DIRECTORS’ BENEFITS - 18.05.2012

Turning back the clock on company car tax

Costly combination

The tough financial conditions over recent years have meant some directors are hanging on to their company cars for longer than usual. Meanwhile, the tax and NI charges on these have increased, undermining this money-saving plan. So if you’re completing your benefits and expenses return (P11D) for 2011/12 and realise you’ve been paying a fortune in tax on your “old” car, is it too late to change this? Example. In March 2008 Peter, the sole shareholder and director of Acom Ltd, bought an 18-month old diesel Jaguar for £24,000, about £9,000 less than the original list price. It’s now worth about £7,000. Its high CO₂ emissions mean Peter has to pay tax on 30% of its original list price and his company 13.8% Class 1A NI. The tax (£3,960) and NI (£1,366) for 2011/12 are nearly 75% of the car’s current value. Worse still is that the Jag will cost even more in tax and NI for the current tax year - about another £200.

Retrospective effect

Usually, once a transaction has been made you’re stuck with the tax consequences. But the good news for Peter is that even though the 2011/12 tax year is over he can choose not to apply the company car tax rules. He can do this using the Taxman’s rule of “making good”. This involves meeting the costs your company incurred in providing the benefit-in-kind (BiK).

Change of ownership

Peter can’t change the fact that Acom owned the car for 2011/12, but by buying it from the company now for an amount equal to its value at the beginning of that tax year and reimbursing the running costs, he will eliminate the BiK tax and NI charges. Example. If the car was worth, say, £8,200 in April 2011 and the repairs etc. (fuel costs for business trips can be ignored) for 2011/12 came to £1,500, Peter would need to pay Acom £9,700. But he won’t have to part with any money. Because, for tax purposes, the car is treated as belonging to Peter, Acom can pay him a tax-free mileage allowance for business travel. As he drove 18,000 miles for Acom in 2011/12, the allowance is £6,500 (see The next step). The remaining £3,200, plus a bit to spare, comes from the Taxman who owes Peter £3,960 because the BiK for 2011/12, on which he was taxed through his PAYE code, is no longer payable and so must be refunded to him. More good news is that Acom won’t have to pay the £1,366 in NI.

Changing circumstances

It’s easy to think that keeping hold of your company car for longer will save money, but continually rising tax and NI bills can spoil your plans.

Tip. Directors should keep their company car policy under review and consider a switch to personal ownership, possibly with effect from the previous year, where their car has high CO₂ emissions, has substantially depreciated and is used significantly for business journeys, say 10,000 miles a year or more. Our car cost comparison calculator can help you work out the figures (see The next step).

For the calculation in the example (CD 13.16.05A) and to download our cost comparison tool (CD 13.16.05B), visit http://companydirector.indicator.co.uk.