s list price It will normally take a bit of research to establish the manufacturer s list price of the car; it s unlikely to be the price that you pay for a new car as the dealer s price is typically reduced by discounts or special offers. Check the manufacturer s website What if you can t find a published list price? If a car has no list price or one can t be traced (this might happen if it s an import, kit car, or road fuel hybrid), you have to work out your own notional price. There s no exact way to calculate this, so it comes down to a question of judgement. Avo i d i n g Ta x o n Co m pa n y Ca r s a n d Bu s i n e s s Tr av e l, 49

5 Tip As manufacturers tend to have different charging structures for each country, the Taxman will not let you just convert a foreign list price into sterling. Instead, try to compare the car to one which is sold in the UK. If possible, establish the different mark- ups between models, and adjust accordingly. If there s no similar model in the UK, then currency conversion may have to be the method used, but you can always refer it to the Taxman s technical team Step 2: add accessories You need to add in the cost of any extra accessories that are supplied with the car. An accessory is an item of equipment that is fitted to the car, so this doesn t include loose items such as first aid kits or maps, intangible extras such as extended warranties, or items such as road fund licences. You do not need to include accessories that are: standard, or as part of the vehicle s specification if they are included in arriving at the list price necessarily provided with the car. The Taxman suggests that this could include equipment such as a towbar if your employee regularly tows equipment around for you. It could also include a navigation system or a roof rack if you can justify business use provided for the sole use of a disabled driver (a blue badge holder). Trap. If an accessory, such as a towbar, is added to the car after it has been delivered, the cost must be added to the list price for the purpose of calculating the benefit-in-kind charge. However, a different rule applies if the accessory isn t permanently fixed. A non-fixed accessory attached to a company car is chargeable to tax under a different rule. It will be charged as a benefit-in-kind equal to 20% of its cost for each year it is made available to the director or employee. Tip If the rate of car benefit charge is higher than 20% and you want to add an accessory, try to make it of the non-fixed variety, as the rate of benefit-in-kind will then be capped at 20% of its cost. 50 Avo i d i n g Ta x o n Co m pa n y Ca r s a n d Bu s i n e s s Tr av e l,

6 What don t count as accessories? The following items, whilst adding to the cost of a vehicle, aren t treated as accessories and therefore don t need to be taken into account when calculating the benefit-in-kind. Extended warranties. A warranty is an additional service that comes with the car, or may be extended at an extra cost when a car is first bought. It is not added into the cost of accessories. Delivery charges and delivery fuel. These are not classed as accessories, but they may be included as part of the list price. Finance charges. These are part of your cost but not classed as accessories Step 3: deduct capital contributions An employee can make a contribution towards the capital cost of the car. However, for tax purposes, it s not efficient to make a contribution in excess of 5,000 as the list price reduction for capital contributions is capped at this figure. Any capital contributions in excess of 5,000 will not reduce the tax bill and would be better made as private use contributions. The effect of a capital contribution in terms of a reduction in the cash equivalent of the car benefit charge depends on the car s CO 2 emissions. Example 1 If the car benefit percentage based on CO 2 emissions is 35%, and the employee is a higher rate taxpayer, a capital contribution of 5,000 will save the employee 700 in tax per year (that is 5,000 x 35% x 40%). It will save the employer in Class 1A NI ( in three years) and so the capital contribution will mean that the employer has saved 5, in total over the life of the car. If you repay the employee their full capital contribution when they sell the car, they are treated as not having paid any contribution. However, you can make an agreement to repay a proportion of the contribution when the car is sold without any tax effect on the employee. Example 2 Chris pays his employer 5,000 in respect of his new company car, which costs 24,000. The car is sold three years later for 12,000. Chris can be repaid 2,500, which is 5,000 x 12,000/ 24,000. Avo i d i n g Ta x o n Co m pa n y Ca r s a n d Bu s i n e s s Tr av e l, 51