Monthly Archives: October 2013

Company car tax saving scheme tribunal appeal

The provision of an employer provided car (often referred to as a company car) is still valued by recipient employees and directors. However, the increasing tax and national insurance costs to the employee and employer respectively have driven employers to consider alternative arrangements to provide cars to their employees.

In a recent case a company entered into leasing agreements with its employees. The employees paid a market rate rent for the exclusive use of the car. The company also reimbursed employees for business mileage travelled at the standard HMRC rates for employees who use their own car for business purposes.

HMRC argued that even though market rate rents were being paid by the employees, the arrangements still gave rise to a taxable benefit as the car was essentially being provided by the employer. If this was the position then the mileage rates paid would also be considered excessive with a resulting tax charge to the employees. This is because the acceptable tax free mileage rate for an employer provided car is much lower than the standard rates for an employee owned car.

The company appealed to the First Tier Tribunal on a number of grounds. Firstly, they argued that the car benefit charge can only apply if a car is made available to an employee, without any transfer of the property in it. The Tribunal agreed that as a result of the lease agreements there was a transfer of the property in the cars to the employees. Secondly, the car benefit charge can only apply if there is an actual benefit provided to an employee. As the employees were paying market rate rents for the cars there was no benefit provided to the employees. The Tribunal agreed with these arguments.

As regards the contention that the mileage rates were too high as the cars were company cars, the Tribunal did not agree with HMRC as the cars were not company cars. As a result the Tribunal allowed the taxpayers’ claims for relief from tax for the mileage allowance payments.

The key tax decisions made in this case are being appealed by HMRC to the Upper Tribunal so whilst the first round has gone to the taxpayers the fight is not yet decided.

If you would like to talk through any concerns you may have surrounding the provision of company cars to employees please contact Brian Gooch on 0114 266 7141 or bjg@hawsons.co.uk for further information.

Disclaimer – for information of users: This briefing is published for the information of clients. It provides only an overview of the regulations in force at the date of publication and no action should be taken without consulting the detailed legislation or seeking professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material contained in this briefing can be accepted by the authors or the firm.

 

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Tax on loans to shareholders update

This Briefing summarises the tax implications of shareholders borrowing from or lending to an owner managed company. There is new tax law to contend with particularly if loans are being taken by an individual directly or indirectly from a company.

Loans from the company
The tax issues for the company

If a close company makes a loan to a participator, (for example, most shareholders in unquoted companies), the company must make a payment of corporation tax to HMRC if the loan is not repaid within nine months of the end of the accounting period. The amount of the corporation tax, often referred to as ‘s455 tax’, is 25% of the loan. This tax is included within the corporate tax self-assessment system and the company must also report the loans still outstanding at the accounting period end in the tax return.

If the loan is repaid after the company has paid over the tax, then the s455 tax will be repaid but not until nine months and one day after the end of the accounting period in which the loan is repaid. This means that the company may have to wait some time for it to be repaid.

A loan includes advances, such as a current account that many shareholders may have with the company, when the shareholder is also a director of the company. A loan to an ‘associate’ of a shareholder, such as a relative, is also included as if the loan had been made to the shareholder.

Example

A company makes accounts to 31 December annually. A loan made to a shareholder in the 2011 accounting period was not repaid by 1 October 2012. The company must pay the s455 tax by 1 October 2012. If the loan is repaid at any time in, say, 2013 the tax relating to that loan would not be due for repayment until 1 October 2014.

Tax issues for the shareholder

The making of the loan may have tax consequences for the shareholder who is also a director of the company. An income tax charge will arise if the interest paid on the loan (if any) is less than the interest at HMRC’s official rate. In most cases, National Insurance Contributions (NIC) of 13.8% will be due from the company on the value of the benefit assessable on the director.

Recent changes to the s455 tax charge – repayments not treated as repayments of the original loan

A shareholder may organise his finances such that he repays a loan or advance made by the company to him just before the end of the nine month period so no tax charge arises on the company. Shortly afterwards the company provides another loan to the shareholder. In substance the shareholder has continual use of the money from the company but the company does not suffer the s455 tax that would otherwise arise.

HMRC have been concerned about this and certain other arrangements for some time. Whilst not necessarily accepting that all such arrangements work, HMRC want to ensure that some of the arrangements are definitely caught by the tax.

The new law which consists of two new rules applies to repayments of loans on or after 20 March 2013.

The first is a 30 day rule. This applies for loans of £5,000 or more. If at least £5,000 is repaid to the company and within 30 days new loans or advances of £5,000 or more are made to the shareholder (or an associate), the old loan is effectively treated as if it has not been repaid. As a consequence s455 tax may become due.

The second is an arrangements rule. The first rule could be avoided by waiting 31 days before the company advances further funds to the shareholder. The second rule applies where:

    • the outstanding amount from the shareholder is £15,000 or more
    • at the time the loan is repaid by the shareholder, arrangements had been made to make a new withdrawal with the effect of replacing some or all of the amount repaid and
    • a new payment is made to the shareholder or an associate under the arrangements of £5,000 or more.

The effect where the rule applies is that either s455 tax is still due or any repayment of s455 tax will be restricted by 25% of the lower of the amount repaid and the new payment.

Example

Taylor Ltd lends a shareholder £20,000 which is still outstanding at the end of the accounting period. 35 days before the s455 tax becomes due and payable, the shareholder receives a further £25,000 payment from the company. The original £20,000 is repaid using £20,000 of the £25,000 new loan.

It is likely in this situation that the repayment of £20,000 would be treated as a repayment of £20,000 of the new £25,000 loan so the original loan would be treated as not repaid and so the s455 tax would become due and payable. 

What should be done by the company and shareholder so that the s455 tax does not arise?

If loans or advances on a current account are made to a shareholder, the amounts need to be cleared within nine months of the end of the accounting period in which these amounts arose. This can be achieved by:

    • the shareholder repaying the loan by making a payment in cash but if further amounts are subsequently borrowed from the company, HMRC may have scope for applying the new rules so that the old loan is not treated as repaid or
    • the company declaring a dividend or granting a bonus which is equal to the amount outstanding. HMRC have confirmed that the dividend or bonus will remove the s455 tax liability as these amounts are chargeable to income tax in the hands of the shareholder.

Example

Bernard is the sole shareholder and director of Extra Ltd. He withdraws £2,000 a month from his current account with the company so that by the end of the company’s accounting period which ends on 31 December 2013, he owes the company £24,000. The current account continues to increase by £2,000 a month in 2014. In June 2014 a dividend is declared which is £24,000.

Under general principles of law, loans are treated as being repaid first unless another order is agreed. The accumulated current account balance at 31 December 2013 is therefore treated as cleared by the dividend and thus no s455 tax is due from the company on 1 October 2014. 

It is essential however that the amounts are cleared properly and, in the case of a dividend, in compliance with company law. This is where we can help you to ensure that s455 tax is not payable.

Recent changes to the s455 tax charge – use of a partnership or a trust

HMRC has seen an increase in the number of shareholders who, in HMRC’s view, have had the benefit of money from a company but without a s455 charge applying to the company. New law has been introduced which:

    • makes certain that s455 tax arises where a close company makes a loan to a partnership and an individual is a shareholder in the company and a partner in the partnership
    • ensures s455 tax arises where there is a loan to the trustees of a settlement in which at least one trustee or beneficiary (or potential beneficiary) is a shareholder in the close company making the loan.

A common example of a partnership scenario which may be affected by the legislation is a ‘mixed’ partnership in which a partnership carries on the main trade, a company is a partner in the partnership along with individuals, and the individuals are shareholders in the company. The company is entitled to a share of profits which will be subject to corporation tax usually at a lower rate than the marginal rate of tax of partners who are individuals. If loans are made by the company to the partnership and there is an individual partner who is also a shareholder in the close company, the loan is chargeable to s455 tax on the company.

What if the company does not withdraw its profit share but an individual partner draws an amount exceeding his profit share (i.e. drawing on funds available as the company has not withdrawn its profit share)? This may not be caught by a s455 charge on the basis that a loan or advance has not been made by the company to the partnership. So, further legislation is introduced to catch such arrangements. A new tax charge (which is equivalent in its effect to s455) catches tax avoidance arrangements, to which a close company is party, under which a benefit is directly or indirectly conferred on an individual, who is a participator in the close company or an associate of such a participator.

Example

X, an individual, is a participator in a close company (C Ltd). C Ltd and X are partners in a partnership. Under the partnership agreement, 80% of the profits are allocated to C Ltd and charged on C Ltd at the corporation tax rate of 20%.

C Ltd leaves its profits undrawn on capital account in the partnership and X draws on them.

There is a benefit conferred on X because X has received funds from C Ltd, a company in which X is a participator and there was no s455 charge on C Ltd and no income tax charge on X. If the funds had been transferred directly from C Ltd to X, they would have been chargeable to income tax (if transferred as remuneration or a dividend) or s455 (if they were transferred as a loan). 

Loan releases

If the company decides to release the shareholder from repaying the loan (i.e. loan write off), the shareholder is assessed on the amount released as though it were dividend income, as opposed to earned income. The effective tax rates are therefore the same as if a dividend had been paid to the shareholder. For example, a 40% higher rate taxpayer would pay 25% effective additional tax on the deemed dividend income.
Although from a tax viewpoint the income is not assessed as earned income, HMRC generally consider the deemed dividend to be subject to Class 1 employer and employee NIC if the individual is a director or employee of the company.

The impact of NIC means that it is preferable to pay a real dividend to enable the loan to be cleared. As there are a number of points to consider, please talk to us before a decision is made.

For the company, a release of the loan will be treated as if the shareholder has repaid the loan and thus the company will be entitled to a repayment of any s455 tax paid.

Loans to the company

If the company is in need of additional funds the shareholder may wish to lend money to the company. It will generally be tax efficient to charge interest as a means of extracting money from the company in a tax efficient way.

Interest charged at a commercial rate will generally be tax deductible for the company.

In the hands of the shareholder, the income will be taxable as savings income. No NIC will be due even if the shareholder is a director as NIC only applies to earned income. This will benefit both the employer and employee.

What if the shareholder is taking on personal loans to on-lend to the company? There may be a number of reasons why such a route is taken rather than the company being directly provided with finance from a bank. For example, the individual may be able to provide better security for the loan compared to a new company with no obvious collateral or track record.

The shareholder in this instance needs to ensure that:

    • tax relief is available to the individual on the interest which depends on certain qualifying conditions, the detail of which we can advise you on
    • relief will be available for any capital loss suffered if the company is unable to repay the loan from the shareholder.

Other main points to appreciate here are:

    • the finance received by the individual must be a loan rather than an overdraft or use of a credit card
    • interest relief is given as a deduction from total income of the individual. Where there is a significant amount of interest paid there may be restrictions on the amount of interest that can be deducted from income
    • to obtain capital loss relief the company must have used the monies from the loan provided by the individual for the purposes of its trade.

In some cases, it may be preferable to invest the monies borrowed as further share capital rather than as a loan but this requires consideration of different qualifying conditions not covered here. Please talk to Brian Gooch on 0114 266 7141 or email bjg@hawsons.co.uk if you are considering providing finance to, or obtaining loans from, a company so we can advise on the alternative options available. 

Disclaimer – for information of users: This briefing is published for the information of clients. It provides only an overview of the regulations in force at the date of publication and no action should be taken without consulting the detailed legislation or seeking professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material contained in this briefing can be accepted by the authors or the firm.

Business motoring – tax reliefs and benefits

Tax on company cars has changed recently and there are more changes in the pipeline. It is important to understand the tax consequences of company cars both now and over the lifetime of the vehicle.

This Briefing covers recent and future changes affecting the tax position of business motoring. This includes a consideration of the current tax deductions available on different types of vehicle expenditure in a variety of business scenarios (unincorporated and companies) and how individuals are taxed when vehicles are provided for employees/directors.

Key essentials

Motoring costs, like other costs incurred, which are wholly and exclusively for the purposes of the business are tax deductible but the timing of any relief varies considerably according to the type of expenditure. In particular, there is a fundamental distinction between capital costs and ongoing running costs.

Purchase of vehicles

Where vehicles are purchased outright, the accounting treatment is to capitalise the asset and to write off the cost over the useful business life as a deduction against profits. This is known as depreciation.

The same treatment applies to vehicles financed through hire purchase contracts with the equivalent of the cash price being treated as a capital purchase at the start. There is also a deduction for the finance charge as it arises. However, the tax relief position depends primarily on the type of vehicle, and the date of expenditure. If alternatively a vehicle is leased, the type of lease may result in differing accounting treatments albeit a similar tax treatment applies, which is considered later in the Briefing.

A tax distinction is made for all businesses between a normal car and other forms of commercial vehicle including vans, lorries and some specialist forms of car such as a driving school car or hackney cab. In addition, specific tax reliefs are currently available to encourage the acquisition of low emission vehicles.

Lower emissions means more tax savings

Both cars and vans which meet certain criteria may benefit from 100% tax relief on the capital cost on acquisition. Such purchases attract a 100% allowance to encourage businesses to purchase vehicles which are more environmentally friendly and are only available on brand new vehicles.

This is particularly significant in relation to cars because otherwise they would only attract an annual tax allowance known as the ‘writing down allowance’ (WDA) of either 8% or 18% depending on the emissions (see below).

To be eligible for the 100% relief on a car purchase the CO2 emissions must not exceed 95 grammes per kilometre (g/km) for capital acquisitions between 1 April 2013 and 31 March 2015. Prior to 1 April 2013 a car was eligible for the maximum relief where emissions did not exceed 110g/km. The 100% allowance is then due to be extended for a further three years to 31 March 2018 but the threshold for eligibility will be reduced to 75g/km emissions. The cost of the car is irrelevant and the allowance is available to all types of business.

Goods vehicles with zero emissions, essentially electric vans, also qualify for the enhanced 100% capital allowance up to 31 March 2015.

Tax relief on other vehicles

Other vehicles which are not classed as cars are eligible for the Annual Investment Allowance (AIA) on the basis that they are qualifying plant and machinery. This is also a 100% allowance but a prescribed maximum is set annually. For expenditure incurred on/after 1 January 2013 the AIA is set as £250,000 for two years. Prior to 1 January 2013 the level of AIA was considerably lower and involves some complex calculations where an accounting period straddles that date to determine the correct AIA available, so please do ask us if this information is required.

When plant and machinery purchases exceed the AIA, a WDA of 18% is due instead on the unrelieved expenditure of any commercial vehicle purchases.

Little relief for cars

As previously indicated, cars which do not qualify as low emission cars attract tax relief on a slower basis with an annual WDA as follows:

From
1 / 6 April 2013
Before
1 / 6 April 2013
Allowance
g/km CO2 emissions
96 to 130 111 to 160 18% WDA
Exceeding 130 Exceeding 160 8% WDA
Example

King Limited has a 12 month accounting period to 31 March 2014 and is planning on purchasing a commercial van for £25,000 and a car for a member of the sales team costing £14,500 with CO2 emissions of 144g/km. Other planned purchases on plant and machinery are likely to amount to £35,000 during the period.

As this period falls wholly after 1 January 2013 £250,000 AIA is available and all the qualifying AIA expenditure of £60,000 will be relieved (£25,000 + £35,000). However, the proposed car purchase of £14,500 will only attract an 8% WDA which amounts to only £1,160 in the period giving the company £61,160 total allowances to reduce its profits.

Planning point

Consideration should be given to buying a lower emission car to either increase the WDA to 18% or even in order to obtain the 100% relief.

Comment

The effect of reducing the tax liability of the business with such allowances depends on the type and size of business. For a small company, as in the earlier example, the tax rate is 20%, so the company’s tax liability is reduced by £12,232. For a sole trader who pays 40% higher rate tax and whose trading profits are in excess of the upper limit for National Insurance (NI) meaning only 2% NI is due, the effective tax saving is 42% x £61,160 = £25,687. 

A particular problem for companies

Companies are required to pool all car purchases along with other plant and machinery acquisitions into either the main pool which attracts the 18% WDA or the special rate pool which attracts the 8% WDA. This may also apply to an unincorporated business where the car is provided for an employee or where it is wholly used (unusual) by a sole trader/partner for business purposes. The key tax implication of pooling is that on a disposal any unrelieved balance of expenditure is not immediately relieved for tax but instead the balance continues to be written down year on year by the 18% or 8% allowance. This could take many years to relieve the true cost incurred by the company or business.

Alternatives to purchase
What if the vehicles are leased?

The first fact to establish with a leased vehicle is whether the lease is really a rental agreement or whether it is a type of purchase agreement, usually referred to as a finance lease. This is because there is a distinction between the accounting and tax treatment of different types of leases.

Tax treatment of rental type operating leases (contract hire)

The lease payments on operating leases are treated like rent and are deductible against profits. However, where the lease relates to a car there may be a portion disallowed for tax purposes. For contracts commencing from 1/6 April 2013, the disallowed portion applies where the emissions of the car exceed 130g/km (160g/km for contracts from April 2009) and is 15% of the leasing costs incurred. The restriction does not apply to any service element of the cost.

Comment

Where a company has a key requirement to use cars in its business, particularly those which only attract 8% annual WDA, then the leasing alternative even with the 15% disallowance will bring an earlier tax saving to the business. If cars up to 130g/km emissions are leased then the full cost incurred under the lease is tax deductible. 

Tax treatment of finance leased assets

These will generally be included in your accounts as fixed assets and depreciated over the useful business life but as these vehicles do not qualify as a purchase at the outset, the expenditure does not qualify for capital allowances unless classified as a long funded lease. Tax relief is generally obtained instead by allowing the accounting depreciation as well as any interest and finance charges in the profit and loss account, a little unusual but a simple solution! A 15% disallowance still applies to both the depreciation and other costs if the lease applies to a car with emissions exceeding 130g/km.

Private use of business vehicles

The private use of a business vehicle has tax implications for either the business or the individual depending on the type of business and vehicle.

Sole traders and partners

Where you are self-employed and use a vehicle owned by the business, irrespective of whether it is a car or a van, the business will only be able to claim the business portion of any allowances. This applies to capital allowances, rental and lease costs, and other running costs.

Providing vehicles to employees

Where vehicles are provided to employees irrespective of the form of business structure (sole trader/partnership/company), a taxable benefit generally arises on the employee for private use. A tax charge may also apply where private fuel is provided for an employer provided vehicle. For the employer all such taxable benefits attract 13.8% Class 1A National Insurance contributions.

Cars

When a car is provided for the exclusive use of a particular employee a taxable benefit is calculated based on the list price of the car and the level of its CO2 emissions.

This is intended to encourage company car drivers and their employers to choose more fuel efficient vehicles as the lower the emissions, the lower the taxable benefit which corresponds with how cars are treated for capital allowance purposes.

Table showing effect of level of emissions on benefits 2013/14
no CO2 emissions 0%
1-75g/km or less 5%
76-94g/km or less 10%
95-99g/km 11%

Graduated increases then occur of 1% per 5g/km up to a maximum of 35%.

A diesel car generally has lower CO2 emissions than a petrol equivalent but attracts an additional 3% supplement each year (due to other pollutant emissions) but not to exceed the overall maximum. This is abolished from 6 April 2016.

2014/15

The benefit on cars with CO2 emissions of more than 75g/km will increase by 1% up to a maximum of 35%, for example, those cars from 76-94g/km will be 11%, 95-99g/km 12%, etc.

2015/16

The 0% band is abolished but two new bands will provide for a 5% rate for cars with CO2 emissions of 0-50g/km and a 9% band for cars with CO2 emissions of 51-75g/km. All other percentages will increase by 2% to a new maximum of 37%.

2016/17

All percentages will increase by a further 2% up to the maximum of 37%

Illustration based on 2013/14 rates

For a car with a list price including VAT of £23,000 and CO2 emissions of 180g/km the benefit would be 28% x £23,000 = £6,440. If the CO2 emissions were instead 85g/km the taxable benefit would only be 10% x £23,000 = £2,300! 

Comment

There are a number of detailed rules which can reduce the tax benefit charged such as unavailability of the car and contributions made by the employee/director, so if you are concerned with the precise tax position please contact us for further information. 

Fuel and cars

If free fuel is provided with an employer provided car for private motoring then a fuel benefit tax charge also arises. This is based on a ‘fixed’ list price multiplied by the car benefit percentage for that employee. The ‘list price’ for calculating this has increased substantially over recent years and is now £21,100 for 2013/14. This means that if an employee has a 28% car benefit percentage and also receives fuel for private motoring, then the fuel benefit for 2013/14 will be: £21,100 x 28% = £5,908.

Vans

No charge applies where employees have the use of a van and a restricted private use condition is met. For details on what this means please contact us. Where the condition is not met there is a flat rate charge per annum of £3,000 for the unrestricted private use. Where vans are shared a reduction is made to the benefit on a just and reasonable basis.

Where an employer provides fuel for unrestricted private use an additional fuel charge of £564 also applies.

If you would like further details on any matter contained in this Briefing please do get in touch with Brian Gooch on 0114 266 7141 or email bjg@hawsons.co.uk.

Disclaimer – for information of users: This briefing is published for the information of clients. It provides only an overview of the regulations in force at the date of publication and no action should be taken without consulting the detailed legislation or seeking professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material contained in this briefing can be accepted by the authors or the firm.