The View from No 50
K P Bonney & Co
Chartered Accountants and
Chartered Tax Advisers
Ilkley LS29 6JA
Tel: 01943 870933
Fax: 01943 870925
The amount of income tax an employee pays on an employer provided motor car is determined by the manufacturer’s list price of the car and its CO2 emissions. So high are the assessable amounts that a driver of a car having high CO2 emissions effectively pays tax on the full list price of the car within three years of it being made available.
It is now the case that most employees are better off driving a privately owned car than an employer provided car.
When the rules for list prices were first brought in, it was recognised that some ‘classic cars’ would have a low list price but have a high market value. Without a special rule for cars like these, employers would be able to provide valuable cars at modest tax cost to their employees. For example a 1960’s E-type Jaguar having a list price of £2,000 and a market value of £20,000 would translate into an annual benefit in kind of only £640, the tax on which at (say) 40% would be £256.
So a ‘classic car override’ was introduced. A car is caught by the rule if it is more than 15 years old and has a market value of £15,000 or more. For these cars the taxable benefit is computed using the market value rather than the original list price. Using the example of the E-type Jaguar again, the benefit in kind would be £6,400. A 40% taxpayer would pay income tax of £2,560 on such a benefit.
That is quite an increase in tax.
Turned around though, it is a great tax saving opportunity.
Suppose the E-type is worth only £14,000. The £15,000 limit is not exceeded so the benefit in kind is based on the original list price of £2,000. Now the benefit in kind is back down to £640 again.
You can even take this a stage further. Suppose you already own privately a car with a value of less than £15,000 and an original list price of £2,000. You could sell the car to your employer company for its full value. If you happen to make a profit on the sale of the car that is tax free because there is no capital gains tax on the sale of private cars. Further, the company can claim tax relief (capital allowances) for the full value of the car.
Our Advice – If you already own a suitable car, consider selling it to your employer company.
If you don’t already own a suitable car, bear this tax planning opportunity in mind next time you are thinking of indulging your interest in classic cars.
ARCTIC SYSTEMS LATEST
The House of Lords has agreed to hear the appeal of HM Revenue and Customs against the decision of the Court of Appeal.
A decision is expected towards the end of the year.
Let us all hope common sense prevails and the decision is given in favour of the taxpayer.
SAVE MONEY ON BUSINESS BANK ACCOUNT CHARGES
Do your business bank account charges exceed £200 per annum?
If so, the chances are you could save money by joining the Federation of Small Businesses. Members of the Federation benefit from permanent free banking with Co-operative Bank. If you don’t have a branch of the bank near you that is not a problem; transactions can be conducted through local post offices and over the Internet.
Our Advice: Follow up your interest by logging on to
COULD YOU SAVE VAT ON CAR FUEL?
Some businesses pay a fixed quarterly sum of money, often referred to as a ‘scale charge’, to Customs in respect of each car used in the business. Paying the scale charge enables them to reclaim all the VAT on all the fuel they buy for those cars whether it is used for business purposes or not.
If the business pays the scale charge it does not have to keep records of how the car fuel is used.
For businesses with high private mileage drivers the scale charge is a good thing. The amount of input tax reclaimed on fuel used for private motoring exceeds the scale charge. Profit!
For other businesses the scale charge is not a money maker. Were it to be operated it would be a loss maker.
Following changes to the scale charges in the 2006 budget, some of the businesses which previously made a profit will find that in future they will make a loss.
new scale charges take effect from the beginning of the first VAT period
The scale charge for a petrol driven car having an engine capacity of between 1400 and 2000 cc is £51.53 per quarter. That is £206.12 per annum. The scale charge is a money maker if VAT on fuel used for private motoring exceeds this amount i.e. the cost of private fuel is £1,178 excluding VAT, £1,384 including VAT.
If you don’t spend this amount of money on private fuel the scale charge is a money loser. You are better off opting out of the scheme.
Our Advice: Following changes to the income tax and national insurance rules in recent years, it has not generally been advisable to make fuel available for private use, particularly to employees. The change to the VAT scale charges provides further support for that advice.
If you continue to account for the scale charge make sure you understand why.
NO BUT YES BUT NO
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Up until 1999 if an employer provided an employee with home computer equipment and the employee made private as well as business use of it, a charge to income tax was imposed on the employee. The notional income on which tax was chargeable was set at 20% of the cost of the equipment. The benefit was reportable by the employer on the annual benefits form P11D. The employee had to disclose the benefit on his tax return and could, if appropriate, claim a deduction for business use.
It was recognised that this charge to tax and the reporting burden was hindering the development of modern skills. In the 1999 Finance Act there was introduced an exemption from tax (later extended to national insurance) and from reporting. The exemption applied so long as the cost of the equipment did not exceed £2,500.
In the intervening years it has become commonplace for employers to provide employees with home computers and laptops. Employees have been able to use the computers for business and private purposes. Employers have not needed to report benefits in kind. The computer literacy of employees and their families has improved and that has benefited the economy.
Everybody has won.
So it came as surprise to everybody, including several government departments which were in the process of introducing home computer initiatives for their employees, to hear in the budget that the exemption was being closed down to new computers from 6 April 2006.
Now we are back to where we were in 1999 only now the employer has a cost too – the class 1A national insurance.
More cost, burdens and bureaucracy for business. More tax for employees.
Had the Treasury consulted beforehand it is just possible it might never have abolished the exemption. Sadly the Treasury doesn’t do consultation. The Treasury knows what is good for us.
On a cold, wet, windy Wednesday night Mick and Paddy are in the clubhouse counting the gate receipts at the end of the match. Only five spectators had turned up.
With the cost of floodlighting and match fees the club has made a loss it can ill afford.
Mick says, “The way I figure it Paddy, each of them fans cost us £400.”
“Well,” says Paddy “in that case it’s a good thing no more of them turned up.”
Copyright: K P Bonney & Co LLP 2006. All rights reserved. No part of this publication may be produced, stored in a retrieval system, or transmitted in any form or by any means, electronic mechanical, photocopying, recording or otherwise without prior written permission of the publishers. Disclaimer: The publishers have taken all due care in the preparation of this publication. No responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication can be accepted by the authors or the publisher.
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