COMPANY CARS - 07.05.2020

Share the company car?

A friend has told you that you can save tax and NI if your company car is provided to your spouse instead of you as they pay tax at a lower rate. Are they right and if so what are the potential savings?

Rule change

Prior to April 2016 HMRC attributed the tax bill for a company car used by both spouses to the one with the greater earnings. However, the rules then changed so that the tax bill can now be attributed to the spouse to whom the company nominally makes the car available.

Example. Steve and Soody are director shareholders of Acom Ltd. Soody works full time in the business and is paid a salary and dividends totalling £100,000 per year and is therefore a higher rate taxpayer. She has no other income. Steve works occasionally for the firm and is paid salary and dividends totalling £15,000 per year and is therefore a basic rate taxpayer. He has no other income. Here are how the payments work out for a £10,000 car:

Available to Soody only: £4,000 tax (£10,000 x 40%)

Available to Steve: £2,000 tax (£10,000 x 20%).

Note. Acom will be liable to the same Class 1A NI bill of £1,380 whoever the car is provided to.

Tip. If a car is made available to the lower rate taxpayer the other can have use of it without having to pay higher rate tax for the privilege.

HMRC says…

There’s nothing in the legislation that specifically prevents Steve and Soody from doing the above, but that doesn’t mean HMRC likes the idea. Indeed, it hides its internal guidance on this. What we can say though is that HMRC will look at:

  • who the company insures to drive the car
  • records that indicate who actually drives the car
  • employment contracts and other records that might indicate that a spouse is only on the company books as an employee so it can provide a car at a lower tax cost than would apply if it were provided to their spouse.

Tip 1. Make sure that the insurance policy for the car fits the usage, e.g. if the car is only to be used by one spouse make them the only named driver.

Tip 2. An argument with HMRC can probably be avoided by making the car available to both spouses rather than just one. You can still save tax and NI this way.

Safer option?

HMRC is unlikely to challenge you if the company makes the car available to you and your spouse. In this situation the taxable amount must be divided between the persons sharing the car on a “just and reasonable” basis. For a couple who each have the right to use the car (even if one uses it slightly more than the other) a 50/50 split is fair. If one person clearly makes significantly greater use of it, a different split should be estimated.

What you’ll save

Using the example above this is what will be saved.

User Taxable Tax on car Class 1A NI Total
Soody only Soody £10,000 £4,000 (40%) £1,380 £5,380
50/50 split Steve & Soody Soody £5,000 £2,000 (40%) £690 £4,380
Steve £5,000 £1,000 (20%) £690

If a car is made available to the lower rate taxpayer the other can have use of it without having to pay higher rate tax for the privilege. In our example it saved £1,000. Make sure that the insurance policy for the car fits the usage to stave off an HMRC challenge.

© Indicator - FL Memo Ltd

Tel.: (01233) 653500 • Fax: (01233) 647100

subscriptions@indicator-flm.co.ukwww.indicator-flm.co.uk

Calgarth House, 39-41 Bank Street, Ashford, Kent TN23 1DQ

VAT GB 726 598 394 • Registered in England • Company Registration No. 3599719