As an owner of a company and director (employee), it is crucial to understand the implications of the personal use of company assets. Often referred to as a “benefit in kind”, there may be potentially significant tax liabilities for the individual and the company. If you own the company and are a director, you could be hit with two separate tax liabilities!
What is a benefit in kind?
A benefit in kind is defined as:-
“Any non-cash benefit of monetary value that you provide for your employee”
The most common type of benefit in kind is a company car which, under a limited company structure, can attract significant tax liabilities. We will now look at the benefit in kind tax calculation under a limited company and consider ways to mitigate this.
Taxing company car use as a benefit in kind
Looking at the potential tax liability when using a company car as a benefit in kind, there are several factors to take into consideration:-
- List price of the vehicle (P11D value)
- CO2 emissions
- Personal tax rate
- Class IA National Insurance (charged on benefits in kind)
- Car fuel benefit charge (HMRC defined annual petrol cost)
- Depreciation allowance
HMRC is using the tax system to encourage companies to use vehicles which emit as little CO2 as possible, with desirable tax rates for electric cars. Coincidently, HMRC does not recognise electricity as fuel; therefore, there is no car fuel benefit charge. The best way to demonstrate this is to show you an example.
Example of company car use as a benefit in kind
To demonstrate the potentially significant tax liabilities of using a company car as a benefit in kind, we will assume the following extreme circumstances:-
Individual: Company owner/director (employee)
Income: £150,000 per annum
Tax rate: 45%
Business vehicle: Limited company
Class IA National Insurance: 15.05% (tax year 2022/23)
Petrol vehicle list value (P11D): £250,000
CO2 emissions g/km: 170+ (highest rate)
Fuel benefit charge: £25,300 (2022/23)
When calculating the combined tax liability, we need to consider the benefit in kind or use of the car and fuel paid by the company.
In the above scenario, the personal income tax liability for the director (employee) is calculated as follows:-
|Personal Income Tax Liability||(£250,000 x 37% x 45% tax)||Car Benefit||£41,625|
|Personal Income Tax Liability||(£25,300 x 37% x 45% tax)||Fuel Benefit||£4,212|
If we now look at the company’s Class 1A National Insurance liability, this is calculated as follows:-
|Company National Insurance||(£250,000 x 37% x 15.05% NI)||Benefit in Kind||£13,921|
|Combined Tax and NI Liability||£59,758|
As the owner of the company, and director (employee), there is a double whammy which equates to a combined tax liability of £59,758. While this is charged each year, it is important to note that the company can still claim a capital allowance of 6% per annum (writing down allowance). Even though the company and employee are taxed on the benefit in kind, the cost of petrol, insurance, road tax and finance are still classed as business expenses.
Company car benefit in kind rates
While we have used the extreme example of an expensive vehicle emitting the highest levels of CO2, there is a wide range of rates for different vehicle types. For example, the benefit in kind rate for cars registered after 6 April 2020 is as follows:-
- Electric cars – 2% to 14%
- Petrol vehicles – 2% to 37%
- Diesel vehicles – 24% to 37%
- Some diesel vehicles also have a surcharge of 4%
As you can see from the calculation above, the level of CO2 emitted by the the vehicle is used to calculate not only the car benefit but also the fuel benefit and the company’s Class 1A National Insurance liability. Therefore, it is not difficult to see how HMRC will encourage companies to acquire more environmentally friendly vehicles for their fleet.
Other widespread benefits in kind
While we have focused on a company car as a benefit in kind, it is essential to note that this source of non-cash benefit can take many different forms, such as:-
- Private healthcare
- Accountancy fees
- Phone bills
- Non-business travel expenses
- Non-business entertainment expenses
- Personal use of company premises
We will now look at a way to potentially mitigate the taxation connected to benefits in kind. How would you like to eliminate the above £59,758 tax liability?
How to avoid this charge
Central to the benefit in kind tax regime is an employee’s use of company assets. The critical factor here is the employee, effectively enjoying non-cash benefits provided by the company. In the above example, a Limited Liability Partnership (LLP) could provide a means of avoiding significant tax liabilities.
What is an LLP?
An LLP is an alternative corporate structure that offers the flexibility of a partnership and the benefit of limited liability seen with companies. In addition, the LLP is recognised as a legal entity and can enter into contracts and hold assets in its own name. So, how might this benefit the owner and director of a company?
LLP member but not an employee
Under the terms of an LLP, each individual with a share in the partnership is recognised as a member (sometimes referred to as a partner). However, they are not recognised as an employee. As benefits in kind can only be charged against use by an employee, there is no basis on which to charge the LLP or the member. So, legally the member could use a car owned by the LLP, and it would not be deemed a benefit in kind. Hence, there is the potential to avoid the significant tax and NI charge incurred by a company in a similar situation.
Will HMRC close this loophole?
As a member of an LLP, you are not deemed an employee; therefore, the traditional benefit in kind taxes do not apply. Some company directors use LLPs as an ownership vehicle for company cars, avoiding benefit in kind taxes. HMRC believes this is an abuse of the LLP system, and while no changes are planned at the moment, this may change in the future.
While an LLP may not be suitable for all types of business, there is the potential to avoid benefit in kind taxes when using, for example, LLP owned over company owned vehicles. At the heart of the matter is the fact that benefit in kind taxes can only be charged against employees. This tax regime is redundant as an LLP member, not an employee.