If your limited company incurs costs or provides assets for the private use of directors or employees, or reimbursed expenses not wholly and exclusively for the purpose of your trade are incurred, they are classed as a Benefit in Kind. This means additional Income Tax is payable by you, and Class 1A National Insurance contributions are payable by your limited company at a rate of 13.8%. In order to establish whether an expense will attract a Benefit in Kind charge the following points should be considered.
Duality of purpose
Duality of purpose occurs where an item purchased by you or your company has both personal and business use. HMRC does not regard any expenditure that has a ‘dual purpose’ element to be allowable for tax. For example, a suit or dress purchased to wear at work has a dual purpose in that you need to wear clothes for work anyway, therefore tax relief would not be available on this expense.
There are many scenarios where expenses paid on your behalf would incur a Benefit in Kind. Any item which is for your personal benefit or which has dual purpose falls into this category. It is impossible to list all of these but we have listed below the most common examples and the tax treatment applied to each of them.
1. Car & Fuel Benefit
Where your limited company purchases or leases a car and pays for associated expenses, including the finance and running costs, you are treated as having the personal benefit of using a company car and there will be a taxable benefit on you as an individual. This is calculated as a percentage of the market list price of the car, based on the CO2 emissions. The list price is calculated as the market list price of the car when new, not the price you pay for the car, together with any extras added to the car. Some dealers sell new cars for less than the nationally recognised list price so you should be aware of this when making the purchase.
Even where you use the car solely for business use there may still be a Benefit in Kind chargeable, as you theoretically have the ability to use the car personally. The only case where this does not apply is pool cars where more than one person uses the company car and it is kept locked on the works premises. HMRC pay particular attention to pool car arrangements and whether they represent a Benefit in Kind.
There will also be an additional Benefit in Kind if the company pays private fuel costs. This is calculated as £22,200 x a percentage applicable to the car based on its CO2 emissions for 2016/17. The charge does not apply to certain environmentally friendly cars.
If your limited company has purchased a company car you need to notify HMRC by completing the form P46 (car).
2. Assets transferred at less than the market value
If your limited company transfers an asset to you for less than its stated market value, a Benefit in Kind will be calculated on the actual value of the asset less the value that you paid at the time the transaction took place. An example of this is where a company owns a vehicle and arranges to sell it to you for a sum deemed considerably less than its actual worth.
3. Payments made on your behalf
Should your limited company settle a liability on your behalf such as your personal tax liability, or a mobile phone bill where the contract was held in your name, a Benefit in Kind charge should be calculated on the value of the settlement.
4. Directors’ Loans
Overdrawn director loan accounts can be caught within the Benefit in Kind rules. Where your company loans are an amount greater than £10,000 to you, interest free, it is classed as a beneficial loan. Income Tax and National Insurance is charged accordingly. The amount chargeable is calculated by averaging the amount of loan, by reference to the opening and closing balances in the year, and multiplying this amount by the appropriate official rate of interest for the tax year (this is published by HMRC). However, directors may elect for a more complex but accurate method of calculating the benefit from interest free or low interest loans if it is beneficial for them to do so.
There are many examples of other expenses paid by your limited company that attract a Benefit in Kind charge. This list is not meant to be exhaustive:
- Medical Insurance
- Suits and professional clothing
- Home telephone rental and Internet costs
- Mileage paid where the sum exceeds the HMRC guidelines