Author: Alastair Kendrick (pictured), employment tax director, MHA MacIntyre Hudson. He is an employment tax specialist. His involvement with employee car ownership arrangements goes back to the early 1990’s. His experience is with dealers, manufacturers and leasing companies.
Many car dealers have decided to introduce an employee car arrangement for employees who historically may have been entitled to a company car.
There are some key factors which need to be taken into account when looking at these arrangements
1. Transfer of title
These arrangements only work for tax purposes if ‘title’ to the vehicle is transferred to the employee at the outset. If title remains with the employer, or a third party, then in most circumstances the vehicle will be considered a company car and a benefit in kind arise on the vehicle.
This does not mean that the vehicle registration needs to be in the employees name. The vehicle registration is of the ‘keeper’ not the owner and subject to there being an invoice or record of sale of the vehicle to the employee no difficulty should arise
In the past HM Revenue & Customs (HMRC) have challenged whether there is a transfer of title if there are restrictions on the use of the vehicle. So an employer who requires the car to be available for demo use could find themselves the subject of a HMRC challenge. Clearly the agreement would work if the rights rested with the employee rather than the employer
2. The price paid by the employee for the vehicle
To avoid a benefit in kind in regard to the value paid for the vehicle must be sold to the employee at a cost or above that paid by the employer. In the world of a car dealer this ‘employer cost’ may not be straightforward with an initial purchase price which is adjusted by discounts. Clearly if this matter was to be reviewed by HMRC, they are likely to want the comfort that the price does equate to cost and so any discounts clearly need to be shown as arising on that specific car
3. Loan to fund vehicle
There are a number of ways that funding can be provided and a number of different issues arise. If the employer loans a sum to the employee on an interest free basis, then a taxable benefit will arise based (for the current tax year) on 3% (the table rate). If a third party loan is provided, then subject to the interest charged exceeding the HMRC table rate, no taxable benefit will arise. You will however, need to consider whether this constitutes a regulated agreement within the FCA rules
If the loan arrangement requires the employee to be credit referenced this can create difficulties if the individual employee is an essential car user. The question of what to do if they fail a credit check, is not straightforward as the fact they have failed such a check could create significant HR issues. Before you decide to go this way you need to consider the impact and get some legal support
4.Maintenance and deliberation charges
Any costs incurred by the employer will give rise to a taxable benefit. Please bear in mind that when determining the level of benefit in kind this will be based on the marginal cost to the employer. This may mean that the cost of labour is ignored so this will significantly reduce the level of any benefit in kind
5. Vehicle insurance
This is often an area of difficulty with HMRC. The level of benefit in kind is the additional cost of covering these vehicles on some block insurance cover. We have seen some employers who have suggested that there is no cost to cover these vehicles but this is hardly likely to be accepted by HMRC.
It would be sensible for the employer to get written confirmation from the insurance broker setting out what the cost was in their view which can be used in any HMRC challenge
6. Buy-back value
In view of the fact that the car is the employee’s and no longer owned by the employer, there can be no requirement for the vehicle to be returned to the employer on expiry of the loan period. The employee can be invited to return the vehicle but not compelled
To avoid a benefit in kind on the disposal of the vehicle the value paid to the employee on the return of the vehicle must be at or below market value. This is a particular area of HMRC interest at the time of any review and it is therefore important to ensure this does not present a problem
This is a fairly complex area and employer’s need to ensure that any policy addresses all tax and National Insurance requirements. If the employee is provided with a fuel card then a benefit in kind will arise on the cost of fuel purchased.
However, the employer can reimburse business mileage at a rate up to 45p per mile for the first 10,000 miles in a tax year and 25p thereafter. If the employee does not have a fuel card then the employer can reimburse a mileage rate at or up to 45p per mile (on the basis above). Getting this wrong can prove expensive so I would recommend an employer to take professional advice and on a regular basis ensures that adequate mileage records are being obtained
In conclusion employee car ownership arrangements are technical areas and it is important that those looking to avoid difficulty with HMRC take appropriate tax advice.