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HMRC drive hard line

Further to my last blog on the taxation of company cars, you may not be surprised to learn that people are looking at ways to avoid the benefits.  Equally you would expect that HMRC is taking a hard line on the question of what comprises “private use”.

A recent tax case looked at a service partnership, funded in part by partners capital which enabled the partnership to buy cars.  The partnership charged a management fee for the services provided by the partners and three employees.  The sole customer of the partnership was the limited company. 

As part of its trade the partnership provided cars and fuel for the partners and a disallowance was made for private use.  However HMRC held that as two of the partners were directors of the company the provision of the cars came from the directors’ employment.  The additional tax was high because the company would owe class 1A national insurance of around £70,000 and the individuals income tax of around £145,000. 

The case went to the Tribunal who confirmed that the partnership was independent of the company and carried on its own commercial business but that the business was wholly dependent on the company.  The Tribunal took the view that the management fee paid by the company to the partnership was more than a market rate.  Hence, the Tribunal found that part of the management charges comprised some of the running costs and depreciation for the cars and so held that the company had made the cars available to the directors.

The outcome appears to be dreadful.  The existing disallowance for partnership profit for their private use remains but they now also face personal tax on benefits in kind and a company NIC cost.

Any planning arrangements around cars may need to be reviewed.



Date: 5th September, 2012
Author: Cathy Corns


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