HM Revenue and Customs (HMRC) is very aware that there are some common employment tax issues for motor retailers that are often treated incorrectly. It knows that these issues can result in significant penalties from reviews and inspections – so much so that it even has specialist inspectors who understand the industry. Independent consultant Tim Humphries gives an overview of the key areas.
Beginning with company cars, there are three main ways in which we tend to provide cars to our employees:
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In a car lease scheme, the car is leased at an arm’s length for a commercial rate. No fuel is provided to the employee or their family member. There is no tax due on this type of scheme.
With a traditional company car the employee is provided with a car but usually makes no contribution to the cost. Fuel may be provided free of charge, sometimes up to an agreed limit. The car – and fuel – is treated as a benefit in kind, and is reported annually to HMRC through the P11D.
Employers National Insurance (NI) is due on the benefit value, which is calculated using the car’s list price and CO2 rate. Normally, every time a car is changed, HMRC have to be updated with the car’s details, the benefit value recalculated and a new tax code issued.
The motor trade, however, has an agreed scheme for averaging the value of the typical car provided throughout the year. This is only an option where there is a frequent change of car. There is not a definition of what ‘frequent change’ is, and HMRC has quoted anything from every couple of days to once a quarter!
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By GlobalDataThirdly, an employee car ownership scheme (ECOS) takes the car outside of the company car regime, and therefore removes any benefit in kind and NI due. The company sells the car to the employee, usually at cost. The employee funds the purchase with a loan from the employer or a third party.
At some point in the future, the employee sells the car back to the employer for the amount outstanding on the loan. The employee is able to claim back business mileage use from the employer at up to £0.45 per mile without it becoming a benefit. Any loan with interest below the government-approved rate will also be classed as a benefit of the employee.
The key areas to watch out for on an ECOS scheme are:
- Can you evidence what the cost price is, including all bonuses?
- Can the car be funded (and ‘count’) as a demonstrator and also be owned by the employee?
- Can you insure the employee’s personal car – what is the benefit in kind for the employee?
- Ensure the buyback price is the market value of the car, otherwise it is a benefit.
- Make sure you maintain and retain all the relevant paperwork!
Fuel
Any private fuel (even just £1) provided to an employee is a benefit in kind calculated using the car’s CO2 emissions and a fixed HMRC annual value.
Fuel benefit is increasingly being seen as expensive for both the employee and the employer. If private fuel is not provided – for example, the employee is recharged for any fuel purchased – then it is important to retain the records showing how this is achieved. For example, if you operate a sales department fuel card or keep fuel cans on site, how can you be sure there is no private use? How will you evidence this?
Employment Status
The motor trade will often have people who are self-employed working on a regular basis. This may include valeters, cleaners, drivers and even the odd consultant!
HMRC will want to understand whether these workers are truly self-employed or should be treated as employees. Currently this is not an issue if the worker operates through a limited company, but the recent budget announcement extending IR35 to the private sector from 2020 may change this. You should review all your off-payroll labour (including currently approved schemes) to examine your potential exposure now or in 2020.
HMRC has a useful online employment status tool that you can use and then print out the results to evidence your approach at www.gov.uk/guidance/check-employment-status-for-tax.
Entertaining
The three main types of entertaining and sponsorship are:
In the case of customer or supplier entertaining, any expenditure is not allowable for Corporation Tax and you must not recover the VAT on this expenditure. You may be able to class the expenditure as a promotion or advertising, which would be allowable.
The key point is to maintain records of what you actually get for your money; you may have to separate out the entertaining element from the advertising.
In staff entertaining, expenditure is usually allowable for Corporation Tax and is VAT-recoverable. There is an exemption of £150 per year for an annual event per employee. Anything outside this – including meals, etc. – should be included on the employee’s P11D unless covered by a PSA (below).
Sponsorship is an area that HMRC will look at very closely. It will want to see what benefit the business is getting from the sponsorship, or whether it is a personal project of the owner or director.
One area that seems to be on the increase is the lending of vehicles to third parties – either to celebrities or sportspeople, or in return for a service such as gym membership.
In these circumstances there may be tax and NI issues for the motor dealer if the person who uses the car is an employee of another business. What tax is due will depend on who decides who can use the car. There is a fine line between providing a benefit and promotion or advertising, so tax advice should always be obtained before entering into a contract.
PAYE Settlements
PAYE settlement agreements (PSAs) are used where you want to provide a benefit to employees but also want to pay the tax on their behalf. Typical examples would be incentive awards or trips, minor gifts or shared benefits. A PSA cannot be used for cash, vouchers or regular benefits.
If a PSA is agreed with HMRC then these benefits do not appear on the employee’s P11D, but instead are reported annually. The employer will make a single payment to HMRC to cover income tax, Class 1 NI and Class 1B NI. You can apply for a PSA at any time, and it must be renewed annually if you wish to continue to use it.
Some VAT?
While this article is principally about employment taxes, there are a couple of VAT matters that I cannot ignore:
HMRC has recently written to a number of motor groups requesting copies of their partial exemption calculation for the last four years. It is likely that if they discover issues – and, therefore, potential income – they will want to expand this review.
If you are not 100% sure that your calculations will pass scrutiny, now is the time to review and revise them.
You are probably aware of the term ‘making tax digital’. This is HMRC’s approach to ultimately having access directly into the DMS.
There is a phased approach, but the key date is April 2019. From this date, unless you qualify for deferral, your VAT return must be submitted electronically – not typed into the HMRC website. It is likely you will need additional software to complete this.
by Tim Humphries
