BENEFITS - 26.05.2010

Choosing not to pay tax on a benefit

Basic principle of benefits

The idea behind the Taxman’s so-called “benefits code” is to stop you escaping tax or NI by getting your company to pay for goods or services instead of paying you an equivalent amount of salary etc. All benefits must be reported by July 6 following the end of the tax year on Form P11D. That seems fair, but in some cases the Taxman’s rules can mean you’ll be taxed on an amount much greater than the cost of the benefit to the company. Cars are a good example.

Example. In April 2009Jane, who owns a consultancy company, is persuaded by her car enthusiast son to buy him a sporty nine-year-old BMW. It cost £28,000 when new but it has high mileage and she was able to pick it up for a song at £3,000. Jane decided to buy it through her company. She knew she would have to pay tax on this, but didn’t realise how much. In fact, because the tax and NI on company cars is based on a combination of CO2 emissions and original list price, it will cost her a staggering £3,360 per year in tax and her company £1,075 in NI (see The next step).

Salary option

Jane could have taken extra salary to pay for the car. This would have cost her £2,084 in NI and tax and her company £650 in NI (see The next step). But these would have been one-off charges unlike the annual tax and NI that applies where the company owns the car. But now the 2009/10 tax year has ended what can she do about it?

Buy back to save tax

One option open to Jane would be for her to buy the car from the company so that in future the benefit rules won’t apply. She could use the salary option to fund the purchase. But would this mean that the company car tax and NI bill for 2009/10 would stand?

Retrospective effect

The Taxman’s “benefits code” allows you to cancel a potential benefit-in-kind by “making good” the company’s costs of providing the benefit. In Jane’s case when she pays the company £3,000 in June 2010 it will have the effect of cancelling the tax charge from the outset. So there will be no car benefit tax or NI for 2009/10 or for the period April 6 2010 to the date she pays the company for the car. This also means she won’t have to make the fiddly calculations of car benefit or report the figures on Form P11D.

No money, no problem

If Jane doesn’t have £3,000 available, she can actually borrow it from the company, debiting her director’s loan account.

Tip 1. To keep the Taxman happy, place a minute in the company records confirming that the debit to your director’s loan account was to repay the cost of a benefit.

Tip 2. All taxable benefits (except car fuel) can be cancelled this way. So before you sign off your P11D’s for 2009/10 work out whether you would be better “making good” to your company.

For the calculation in the example, visit http://tax.indicator.co.uk (TX 10.17.03).