Minesh Trivedi, Head of Employment Tax, PKF Cooper Parry
Car dealerships face unique challenges when it comes to employment taxes. What’s more, HMRC has brought in so many changes over the past five years and, with a few more in the pipeline, it is tricky to keep up. In this article, we consider the key areas of concern for car dealerships, and give you the information you need to tackle any potential issues that may arise…
Company car compliance
One of the biggest challenges relating to employment tax involves the provision of company cars to employees for private use.For most businesses, this is straightforward. However, car dealership employees are unique as they frequently change their car throughout year. HMRC expect dealerships to report car benefits using the “averaging” method, which, broadly speaking, requires the dealership to take an annual stock of cars, allocate them into list price bands and assign them to employees depending on their grade.
HMRC’s view is that companies should strictly apply the guidelines and individuals should only be allocated cars within their band. Therefore, the issue, in terms of compliance, arises when employees are permitted to drive cars which are outside their allocated band. However, the stark reality is that employees often need to improve their knowledge of the cars that sit outside their band. This is significant as it means that the individual is paying either too much tax or not enough.
With affordable car tracking/monitoring solutions readily available on the market nowadays, some dealership employers have chosen to report the car benefit based on an actual basis (i.e. each car the employee has had private use of). Whilst this method is considered to be a fairer and more accurate way of calculating the tax (and Class 1A NIC for the dealership) payable, it is very much at odds with HMRC’s current guidelines. HMRC’s view is that the current legislation is based on the principles of “availability” of cars to employees, which does not support the “actual” usage method of reporting.
This is a potential time bomb for the car dealerships that have chosen to deviate from HMRC’s “averaging” method of reporting car benefit. It is probably only a matter of time before HMRC follows up on this and seeks to recover the additional tax, Class 1A NIC plus interest and penalties, that it believes to be outstanding.
Another challenging employment tax issue faced by car dealerships concerns private fuel. If an employee drives a company car and the dealership pays for any private fuel, which the employee does not reimburse in full, it could trigger an automatic private fuel-scale charge. This is an “all-or-nothing” charge. In other words, driving one mile for private purposes would incur the same tax charge as someone driving 20,000 private miles.
Therefore, the advice here is to monitor mileage rigorously to ensure that private and business records are accurately maintained. One option to avoid incurring the fuel-scale charge is for the dealership to pay for all fuel. Then, based on transparent records, the employees pay back for their own private mileage.
Alternatively, the employer can reimburse the employee for business mileage only. In other words, the individual pays for all fuel used out of their own pocket and through accurate records, the dealership then pays the employee for the business mileage once the records have been submitted. This puts the onus on the employee to keep good records.
Employee car ownership
Broadly, this is when an employee buys a dealership’s car, which they use for both private and business mileage. The employee would normally receive a loan from the dealership to fund the vehicle, which the employee agrees to keep for a fixed period (typically for 24 or 36 months). The employee would subsequently sell the car back to the dealership after the agreed fixed period.
As the car is regarded as a personal vehicle, the employee is entitled to claim a higher HMRC approved mileage rate as reimbursement for business mileage and does not incur a company car or private fuel benefit in kind tax charge.
The important thing to remember is that the arrangement needs to be set up and documented correctly to pass the HMRC test. Failure to do so could result in significant unexpected tax and NIC liabilities (plus interest and penalties).
This area has been very topical with HMRC for many years and continues to be even more so now. HMRC believe that there are a lot of individuals who are incorrectly engaged and treated as self-employed, costing the Exchequer millions, mainly in lost National Insurance Contributions.
Indeed, HMRC has recently set up specialist units to tackle ‘false self-employment’ and is focusing quite heavily on individuals who are being treated as self-employed/individuals providing their services through an intermediary (e.g. a limited company).
The potential problem arises when ‘engagers’ take on people on a self-employed basis when in reality they have all the hallmarks of being employees. Engaging self-employed workers saves on National Insurance so can be an efficient cost saving. However, if HMRC believes that self-employed individuals are in fact employees, it can potentially back-claim six years of tax and National Insurance, plus interest and penalties.
This area is also topical following the controversy surrounding the recent outcome of the ‘Uber’ and Pimlico Plumbing cases, which further highlighted the importance of this relatively new ‘worker’ status. Whilst this status does not entitle the individual to all the employment rights which an employee would enjoy, it does entitle the individuals to certain benefits (e.g. right to be paid at NMW/NLW rates, paid holiday, etc).
If you are at all concerned about any of these issues, we can offer you an employment status review to help.
Car dealership employees are often given incentives by third parties (e.g. finance companies, parts suppliers, etc) to ‘push’ their products to the end customer.
Provision of such incentives still have tax and NIC implications and need to be reported to HMRC. The responsibility for compliance could fall on the dealership (as the employer) or on the third-party provider, depending on who is party to the “arrangement”.
This can be a very complex area. If you are aware of any such awards and need to understand the tax, NIC and reporting obligations, please let us know.
There is a great deal for car dealerships to consider when it comes to the ever-shifting world of employment taxes. We recently conducted a survey, which put employment tax near the top of the ‘worry list’ for car dealerships. However, by tackling the issues head on, it’s possible to get on top of your game and put your worries to bed.
Minesh Trivedi has been an employment taxes specialist for 26 years. He spent four of those years working for HMRC.