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22 March 2011
Doubt has been cast on whether the expenses of a ‘hobby car’ for a company director would be eligible for corporation tax relief, even though a benefit charge would apply.
I was a little uneasy at Nick Lloyd’s suggestion ‘Carefree motoring’, that the company car tax regime be utilised for the purposes of buying teenage children their first car and of indulging a classic car hobby ‘at the expense of HMRC’.
But regardless of personal views as to the acceptability or otherwise of the suggestions (which no doubt vary widely), is it not the case that claims for corporation tax relief on the cost of running such vehicles are likely to fail on first principles if challenged – the vehicles have not been provided for the purposes of the business?
Now as I understand it, and I claim no particular expertise – I am a high street practitioner – the corporation tax deductibility rules and the employment income benefit in kind rules exist quite independently of each other, thus it is entirely possible for an expense to be non-deductible for corporation tax purposes while at the same time remaining chargeable in the hands of the director or employee receiving the benefit.
Or am I quite wrong – is the provision of such benefits deemed simply to be part of the remuneration package and fully deductible for corporation tax purposes?
Clarification would be very helpful.
Query 17,766 – Fisher
Reply from Hodgy
The concern is that if, say, the owner of a company arranges for his company to buy a low emission car for the use of the son, on which the father pays the benefit in kind, that any deduction for the running costs of the car might be restricted.
I understand why Fisher might feel that the scenarios as set out are almost too good to be true and so there must be a catch, but let us look further.
There are cases where HMRC sought to argue that a car chosen by a taxpayer for his business was more expensive than was necessary and so there should be a private use adjustment.
The taxpayer won in Kempster v McKenzie 33 TC 193 and HMRC won in the later case of GH Chambers (Northiam Farms) Ltd v Watmough 36 TC 711.
The Capital Allowances Manual at CA 27100 states that an inspector should accept that ‘expenditure incurred by an employer in providing an asset for a director’s or employee’s private use as part of a remuneration package, thus giving rise to liability under ITEPA 2003, is incurred wholly and exclusively for the purposes of the qualifying activity’.
The importance of the reference to ‘for the purposes of the qualifying activity’ is that this was the term used in the former CAA 2001, s 77. A reduction in the capital allowances claim would only apply if the car was used for purposes other than those of the qualifying activity.
The reference in the manual goes on to state that if the asset is machinery, which terms includes a car, the capital allowances claim should be accepted.
There is a further comment that a potential restriction of the capital allowances claim for personal choice should be considered if there is a blatant incongruity between the asset and the business carried on by the company.
However, given the previous comments outlined above, I would argue that this would not apply to the provision of a car by a company. Commentary in this area indicates that where a car is provided by a company there should be no restriction in the capital allowances claim.
Thee is also the question of whether, in providing the car, the overall package for the director/shareholder has become excessive. In this respect, Fisher could consider the case of Postlethwaite’s Executors v IRC [2006] SpC 571, where a company paid a contribution of £700,000 into a FURBS. The case was on the issue of inheritance tax, but given that the main argument was whether the payment was meant to confer a gratuitous benefit as set out in IHTA 1984, s 10, it has relevance to this case.
If a payment does not confer a gratuitous benefit, I would contend that there is a reasonable case to say that the total remuneration package is commercial and so has been incurred wholly and exclusively for the purposes of the trade of the company. In Postlethwaite, the taxpayer had generated profit of almost £1 million for the company and because as it was a consulting company and he had taken only a modest salary, it was considered to be entirely commercial for the company to make such a payment.
In addition, at paragraph 91 of the judgment, the following comment is made:
‘If the sum had been paid as a bonus it would not have been apt to describe it as given for nothing. We do not see that the fact that a large FURBS payment was made instead of a bonus affects the position. If the payment had been excessive in comparison with what Dr Postlethwaite had earned for the company, the position might well have been very different. That was not however the case.’
The fact that an individual makes a personal choice in terms of the provision of cars which happens to produce a low benefit in kind does not of itself affect the commerciality of that decision and the deduction to be given in the company accounts.
Reply from TQ1
Fisher is correct that the corporation tax rules and the benefit in kind rules operate independently. In order to obtain a deduction for any company expenditure, it is necessary that it meets the wholly and exclusively rule in CTA 2009, s 54.
Remuneration will normally meet this test, whether it takes the form of cash or benefits in kind. For most employees, the amount they receive will be set out in their contract of employment and will be the market rate for the role they undertake. Provided that role is related to the trade, then there will be little doubt that a corporation tax deduction will be available.
In relation to a controlling shareholder/director of a company, it would be highly unusual for HMRC to query the level of remuneration paid to that director by way of salary or benefit in kind because they would far rather money came out in this way than as a dividend, as will commonly be the case.
The use to which the company car is put is to some extent a red herring. The question is whether that vehicle is provided to the employee as part of an overall remuneration package which is wholly and exclusively for the purposes of the trade.
The fact that the employee may not use the car at all for work is not relevant because it is the benefit of the private use that we are considering as being part of their remuneration package. It is recognised that remuneration may take the form of the use of an asset, and that is why we have the special provisions to calculate the value of that benefit.
If it there is a question as to whether the provision of a car meets the wholly and exclusively rule, the value of the benefit in kind is irrelevant. Rather, it would be necessary to consider the expenditure that the company incurs in providing that car.
Supposing that the £10,000 per year spent on a car is accepted as being incurred wholly and exclusively for the trade, it makes no difference to the availability of a deduction whether that car is a classic car, a gas guzzler or a super-efficient small car. It relation to this, by picking a car with a low benefit in kind an employee is simply following the intention of the legislation when the car benefit rules were amended based on emissions.
Tax planning by careful choice of company car is therefore highly unlikely to be challenged by HMRC: it is far more likely that an adviser will face a professional indemnity insurance claim if he is aware that a client is considering a company car and fails to advise them on the tax consequences of their choice.
If a corporation tax disallowance is proposed, the Employment Income Manual at EIM42730 may assist in reducing the amount of taxable remuneration, although this is likely only to be relevant to the cash element of the remuneration.
There are, however, certainly situations where HMRC will quite correctly challenge the provision of a company car. These normally involve cases where the company provides a car to the spouse or child of the shareholder/director and claims that these vehicles represent remuneration provided to the spouse or child. In such a case it is necessary to consider whether what is provided does indeed represent a market rate for work carried out (see the Business Income Manual at BIM41705).
If they are doing little or nothing for the company and the purpose is simply to provide a car and take advantage of their personal allowances and basic rate bands a challenge may be expected. Normally however this challenge will not be in relation to a deduction for corporation tax purposes, but rather that the cars are actually provided by reason of the shareholder/director’s employment and should be taxed on him instead.
Reply from The Weather Man.
I don’t think Fisher should worry unduly here. It is up to the employer and the employee to agree a remuneration package. One doesn’t have to look far in the papers, for example, to see cases where houses, yachts, fast cars, ‘champagne lifestyles’, etc. are paid for by the employer as part of the remuneration and benefits in kind of executives and employees.
If the employer decides to pay for benefits that are used by members of the director’s family as part of his remuneration package then I think there should be a corporation tax deduction for these. The critical point is that these benefits are taxed on the director and not ‘dressed up’ as remuneration or benefits of the family member themselves in return for some fictional employment.
I don’t (yet) see any problem with the company/director structuring the remuneration package in the most tax efficient manner possible, for example providing the family member with a car, rather than the director drawing salary subject to tax and National Insurance and paying for the car privately.
Is this really any different from the company paying a pension contribution into the director’s personal pension plan (saving National Insurance) rather than the director drawing salary and paying the premium?
