dcaccounting
18th March 2006, 09:19
BUYING YOUR COMPANY CAR
It's time to think about replacing your company car. What price will the Taxman expect to see you pay, if you decide to buy the car from your company instead of trading it in?
EXPECTATION
Market value
If the company transfers ownership of something to you, such as your company car, the Taxman insists that the deal be done at arm's length, i.e. at market value. Otherwise?
Potential problem
If you bought the car from the company for, say £6,000 but it should have been sold to you for £8,000, there is a transfer at undervalue of £2,000 - with an income tax bill of £800 (£2,000 x 40%) or £440 (£2,000 x 22%) at basic rate income tax. Your company would have to pay employer' NI of £256 (£2,000 x 12.8%) plus interest and penalties if this "error" is discovered.
Solution
What you need to do is pprove the price is right. The Taxman has access to the car dealer's price guide (Glass's guide), otherwise known as book price. However, if the value you use is less than this what should you do?
Tip 1
To support the price you've used, take the car to a dealer and get a quote in writing (on their headed notepaper) as if the company were buying the car. Remember to ask for the "trade-to-trade price".
Tip 2
If you use a figure that is less than the dealer's valuation, you'll need to keep a record of the reasons why you thought the car was worth less. For example, bodywork issues, mechanical problems and overdue maintenance work (such as tyre replacement or servicing). Any buyer would want the cost of putting these things right knocked off the price.
Tip 3
On the annual return of benefits and expenses (P11D) that your company has to provide to the Taxman, there is a box to be filled in for "assets transferred" to employees. Disclose here how much the car was worth and how much you paid for it. As these figure match there will be no tax issues. You've not hidden anything from the Taxman.
Paperwork
Remember to tell the Taxman that it's ceased to be a company car. Change the registered owner and arrange for your own insurance cover from the date you take over the car. This stops the Taxman from trying to tax you on any overlap period as a company car benefit-in-kind.
Warning
Get your company to raise an invoice to you (with normal credit terms, e.g. 30 days). However, don't leave it too long before you settle your account otherwise the Taxman will try to tax this as an interest-free loan, if the balance is over £5,000. The good news is that no VAT should be due on the deal becuase your comapny would have been blocked from claiming input VAT on the purchase of the car originally.
PROFIT EXTRACTION TWIST
Buy to sell
If you were able to buy the car at a good price but then make a profit on a quick resale, is this a problem? Firstly, you personally dont need to declare anything on the sale of a second-hand car; only if you buy and sell them on a regular basis will the Taxman try and tax this as a business.
Secondly, as in all these situations, commonsense says don't push your luck with the Taxman. Using the car for a while before you sell it helps and making a profit of say £500 to £750 would be considered reasonable. However, a £2,000 profit wouldn't look quite right.
Hope this helps.
Regards
Dean
It's time to think about replacing your company car. What price will the Taxman expect to see you pay, if you decide to buy the car from your company instead of trading it in?
EXPECTATION
Market value
If the company transfers ownership of something to you, such as your company car, the Taxman insists that the deal be done at arm's length, i.e. at market value. Otherwise?
Potential problem
If you bought the car from the company for, say £6,000 but it should have been sold to you for £8,000, there is a transfer at undervalue of £2,000 - with an income tax bill of £800 (£2,000 x 40%) or £440 (£2,000 x 22%) at basic rate income tax. Your company would have to pay employer' NI of £256 (£2,000 x 12.8%) plus interest and penalties if this "error" is discovered.
Solution
What you need to do is pprove the price is right. The Taxman has access to the car dealer's price guide (Glass's guide), otherwise known as book price. However, if the value you use is less than this what should you do?
Tip 1
To support the price you've used, take the car to a dealer and get a quote in writing (on their headed notepaper) as if the company were buying the car. Remember to ask for the "trade-to-trade price".
Tip 2
If you use a figure that is less than the dealer's valuation, you'll need to keep a record of the reasons why you thought the car was worth less. For example, bodywork issues, mechanical problems and overdue maintenance work (such as tyre replacement or servicing). Any buyer would want the cost of putting these things right knocked off the price.
Tip 3
On the annual return of benefits and expenses (P11D) that your company has to provide to the Taxman, there is a box to be filled in for "assets transferred" to employees. Disclose here how much the car was worth and how much you paid for it. As these figure match there will be no tax issues. You've not hidden anything from the Taxman.
Paperwork
Remember to tell the Taxman that it's ceased to be a company car. Change the registered owner and arrange for your own insurance cover from the date you take over the car. This stops the Taxman from trying to tax you on any overlap period as a company car benefit-in-kind.
Warning
Get your company to raise an invoice to you (with normal credit terms, e.g. 30 days). However, don't leave it too long before you settle your account otherwise the Taxman will try to tax this as an interest-free loan, if the balance is over £5,000. The good news is that no VAT should be due on the deal becuase your comapny would have been blocked from claiming input VAT on the purchase of the car originally.
PROFIT EXTRACTION TWIST
Buy to sell
If you were able to buy the car at a good price but then make a profit on a quick resale, is this a problem? Firstly, you personally dont need to declare anything on the sale of a second-hand car; only if you buy and sell them on a regular basis will the Taxman try and tax this as a business.
Secondly, as in all these situations, commonsense says don't push your luck with the Taxman. Using the car for a while before you sell it helps and making a profit of say £500 to £750 would be considered reasonable. However, a £2,000 profit wouldn't look quite right.
Hope this helps.
Regards
Dean