Motor cars

This article is relevant to candidates sitting Paper F6 (UK) in an exam in the period 1 April 2015 to 30 June 2016, and is based on tax legislation as it applies to the tax year 2014–15 (Finance Act 2014).

Motor cars have featured in every Paper F6 (UK) exam paper that has been set to date, which is not surprising given that acquiring, running, or having the use of a motor car can have income tax, corporation tax, value added tax (VAT) or national insurance contribution (NIC) implications.

Purchasing a motor car

When a sole trader, partnership or limited company purchases a motor car, then capital allowances will be available. Motor cars do not qualify for the annual investment allowance, although new motor cars with _CO₂ emissions up to 95 grams per kilometre qualify for a 100% first-year allowance.

Motor cars qualifying for writing down allowances at the rate of 18% (_CO₂ emissions between 96 and 130 grams per kilometre) are included in the main pool, whilst motor cars qualifying for writing down allowances at the rate of 8% (_CO₂ emissions over 130 grams per kilometre) are included in the special rate pool.

Example 1
Newstart Ltd commenced trading on 1 April 2014. The following new motor cars were purchased during the year ended 31 March 2015:

The company’s capital allowances for the year ended 31 March 2015 are as follows:

• Motor car (1) has _CO₂ emissions up to 95 grams per kilometre and therefore qualifies for the 100% first year allowance.
• Motor car (2) has _CO₂ emissions between 96 and 130 grams per kilometre, and is therefore included in the main pool.
• Motor car (3) has _CO₂ emissions over 130 grams per kilometre and is therefore included in the special rate pool.

There is no private use adjustment where a motor car is used by a director or an employee – an adjustment is only made where there is private use by a sole trader or a partner. Motor cars with private use are not pooled, but are kept separate so that the private use adjustment can be calculated.

Example 2
Judith prepares accounts to 5 April. On 6 April 2014 the tax written down values of her plant and machinery were as follows:

The following new motor cars were purchased during the year ended 5 April 2015:

The following motor cars were sold during the year ended 5 April 2015:

Motor cars (1) and (2) were used by Judith, and 35% of the mileage was for private journeys. Motor cars (3) and (4) were used by an employee, and 10% of the mileage was for private journeys. The original cost of motor car (4) was £14,300, and this has previously been added to the main pool.

Judith’s capital allowance claim for the year ended 5 April 2015 is as follows:

• The private use of motor cars (3) and (4) is irrelevant, since such usage will be assessed on the employee as a taxable benefit.
• Note that with motor car (2), the full writing down allowance is deducted in calculating the written down value carried forward.

Where partners own their motor cars privately, it is the partnership (and not the individual partners) that make the capital allowances claim.

Example 3
Auy and Bim commenced in partnership on 6 April 2014. The following new motor cars were purchased during the year ended 5 April 2015:

Motor car (1) is used by Auy, and 40% of the mileage is for business journeys. Motor car (2) is used by Bim, and 85% of the mileage is for business journeys.

The partnership’s capital allowances for the year ended 5 April 2015 are as follows:

Unless a motor car is used exclusively for business purposes, input VAT is not recoverable when it is purchased. Output VAT will then not be due on the disposal. Therefore, for capital allowance purposes, VAT inclusive figures are used.

Leasing a motor car

When calculating a business’s trading profit, no adjustment is necessary where the CO₂ emissions of a leased motor car do not exceed 130 grams per kilometre. Where CO₂ emissions are more than 130 grams per kilometre, then 15% of the leasing costs are disallowed in the calculation.

Example 4
When calculating its trading profit for the year ended 31 March 2015, Fabio Ltd deducted the following leasing costs:

• The disallowance of leasing costs for the motor car with CO₂ emissions of 150 grams per kilometre is £492 (3,280 x 15%).
• There is no disallowance for the motor car with CO₂ emissions of 105 grams per kilometre, as this is less than 130 grams per kilometre.

Motor expenses

When calculating the trading profit for a sole trader or a partnership, an adjustment will be necessary for the private proportion of motor expenses that relate to the sole trader or the partners. No adjustment is necessary where motor expenses relate to directors or employees.

Example 5
When calculating its trading profit for the year ended 5 April 2015, the partnership of Look & Hear deducted motor expenses of £4,100. This figure includes £2,600 in respect of the partners’ motor cars, with 30% of this amount being in respect of private journeys.

• The disallowance for motor expenses is £780 (2,600 x 30%).

Provided there is some business use, the full amount of input VAT can be reclaimed in respect of repairs.

Where fuel is provided then all the input VAT (for both private and business mileage) can be recovered, but the private use element is then normally accounted for by way of an output VAT scale charge. The scale charge can apply to sole traders, partners, employees or directors.

Example 6
Vanessa is self-employed, and has a motor car which is used 70% for business mileage. During the quarter ended 31 March 2015 Vanessa spent £1,128 on repairs to the motor car and £984 on fuel for both business and private mileage. The relevant quarterly scale charge is £470. All figures are inclusive of VAT.

Vanessa will include the following entries on her VAT return for the quarter ended 31 March 2015:

However, if an employee or director is charged the full cost for the private fuel provided, output VAT will instead be calculated on this charge to the employee or director.

Example 7
Ivy Ltd provides one of its directors with a company motor car which is used for both business and private mileage. For the quarter ended 31 March 2015 the total cost of petrol was £720, with the director being charged £216 for the private use element. Both figures are inclusive of VAT.

Ivy Ltd will include the following entries on its VAT return for the quarter ended 31 March 2015:

Provision of a company motor car

When an employee is provided with a company motor car the taxable benefit is calculated as a percentage of the motor car’s list price. The percentage is based on the level of the motor car’s carbon dioxide (CO₂) emissions.

List price: Any discounts given to the employer are ignored. The employee can reduce the figure on which his or her company car benefit is calculated by making a capital contribution of up to £5,000.

Percentage: The base percentage is 12%, and this applies where a motor car’s CO₂ emissions are at a base level of 95 grams per kilometre. The percentage is then increased in 1% steps for each five grams per kilometre above the base level, subject to a maximum percentage of 35%.

There are two lower rates for company motor cars with low CO₂ emissions. For a motor car with a CO₂ emission rate of 75 grams per kilometre or less the percentage is 5%. For a motor car with a CO₂ emission rate of between 76 and 94 grams per kilometre the percentage is 11%.

Diesel cars: The percentage rates (including the lower rates of 5% and 11%) are increased by 3% for diesel cars, but not beyond the maximum percentage rate of 35%.

Reduction: The taxable benefit is proportionately reduced if a motor car is unavailable for part of the tax year.

Contribution: Any contribution made by an employee towards the use of a company motor car will reduce the taxable benefit.

Pool cars: The use of a pool car does not result in a company car benefit. A pool car is one that is used by more than one employee, that is used only for business journeys (private use is only permitted if it is merely incidental to a business journey), and where the motor car is not normally kept at or near an employee’s home.

Related benefits: The motor car benefit covers all the costs associated with having a motor car such as insurance and repairs. The only cost that will result in an additional benefit is the provision of a chauffeur.

Example 8
During the tax year 2014–15 Fashionable plc provided the following employees with company motor cars:

Amanda was provided with a new petrol powered company car throughout the tax year 2014–15. The motor car has a list price of £12,200 and an official CO₂ emission rate of 84 grams per kilometre.

Betty was provided with a new petrol powered company car throughout the tax year 2014–15. The motor car has a list price of £16,400 and an official CO₂ emission rate of 109 grams per kilometre.

Charles was provided with a new diesel powered company car on 6 August 2014. The motor car has a list price of £13,500 and an official CO₂ emission rate of 137 grams per kilometre.

Diana was provided with a new petrol powered company car throughout the tax year 2014–15. The motor car has a list price of £84,600 and an official CO₂ emission rate of 228 grams per kilometre. Diana paid Fashionable plc £1,200 during the tax year 2014–15 for the use of the motor car. Diana was unable to drive her motor car for two weeks during February 2015 because of an accident, so Fashionable plc provided her with a chauffeur at a total cost of £1,800.

Amanda
The CO₂ emissions are between 76 grams and 94 grams per kilometre so the relevant percentage is 11%. The motor car was available throughout 2014–15, so the benefit is £1,342 (12,200 x 11%).

Betty
The CO₂ emissions are above the base level figure of 95 grams per kilometre. The CO₂ emissions figure of 109 is rounded down to 105 so that it is divisible by five. The minimum percentage of 12% is increased in 1% steps for each five grams per kilometre above the base level, so the relevant percentage is 14% (12% + 2% (10 (105 – 95)/5)). The motor car was available throughout 2014–15 so the benefit is £2,296 (16,400 x 14%).

Charles
The CO₂ emissions are above the base level figure of 95 grams per kilometre. The relevant percentage is 23% (12% + 8% (135 – 95 = 40/5) = 20% plus a 3% charge for a diesel car). The motor car was only available for eight months of 2014–15, so the benefit is £2,070 (13,500 x 23% x 8/12).

Diana
The CO₂ emissions are above the base level figure of 95 grams per kilometre. The relevant percentage is 38% (12% + 26% (225 – 95 = 130/5)), but this is restricted to the maximum of 35%. The motor car was available throughout 2014–15 so the benefit is £28,410 (84,600 x 35% = 29,610 – 1,200). The contribution by Diana towards the use of the motor car reduces the benefit. The provision of a chauffeur will result in an additional benefit of £1,800.

If fuel is provided for private use then there will additionally be a fuel benefit. This is also based on a motor car’s CO₂ emissions.

Base figure: For the tax year 2014–15 the base figure is £21,700.

Percentage: The percentage used in the calculation is exactly the same as that used for calculating the related company car benefit.

Reduction: The fuel benefit is proportionately reduced if a motor car is unavailable for part of the tax year.

The fuel benefit can also be proportionately reduced where the fuel itself is only provided for part of the tax year. However, it is not possible to opt in and out depending on monthly use. If, for example, fuel is provided from 6 April to 30 September 2014, then the fuel benefit for the tax year 2014–15 will be restricted to just six months. This is because the provision of fuel has permanently ceased. However, if fuel is provided from 6 April to 30 September 2014, and then again from 1 January to 5 April 2015, then the fuel benefit will not be reduced - the cessation was only temporary.

Contribution: No reduction is made for contributions made by an employee towards the cost of private fuel unless the entire cost is reimbursed. In this case there will be no fuel benefit.

Example 9
Continuing with example 8.

Amanda was provided with fuel for private use between 6 April 2014 and 5 April 2015.

Betty was provided with fuel for private use between 6 April 2014 and 31 December 2014.

Charles was provided with fuel for private use between 6 August 2014 and 5 April 2015.

Diana was provided with fuel for private use between 6 April 2014 and 5 April 2015. She paid Fashionable plc £600 during the tax year 2014–15 towards the cost of private fuel, although the actual cost of this fuel was £1,000.

Amanda
The motor car was available throughout 2014–15 so the fuel benefit is £2,387 (21,700 x 11%).

Betty
Fuel was only available for nine months of 2014–15, so the fuel benefit is £2,278 (21,700 x 14% x 9/12).

Charles
The motor car was only available for eight months of 2014–15, so the fuel benefit is £3,327 (21,700 x 23% x 8/12).

Diana
The motor car was available throughout 2014–15, so the fuel benefit is £7,595 (21,700 x 35%). There is no reduction for the contribution made since the cost of private fuel was not fully reimbursed.

The employer is responsible for paying class 1A NIC in respect of taxable benefits at the rate of 13.8%.

Example 10
Continuing with examples 8 and 9.

The total amount of taxable benefits for 2014–15 is £51,505 (1,342 + 2,296 + 2,070 + 28,410 + 1,800 + 2,387 + 2,278 + 3,327 + 7,595), so Fashionable plc will have to pay class 1A NIC of £7,108 (51,505 at 13.8%).

Use of own motor car

Employees who use their own motor car for business travel must use HMRC’s authorised mileage allowances in order to calculate any taxable benefit arising from mileage allowances received from their employer. Employees who use their motor cars for business mileage without being reimbursed by their employer (or where the reimbursement is less than the approved mileage allowances), can use the approved mileage allowances as a basis for an expense claim.

The rate of approved mileage allowance for the first 10,000 business miles is 45p per mile, and for business mileage in excess of 10,000 miles the rate is 25p per mile.

Unlike other taxable benefits which are subject to class 1A NIC, any taxable benefit arising from mileage allowances is treated as earnings subject to both employee and employer’s class 1 NICs.

Example 11
Dan and Diane used their own motor cars for business travel during the tax year 2014–15.

Dan drove 8,000 miles in the performance of his duties, and his employer reimbursed him at the rate of 60p per mile.

Diane drove 12,000 miles in the performance of her duties, and her employer reimbursed her at the rate of 30p per mile.

Dan
The mileage allowance received by Dan was £4,800 (8,000 at 60p), and the tax free amount was £3,600 (8,000 at 45p). The taxable benefit is therefore £1,200 (4,800 – 3,600).

The taxable benefit will be included as part of Dan’s taxable income. It will also be subject to both employee and employer’s class 1 NICs.

Diane
Diane can make an expense claim of £1,400 as follows:

Sometimes, rather than being given the amount of business mileage, you might have to ascertain what it is. Remember that business mileage does not include:

Ordinary commuting: This is where an employee drives between home and their normal workplace. This includes the situation where an employee is required to go into work at the weekend or because of an emergency such as to turn off a fire alarm.

Private travel: This is any journey that is not for work purposes.

Business mileage includes the following:

Travel to visit clients: This is provided the journey is not virtually the same as the employee’s ordinary commute, such as where an employee travels from home to a client’s premises which are situated near their normal workplace.

Travel to a temporary workplace: A temporary workplace is one where the employee expects to be based for less than 24 months. Again, there is the provision that the journey must not be virtually the same as the employee’s normal commute.

Example 12
During the tax year 2014–15 Joan used her private motor car for both private and business journeys. She was reimbursed by her employer, Steam Ltd, at the rate of 40p per mile for the following mileage:

• The mileage allowance received by Joan was £3,416 (8,540 at 40p).
• Ordinary commuting does not qualify for relief, but the travel to the temporary workplace does qualify as the 24-month limit is not exceeded.
• The tax free amount is £2,727 (3,360 + 1,870 + 830 = 6,060 at 45p).
• The taxable benefit is therefore £689 (3,416 – 2,727).

The approved mileage allowances can also be used in other circumstances.

Example 13
Leticia lets out a property that qualifies as a trade under the furnished holiday letting rules. During the tax year 2014–15 she drove 1,180 miles in her motor car in respect of the furnished holiday letting business. She uses HM Revenue and Customs’ authorised mileage rates to calculate her expense deduction. The mileage was for the following purposes:

The mileage that Leticia drove in respect of the property purchase is capital in nature, and therefore does not qualify. Her mileage allowance is therefore £459 (880 + 140 = 1,020 at 45p).

If a sole trader or partnership uses the cash basis to calculate trading profit, then the business can use approved mileage allowances to determine the deduction for business mileage.

Example 14
Winifred commenced self-employment as a surveyor on 6 April 2014. On 10 April 2014 she purchased a motor car with CO₂ emissions of 110 grams per kilometre for £15,600. The motor car is used by Winifred, and 70% of the mileage is for private journeys. For the year ended 5 April 2015 motor expenses were £4,800, with Winifred driving 8,000 business miles.

For the year ended 5 April 2015 Winifred can claim an expense deduction of £3,600 (8,000 miles at 45p). Capital allowances and actual motor expenses are not relevant when approved mileage allowances are claimed.

Capital gains tax and inheritance tax

The disposal of a motor car is exempt from CGT purposes, but there is no exemption from IHT. Therefore a person’s estate includes the value of any motor cars which they own at the date of death.
 

Exam standard question

The following question has been updated from the December 2010 sitting.

You should assume that today’s date is 20 March 2014.

Sammi Smith is a director of Smark Ltd. The company has given her the choice of being provided with a leased company motor car or alternatively being paid additional director’s remuneration and then privately leasing the same motor car herself.

Company motor car
The motor car will be provided throughout the tax year 2014–15, and will be leased by Smark Ltd at an annual cost of £27,720. The motor car will be petrol powered, will have a list price of £82,000, and will have an official CO₂ emission rate of 245 grams per kilometre.

The lease payments will cover all the costs of running the motor car except for fuel. Smark Ltd will not provide Sammi with any fuel for private journeys.

Additional director’s remuneration
As an alternative to having a company motor car, Sammi will be paid additional gross director’s remuneration of £28,000 during the tax year 2014–15. She will then privately lease the motor car at an annual cost of £27,720.

Other information
The amount of business journeys that will be driven by Sammi will be immaterial and can therefore be ignored.

Sammi’s current annual director’s remuneration is £100,000. Smark Ltd prepares its accounts to 5 April, and pays corporation tax at the main rate of 21%. The lease of the motor car will commence on 6 April 2014.

Required:

(a) Advise Sammi Smith of the income tax and national insurance contribution implications for the tax year 2014–15 if she (1) is provided with the company motor car, and (2) receives additional director’s remuneration of £28,000.

(5 marks)

(b) Advise Smark Ltd of the corporation tax and national insurance contribution implications for the year ended 5 April 2015 if the company (1) provides Sammi Smith with the company motor car, and (2) pays Sammi Smith additional director’s remuneration of £28,000.

Notes:

1. You should assume that the rates of corporation tax for the financial year 2014 continue to apply.
2. You should ignore value added tax (VAT) and the national insurance contribution employment allowance.

(5 marks)

(c) Determine which of the two alternatives is the most beneficial from each of the respective points of view of Sammi Smith and Smark Ltd.

(5 marks)

(15 marks)

(a)

Sammi Smith – Company motor car
(1) The relevant percentage is restricted to a maximum of 35% (12% + 30% (245 – 95 = 150/5) = 42%).

(2) Sammi will therefore be taxed on a car benefit of £28,700 (82,000 x 35%).

(3) Sammi’s marginal rate of income tax is 40%, so her additional income tax liability for 2014–15 will be £11,480 (28,700 at 40%).

(4) There are no national insurance contribution implications for Sammi.

Note: There is no fuel benefit as fuel is not provided for private journeys.

Sammi Smith – Additional director’s remuneration
(1) Sammi’s additional income tax liability for 2014–15 will be £11,200 (28,000 at 40%).

(2) The additional employee’s class 1 NIC liability will be £560 (28,000 at 2%).

Note: Sammi’s director’s remuneration exceeds the upper earnings limit of £41,865, so her additional class 1 NIC liability is at the rate of 2%.

(b)

Smark Ltd – Company motor car
(1) The employer’s class 1A NIC liability in respect of the car benefit will be £3,961 (28,700 at 13.8%).

(2) The motor car has a CO₂ emission rate in excess of 130 grams per kilometre, so only £23,562 (27,720 less 15%) of the leasing costs are allowed for corporation tax purposes.

(3) Smark Ltd’s corporation tax liability will be reduced by £5,780 (23,562 + 3,961 = 27,523 at 21%).

Smark Ltd – Additional director’s remuneration
(1) The employer’s class 1 NIC liability in respect of the additional director’s remuneration will be £3,864 (28,000 at 13.8%).

(2) Smark Ltd’s corporation tax liability will be reduced by £6,691 (28,000 + 3,864 = 31,864 at 21%).

(c)

Most beneficial alternative for Sammi Smith
(1) Under the director’s remuneration alternative, Sammi will receive additional net of tax income of £16,240 (28,000 – 11,200 – 560).

(2) However, she will have to lease the motor car at a cost of £27,720, so the overall result is additional expenditure of £11,480 (27,720 - 16,240).

(3) If Sammi is provided with a company motor car then she will have an additional tax liability of £11,480, so she is in exactly the same financial position.

Most beneficial alternative for Smark Ltd
(1) The net of tax cost of paying additional director’s remuneration is £25,173 (28,000 + 3,864 – 6,691).

(2) This is more beneficial than the alternative of providing a company motor car since this has a net of tax cost of £25,901 (27,720 + 3,961 – 5,780).

Written by a member of the Paper F6 (UK) examining team