Tag: Tax

Despite year-on-year tax rises, company cars remain a popular benefit. While the tax cost of expensive high-emission cars can be eye-watering, by choosing carefully it’s possible to enjoy the convenience that comes with a company car for a relatively low tax cost. So, as the new tax year gathers steam, what’s changed for 2018/19?

The tax charge
Company cars are taxed as a percentage of the list price, which is essentially the  manufacturer’s valuation of the car when new. It doesn’t matter how much was actually paid for the car, or whether it was bought second-hand.
It’s the list price that is used to work out the taxable amount and,
where optional accessories are added, the list price is adjusted to
reflect these.
The percentage charged to tax (the appropriate percentage) depends on the level of the car’s carbon dioxide (CO2) emissions. This increases each year, and 2018/19 is no exception. For 2018/19, the appropriate percentage for a car with CO2 emissions of 50g/km or less is 13% (up from 9% for 2017/18), whereas for cars with CO2 emissions in the range of 51 to 75g/km it is 16% – up from 13% – for 2018/19.

For cars with CO2 emissions of more than 76g/km, the charge for 2018/19 is two percentage points higher than in 2017/18 at 19% for cars in the 76 to 94g/km band.
This increases thereafter by 1% for each 5g/km rise in CO2 emission, although there is a maximum charge of 37% which applies to cars with CO2 emissions of more than 180g/km in 2018/19.

The increase in the appropriate percentage means a company car driver will pay more tax on the same company car in 2018/19. When calculating the charge, the list price is reduced for any capital contributions made by the employee (capped at £5,000), while the benefit is reduced to reflect any payments for the private use of the car. If the car is unavailable for part of the tax year, the benefit is proportionately reduced.

Example 1
Tony has a company car worth £30,000 with CO2 emissions of 150g/km, which was available throughout 2017/18. He isn’t due to change his car until July 2019 and pays tax at 40%.
For 2017/18, the appropriate percentage is 29% and the cash equivalent value of the car, on which Tony is taxed, is £8,700. As a higher rate taxpayer, the associated tax bill is £3,480 (£8,700 @ 40%).
For 2018/19, the appropriate percentage has increased to 31%. The taxable amount rises to £9,300 (31% of £30,000) and the associated tax to £3,720 (40% of £9,300).
Although he has the same car, even if it is a year older, Tony pays £240 more in tax as a result of the increase in the appropriate percentage.

Diesel cars
Diesel cars attract a supplement but the nature of that supplement has changed for 2018/19 and beyond.
For 2017/18 and earlier tax years, the supplement was 3%. This increased the appropriate percentage by 3%, compared to that for a petrol car with the same emissions level.

The diesel supplement cannot take the charge above the maximum of 37%. For 2018/19, the diesel supplement increased from 3% to 4% for all cars that aren’t certified to the Real Driving Emissions 2 (RDE2) standard.
The supplement applies to cars registered on or after 1 January 1998, which don’t have a registered nitrogen oxide (NOx) emissions value, and also to cars registered on or after that date which have a registered NOx emissions value that exceeds the RDE2 standard.
While the appropriate percentage is set by reference to CO2 emissions, the new-look diesel supplement is dependent on NOx emissions level.
Under the new rules, diesel cars certified to the RDE2 standard are not subject to the diesel supplement.
In practice, it is unlikely cars on the market before 6 April 2018 will meet the RDE2 standard, with the effect that most diesel cars will be subject to the higher supplement.
Taking into account the increases in appropriate percentages as well, diesel car drivers will suffer a higher tax hike in 2018/19.

Example 2
Maria has a diesel-fuelled company car with a list price of £30,000 and CO2 emissions of 150g/km. Her car doesn’t meet the RDE2 standard but it’s available throughout 2017/18 and 2018/19, and like Tony, Maria is a higher rate taxpayer.
In 2017/18, the appropriate percentage is 32% (normal 29% plus diesel supplement of  3%). This makes the taxable value £9,600 (32% of £30,000) and the tax owed is £3,840 (40% of £9,600).
In 2018/19, the appropriate percentage has increased to 31% and the diesel supplement to 4% – a total of 35%. As a result, the taxable value is £10,500 (35% of £30,000) and the tax bill is £4,200.
The combined effect of the rise in the appropriate percentage and the increase in the diesel supplement means Maria’s taxed £360 more in 2018/19 than in 2017/18 – £120 more than the tax rise suffered by Tony on his petrol car.

Going green
Drivers choosing lower-emission cars are rewarded with lower tax bills.
In the earlier example, Tony paid tax of £3,720 on his company car based on a CO2  emission of 150g/km.
If he had chosen a car of the same value but with CO2 emissions of 40g/km, he would’ve paid tax of £1,560 in 2018/19 (40% (£30,000 @ 13%)) – saving £2,160 a year and £180 a month.
Going electric
Electric cars with zero emissions are charged at the same percentage as cars with CO2 emissions of 50g/km and below – 13% for 2018/19.

However, from 2020/21 new emission bands will apply to cars with CO2 emissions of 50g/km or less based on the electric range of the car.
This is the maximum distance the car can travel without recharging the battery or using the combustion engine of the plug-in vehicle.  Under the new bands, the cars with the greatest range have the lowest appropriate percentage.
The rates for the new bands, which will apply for 2020/21, are shown in the table below. The appropriate percentage is set at 2% for zero-emission cars.

It will pay to go electric, and the opportunity to benefit from a lower tax bill for an  electric car should be taken into account when choosing a new company car.

Fuel
A separate fuel scale charge applies where fuel is provided for private mileage in a company car.
This is found by applying the appropriate percentage (as used in working out the taxable benefit of the car) to a set amount. For 2018/19, this is £23,400 – up from £22,600 in 2017/18.
This means that for a car with CO2 emissions of 150g/km, the fuel charge is £7,006 for 2018/19, costing a higher rate taxpayer £2,802.40 in tax – or £233 a month.
Unless private mileage is very high, private fuel is rarely a tax-efficient benefit and where the cost of the car is below the appropriate amount (£23,400 for 2018/19), more tax will be payable on the fuel than on the car.
By contrast, no fuel charge arises if the employer provides electricity for an electric car.

Choosing wisely
The company car tax rules reward those who choose greener cars.
The tax charge on a cheaper, low-emission car is considerably less than an expensive car with high CO2 emissions.

Looking ahead, choosing an electric car will lower the bills still further with a taxable amount as low as 2% of the list price.

New company car advisory fuel rates have been published which take effect from 1 June 2018. The guidance states: ‘You can use the previous rates for up to one month from the date the new rates apply’.

The rates only apply to employees using a company car.

The advisory fuel rates for journeys undertaken on or after 1 June 2018 are:

The guidance states that the rates only apply when you either:

• reimburse employees for business travel in their company cars
• require employees to repay the cost of fuel used for private travel

You must not use these rates in any other circumstances.

If you would like to discuss your car policy, please contact us.

Internet link: GOV.UK AFR

Entrepreneurs’ Relief reduced the amount of CGT paid on a disposal of qualifying business assets on or after 6 April 2008.

This relief will be available to:

Sole traders and partners selling or gifting the whole or part of their business
Company directors and employees holding at least 5% of ordinary shares and voting rights in a qualifying company who will share or gift all or part of their shareholding
In 2010, the relief changed to qualifying gains arising from 23 June 2010 being taxed at a flat rate of 10%, with the previous need to reduce the gain by 4/9ths being removed.

Conditions for relief

To claim relief, you have to satisfy a number of conditions through the qualifying period, which depend on the type of business disposal you’ve made.

Relief is available where there is either:

Material disposal of business assets
Disposal associated with a material disposal
Disposal of trust business assets
Disposal of a material asset

If the person is only selling part of a business, this part must be capable of being carried on as a going concern.

According to Tolley’s guidance, the disposal of assets which don’t constitute a sale of business capable of being carried on in its own right won’t qualify for the relief.

The definition of a material disposal depends on the type of asset sold:

In the case of a sale or gift of whole or part of a sole trade or partnership business, it must have been owned by the vendor throughout the year ending on the date of the disposal or cessation
It must have been owned by the taxpayer for one year prior to cessation and must be sold within three years of cessation
In the case of the sale or gift of shares or securities in a company, the disposal is material if throughout one year prior to the disposal of shares or date company ceased trading:

The company is a trading company
The company is the taxpayer’s personal company
The taxpayer is an officer or employee of the company or another company in the same group
Entrepreneurs’ Relief is only given in respect of relevant business assets, i.e. assets used for business purposes such as premises.

This means businesses can’t get relief for chargeable assets bought within the year, as long as they are brought into use in the business.

There is no relevant business assets requirement for the sale of shares or securities, meaning there is no need to prorate the relief in accordance with underlying investments held by the company.

Tolley advises using HMRC’s CGT for land and buildings toolkit when calculating the capital gain or loss on the disposal of land or buildings.

Definition of a trading company

According to Tolley Guidance, this is a company carrying on trading activities which does not include to a substantial extent activities other than trading activities.

HMRC says “substantial extent” means more than 20%. However, 20% of what?

Tolley says the test is applied to criteria such as:

Turnover
Asset base or balance sheet
Expenses
Directors’ time
CG64090

HMRC won’t apply the test if the company had a particularly poor trading period. Without this, according to Tolley, a company with seasonal trading fluctations, for example, might not be considered a trading company.

It’s suggested that the taxpayer might consider making a non-statutory business clearance application to HMRC for a trading status ruling, which would be separate to tax compliance from the shareholder.

Associated disposals

A disposal made after material disposal of business assets can qualify for Entrepreneurs’ Relief it it’s associated with it.

How it can be associated:

The individual makes a material disposal of the whole or part of their interest in a partnership or shares or securities in their personal trading company
The material disposal is made as part of the withdrawal of participation in the business
The asset sold after material disposal had been used in that business throughout one year ending with either the disposal or cessation of the partnership or company
Tolley said these conclusions flagged a few points, including:

The associated disposal rules don’t apply to sole traders
These rules don’t apply to isolated disposals of assets
The material disposal must happen first
HMRC says there should not be a significant interval between the material disposal and associated disposal.

Time-frames for associated disposal are:

Within one year of cessation
Within three years of cessation if the asset hasn’t been leased or used for any other purpose after the business ceased
Where the business hasn’t ceased, within there years of the material disposal provided the asset hasn’t been used for any purpose other than that of the business
There are also restrictions of relief on an associated disposal: If the asset is used in the business for only part of the ownership period, is only partly used in the business, or if the individual isn’t involved in the business throughout the period or if the asset was rented to the business.

How to claim and report Entrepreneurs’ Relief

It must be claimed by the first anniversary of the 31 January following the tax year of the disposal.

The gains are reported via usual channels on the CG summary supplementary pages in accordance with the type of asset sold. Calculations of the gains must be attached and submitted with the tax return.

The relief is claimed by crossing boxes 20, 26 and 34 based on the type of asset and including details in the white space on page CG2.

Entrepreneurs’ Relief

Written by: Rachael Power

Expensive but still cost effective

In April 2018 the tax and NI charges for company cars crept up again. While the maximum charge didn’t increase, the CO₂emissions bands moved so that the majority of company car drivers will pay more in 2018/19 and in 2017/18 for the same car. Despite this, financing a car through your company can be more cost effective than doing it personally. This is something to keep in mind if your spouse, son or daughter needs a new set of wheels.

Example. Peter is a director shareholder of Acom Ltd. He is a higher rate taxpayer. His daughter Katy needs a car and Peter agrees to fund the purchase. His budget is £13,000. To keep annual costs down Katy picks one with CO₂ emissions of under 95g/km. Katy will pay the running costs, e.g. insurance, servicing, etc. How do personal and company ownership stack up against each other?

Katy as owner. The idea is for Katy to keep the car after four years and buy a replacement herself. At that time its expected value is £4,750. This means the net cost to him is £8,250 (£13,000 – £4,750). He takes extra dividends of £12,222 from Acom to cover this, which after tax at 32.5% leaves £8,250.

Acom as owner. The cost over the four years to Acom would also be £8,250, but it receives corporation tax (CT) relief at 19%, which makes the net cost to it £6,683. Peter must pay tax on the company car of £988 per year. He takes dividends each year of £1,464 to cover the tax bill. That’s £5,856 over four years. After 32.5% tax that’s £3,952. Acom has to pay Class 1A NI on the car benefit, which after CT relief is £1,104. The total cost to Acom for the car is £13,643 (£6,683 + £5,856 + £1,104). The calculations indicate that personal ownership by Katy is the cheaper option, but that’s not the full story.

Reimbursed costs

If Acom (and not Katy) pays the running costs and Peter reimburses Acom, and Katy reimburses him, this reduces the tax and NI payable on the company car option. This can tip the balance in favour of Acom owning the car.

Tip. For the reimbursed expenses to reduce the tax and NI, Acom must make it a condition of it providing the car. This should be put in writing in case HMRC asks questions.

Less tax and NI. Assume the average annual cost of insurance, road tax, servicing etc. is £1,700. If Acom pays this and requires Peter to reimburse it, the corresponding amount on which he is taxed for the car is reduced by the same amount. Over the four years of ownership that’s a tax saving of £2,720. Therefore, Peter needs correspondingly fewer dividends from Acom to cover the cost. Acom also saves money. Katy’s financial position is neutral, it’s just that she reimburses Peter for the running costs instead of paying them direct.

Tax saving makes the difference. In our example, the tax savings achieved by simply changing how the running costs are managed is over £4,500 (see The next step ). This makes company ownership significantly the cheaper option.

 The full calculations behind the example [Document]