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With the new company car rules from 2002-03, an employee is considering a classic car with a market value under £15,000 and a 1960s cost when new of, say, £1,000. Reading the rules, his benefit would be based on £1,000 new cost and, if he makes a capital contribution of £1,000, his annual benefit would be nil.
With the new company car rules from 2002-03, an employee is considering a classic car with a market value under £15,000 and a 1960s cost when new of, say, £1,000. Reading the rules, his benefit would be based on £1,000 new cost and, if he makes a capital contribution of £1,000, his annual benefit would be nil.
However, he would like the car to have some modifications to enable it to cope with modern traffic. These modifications are recognised and allowed by the marque's owners club and are not considered a 'custom car'. These include replacing drum brakes with discs, upgrading suspension (anti-roll bar, etc.) on safety grounds and replacing the engine (the old engine being leaded fuel and less efficient).
The rules state that the cost price should include accessories not fitted at the time of manufacture. This normally covers such add-ons as a radio, sunroof, air conditioning, etc. Would brakes, suspension and engine be classed as accessories? All are part of the basic structure of a car rather than an add-on. If the conversion cost was, say, £5,000, what would be the basis for P11D benefit calculations?
(Query T15,834) – Morris.
The classic car provisions of section 168F, Taxes Act 1988 only apply where the car is both over 15 years old and has a market value at the end of the tax year of more than £15,000. Where they apply, market value of the car (including any accessories) is used rather than the normal provisions based on cost. Assuming that the proposed modifications will not increase the market value of the car beyond £15,000, these provisions will not apply to 'Morris's' client.
Under section 168A the list price of the car will be the original list price excluding the accessories as they would presumably not have been factory options at the time of manufacture. The price will then need to be adjusted for accessories under section 168B.
Accessories are defined in section 168A(11) as including 'any kind of equipment'. This is a very broad definition and is likely to apply to the changes being proposed notwithstanding their attachment to the vehicle. As an example of this, the Inland Revenue's Schedule E Manual at paragraph SE3437 indicates that alloy wheels are accessories despite the fact that the car cannot run without a set of wheels, any more than it could without brakes or an engine. It is, however, important to distinguish between the fitting of an accessory and the repair and maintenance of the vehicle.
Presumably the existing engine is basically worn out. In this case the fitting of a new or reconditioned engine would simply be a repair. It seems that there will, however, be some differences compared to the engine being replaced: in particular, it is to run on unleaded fuel. This is a minor change and simply involves fitting hardened valve seats in the engine when it is put together. As such, the only accessory being fitted to the engine is the hardened valve seats and consequently the cost of that accessory will be minimal and, if done after the car is first made available for private use, may well fall under the de minimis limit in section 168C of £100.
If the new engine is to be different from the original engine, then the whole cost may need to be taken into account, on the basis that the whole engine is the accessory rather than simply the hardened valve seats as above. It could be argued that the new engine is a replacement accessory within section 168E, in which case the Income Tax (Car Benefits) (Replacement Accessories) Regulations 1994 need to be referred to. In this case a superior accessory is being fitted. However, paragraph 4(b) says that these provisions only apply where the accessory being replaced was an 'optional accessory'. Presumably this was not the case with the engine, although it may perhaps be possible to construct an argument that it was, if there was a choice of engine when the car was new. The significance of this point is that if the new engine is a superior accessory within the regulations, then it is only the marginal cost when compared to a replacement engine to the same specification that needs to be taken into account. If it is not, then the entire cost would need to be taken into account.
The anti-roll bar is a new accessory not replacing anything and therefore the full cost needs to be taken into account. Under section 168B(6) and (7), full cost includes VAT and delivery plus fitting costs.
With regard to the other suspension changes, a similar analysis would be applied to that used for the engine. Thus, simply replacing worn-out shock absorbers and springs would be a repair if standard products were used, or an accessory if upgraded products were used.
The brake modifications are so significant in nature that they could not be regarded as a repair and the whole cost would need to be taken into account.
A capital contribution of up to £5,000 may be taken into account under section 168D. – Wentworth.
The first point to make is that new brakes, suspension and an engine are not accessories, but the price of the car on which the benefit will be based will not necessarily be the list price when new of £1,000. That is the basic rule as set out in section 168A, Taxes Act 1988, but this is modified by section 168F.
The latter section applies if the car in question is more than 15 years old at the end of the tax year and the market value of the car for the year is more than £15,000. This is the point at which the proposed enhancements to the car could lead to an increased tax bill. If the work increases the value of the car so that it exceeds £15,000, the price on which the benefit is based is that market value.
The market value is the price that the car might reasonably have been expected to fetch on a sale in the open market on the material day. The day on which the car is valued, known as the material day, is the last day of the tax year or the last day of the tax year on which the car is made available to the employee.
When completing forms P11D, the values of classic cars must be considered at the end of each tax year. At paragraph SE3447 of the Inland Revenue's Schedule E Manual, it is made clear that Inspectors will review specialist publications or take account of sales of similar vehicles at the same time to check the market values used on the forms.
Where the market value of the car in question will exceed £15,000, there are two planning opportunities. If the work will take more than 30 days and the car will not be roadworthy for that period, a statutory off-road notice should be given as proof that the car was not available for private use, to limit the taxable benefit. Furthermore if the work is to be done on a piecemeal basis as and when time permits, a chunk of work should be left to complete in April 2002, such that the value of the car on 5 April 2002 will remain below £15,000. Thus the benefit will be minimised for an extra year.
If the market value remains below £15,000 after the work, the benefit will be calculated on the list price when new of £1,000, and if the client of 'Morris' makes a capital contribution of £1,000, the price of the car will be reduced to nil as will the taxable benefit. However, given that the tax payable on the car benefit can be no more than 14 per cent of the list price (35 per cent x 40 per cent), the company will have to own the car for eight years before the tax saved exceeds the capital contribution.
A final point is that the mileage in such cars is often limited, especially if it is an open top sports car where usage will be limited to sunny days. If that is the case, 'Morris' should advise on whether all of the fuel should be purchased by the client and a claim made for business mileage to avoid the imposition of a fuel benefit. – Hodgy.
Extract from reply by 'NK':
The recognised modifications of the now aged car appear to fall into the class of replacing a standard accessory. Therefore section 168E, Taxes Act 1988 would apply, with the replacement accessory replacing the original accessory and so 'the price of the car shall be found as if the replacement had not been made and the replacing accessory were a continuation of the replaced accessory …' (i.e. the replacement accessory is ignored and the cost of the car for tax purposes is unaltered). This is repeated in paragraph 3 of the Income Tax (Car Benefits) (Replacement Accessories) Regulations (Statutory Instrument 1994 No 777).
Editorial note. There was some difference of opinion between readers as to whether the proposed modifications were 'accessories' or not. 'Wentworth' sets out detailed reasons why they may be accessories, whereas the other two respondents take a different view.
