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Guest opinion: ensuring dealers' employee car ownership schemes for demonstrators are 'tax robust'

Alastair Kendrick, MHA MacIntyre Hudson

Many car dealers are still confused by the tax treatment of demonstrator cars.

Historically a lot of dealers opted for the car averaging rules which permitted a review across the dealership to be undertaken on a particular day in the tax year to determine the cars that had been made available to employees.

From this the vehicles need to be banded in accordance with the HMRC guidance and then the benefit in kind per band which needs to be reported.   

These rules have remained unchanged now for some time and the bands which are set by the car list price do really need to be amended.

There appears no buy in by HMRC currently to review the rules.

If a dealer decides to operate the car averaging scheme this does not prevent an employee from requesting that their benefit in kind is revised by reference to the vehicles they have actually taken home during the course of the tax year.

What we are seeing with the availability of more data in the dealership it is the case that a number  are tracking the cars provided to their employees in the year and reporting these on the form P11d ( return of expenses and benefits) at the end of the tax year.

The above are well established routes and the only risk to the dealer if there is a flaw in their systems such that the return is incorrect.

Getting this wrong can leave a dealer exposed to a penalty and a potential tax re-claim (although this is a liability of the employee).

We are seeing a growing number of dealers move away from providing demonstrator cars in the historical basis, but entering into an employee car ownership scheme.

These schemes work on the vehicle being sold to the employee with a loan provided which is repaid monthly by the respective employee  (normally by salary deduction).

The dealer agrees to buy back the vehicle from the employee at the end of the loan period.

However, given the vehicle belongs to the employee it is their decision over whether they exercise this option. The vehicle is provided with insurance.

Employee car ownership schemes can be an attractive proposition for the employee and the dealer.

If the figures work out it can result in the employee paying less than the benefit in kind tax they would pay on a conventional company car.

The employer may save on Class 1A National Insurance.

It is important if you are considering an employee car ownership scheme that this is tax robust.

For it to meet the tax requirements, 'title' to the vehicle must transfer at the outset of the agreement.

A benefit in kind will potentially arise on the difference between the cost at which the vehicle is sold to the employee (normally the price paid to the manufacturer by the dealer plus VAT) less the value at the end of the loan period.

There will be potentially a benefit in kind on any loan provided to the employee unless the rate of interest charged does not exceed the HMRC rate.

A benefit in kind will arise on the cost of insurance and any maintenance costs incurred unless these are made good by the individual employee.

I am still somewhat surprised at the number of dealers who operate employee car ownership schemes in which the arrangements are not robust.

Getting this wrong can be expensive and it is sensible that any dealer running an employee car ownership scheme gets HMRC sign off.

We are aware in the movement in the end of term value of vehicles that a number of dealers are now looking at whether these schemes still work.

In making that decision the dealer needs to remember that irrespective of how the vehicle is provided a dealer is required to operate demonstrator stock so that cost arises in any event.

The test in my view should be is the employee contribution still below what the person would pay in income tax if the car was provided in the usual way i.e. a company car.

Many dealers forget the issue of fuel and the point that there needs to be controls in place to ensure any fuel used privately is made good otherwise the fuel scale charge benefit in kind arises.

We are aware of a number of dealerships which do not have adequate mileage logs to show mileage covered by particular employees and separately mileage covered when the car is driven for demonstration purposes by a potential customer.

The position is more complicated when a car is provided under an employee car ownership scheme.

In these arrangements the employee is eligible to the approved mileage allowance rate when they are driving on a business journey, but can claim fuel reimbursement only for mileage covered on a business journey when a colleague or customer is driving.

This is clearly an area which needs to be reviewed on a fairly regular basis given that any errors can lead to the dealer facing a significant liability with HMRC.

Author: Alastair Kendrick (pictured), employment tax and company car specialist

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