Lesley Stalker, tax partner at Surrey-based tax adviser RJP, examines the pitfalls that can be encountered when businesses look to make tax savings with company cars.
If you are a company director and provide yourself with a car (amongst other benefits) through your company as part of your remuneration package, you might well be wondering whether the actual benefit you realise is worth all the additional tax.
Increasingly, companies are moving away from providing company cars to employees and are providing them with a cash allowance instead.
It is possible to amend the structure of a business to a more tax efficient one depending on the individual circumstances and there have been numerous reports of celebrities and highly paid executives becoming self employed ‘consultants’ contracted by their former employers to avoid high taxes.
It is for example, in theory, possible to work for a limited company but be provided with a car by a partnership of which an individual is a partner. In this case different, less onerous, tax rules apply to the benefit of the private use of the car provided.
However, a recent tax tribunal case highlights that this strategy can be risky for a number of reasons. In this instance, the parties involved (DJ Cooper and partners) were faced with a very high retrospective tax bill to the tune of £200,000. This was because HMRC acted to ‘penalise’ them on what it regarded as a deliberate attempt to avoid paying taxes on company vehicles, which it believes were predominantly a private perk.
Case in point
DJ Cooper was a director of a limited company which had, along with other members, formed a partnership structure to conduct a business. Its business was broadly to provide ‘services’ to its sole customer, the limited company. This is a perfectly valid tax planning strategy, providing there are sound commercial reasons for the structure.
It is increasingly one that highly paid clients are embarking upon, especially since the introduction of the 50 per cent tax rate. In the case of Cooper, HMRC had already verified the partnership structure was valid.
Cooper’s business partnership also provided cars for use by its partners both during business hours and privately. The relevant vehicle running costs were recharged to its client (the company) by the partnership and Cooper and his co-partners were each paying tax on partnership profits after adjusting the figures to take into account private car usage.
This arrangement continued uncontested for some years until eventually, HMRC asserted that although the cars were used for delivering business services, they were being provided solely as a benefit by reason of employment with the limited company, and so the benefits were subject to higher taxes under the employment rules, rather than the lower taxes which were due under the self employed rules.
This case really hinged on the commerciality of the situation – HMRC deemed that the cars were only provided by the partnership by reason of employment with the limited company. The fact that the cars were clearly being provided by the partnership to use when supplying services to its customer was disregarded, because HMRC argued that this partnership structure would not have existed commercially, if it were not for the company, its only customer.
The tax tribunal agreed with HMRC, therefore in spite of Cooper and the other directors having already paid the tax they believed was due for their private use of the partnership cars, they were found to owe a collective £200,000 in additional tax. This was calculated based on unpaid tax for a benefit in kind going back over several years.
Beware aggressive tax avoidance
HMRC clearly regarded this as an aggressive tax planning strategy and an example of deliberate tax avoidance. This was in spite of having already validated the partnership’s trading status, and having accepted the situation for a number of years. In its view, the cars provided by the Cooper partnership demonstrated an example whereby an attempt was made to avoid paying tax on a benefit that was predominantly personal rather than business related. And Cooper and co were effectively penalised for their strategy with a large amount of additional tax to pay.
Our advice is that HMRC are now actively looking for opportunities to generate further income; the line between tax planning and tax avoidance is being deliberately blurred, and any tax planning strategies undertaken should be very well thought through, and should be predominantly commercially driven to avoid situations such as this.