The company entered into the lease agreement with the provider and the company pays the monthly lease premiums direct to the provider. The monthly lease payments are then debited to the Director’s Loan Account (DLA). Do these payments reduce the director’s company car BIK?“
A: The only payments that can reduce the company car BIK are capital contributions and payments for private use.
The legislation at Section 121 ITEPA 2003 provides the method of calculating the cash equivalent of the benefit of a company car
Step 3
Make any deduction under section 132 for capital contributions made by the employee to the cost of the car or accessories.
Step 8
Make any deduction from the provisional sum under section 144 in respect of payments by the employee for the private use of the car.
Capital Contributions
As per section 132 ITEPA 2003, capital contributions made by an employee towards the cost of the car and/or accessories reduce the price of the car for tax purposes up to a limit of £5,000.
By its very nature, you would expect to see the payment(s) made at or about the time when the car or accessory in question is provided. An example of a capital contribution would be the director/employee personally paying the deposit for the company car out of their own pocket.
- If the payment satisfies the condition, the reduction to the price of the car is the lower of
£5,000 and - the total of the capital sums qualifying for deduction, i.e. the amount the employee/director actually paid
The reduction can be made for the tax year in which the capital contribution is made and all subsequent tax years in which that employee has that company car.
In this case, the payments debited to the DLA are the regular monthly lease payments. Lease payments are revenue contributions, not capital contributions and would not reduce the director’s company car BIK.
HMRCs guidance can be found at EIM24000 at EIM24350 onwards. The Croner-i Direct Tax Reporter guidance on capital contributions is at 415-500.
Payments for Private Use
As per section 144 ITEPA 2003, payments a director/employee makes towards the private use of their company car can reduce their company car BIK. As per the legislation, a deduction can only be made if, as a condition of the car being available for the employee’s private use, the employee
(a)is required in the tax year in question to pay (whether by way of deduction from earnings or otherwise) an amount of money for that use, and
(b)pays that amount on or before 6 July following that tax year.
The payments would usually be made
• by a direct payment or
• by deduction from salary or
• by a suitable debit to the director’s loan account
It is worth noting that payments deducted from gross pay (before tax and NIC) would not count as a payment. Only payments deducted from net pay (after tax and NIC) would count as a payment.
It is also worth noting that even if the private use payments reduce the car BIK to zero or a negative amount, there is still a car BIK, it is just that the car BIK is zero. So, there would still be a car fuel BIK if fuel were provided for private journeys.
Payments for the private use of the car should also not be confused with any payments made by the director/employee towards their fuel for private journeys.
If HMRC open a compliance check, they will ask for evidence to prove that the conditions for a private use deduction have been met. They would ask to see all relevant correspondence, notes or written instructions given to the employee by the person providing the car.
HMRCs guidance can be found at EIM24000 starting at EIM25250. The Croner-i Direct Tax Reporter guidance on payments for private use is at 415-650.
