General Changes in Taxation System - Essay Example

………………………………………………………………………….xxxxxx …………………………………………………………………….xxxxxx …………………………………………………………………………xxxxx ………………………………………………………………………..xxxxx @2012 Taxation Q 1.1 General changes proposed for taxation of the company cars, for the company and for employees, for the next few tax years. According to Deloitte, there are several of changes that the government has proposed that will influence the cars belonging to the company as well as the private fuel used by both employees and employers. These changes aim at increasing further the tax charge on cars with high emissions of CO2. Back in 2002, the government introduced new reforms on company cars. The company car tax reform encourages people to buy of choose cars with lower levels of carbon dioxide (CO2) emissions. Purposely, the reforms are aimed at tackling changes in climate and greenhouse gas emissions. Also, it also encourages manufacturers to introduce greener cars. As a result, businesses should evaluate their current fleet arrangements and especially those that emit carbon in order to minimize costs. The Government also aims at increasing its revenue (Melville 2012). It has already estimated additional cumulative tax revenue of c?3bn over five years if changes come to effect. The changes will affect three categories of people. To begin with, employers purchasing or leasing cars that are made available to their staffs for business and personal use. Then, employees provided for with a company car and fuel for private use. Changes on cars with private fuel benefits took effect as from April 2012 while changes on capital allowance and lease rental restriction consequences will take effect from April 2013 a. Changes on company car tax rates In the motoring industry, the government has announced for a further three tax years up to 2016/17. In years 2014/15, the appropriate percentage of a company car's price which is subject to tax will go up by 1% point compared to the previous years for those cars which emit more than 75g/km of CO2, to a maximum of 35% and by two percentage points, to a maximum of 37 per cent in both years 2015/16 and years 2016/17 (Melville 2012). In year 2015/2016, the special rates that exist for zero emission and ultra low carbon cars will be changed to 13% while in years 2016/17, the rate will be set to 15%. As from April 2016, supplement for diesel cars which is 3% will be removed. For company cars made available for private use, the government announced that specific security enhancements will be excluded as accessories for the purpose of calculating cash equivalent benefit. This change is already being applied as it took effect from 6 April 2011. b. Changes on Private fuel benefit As from April 2012, the multiplier for calculating the cash equivalent free fuel benefit on company cars provided to employees has been increased from ?18,800 to ?20,200. In addition, a further increase to this multiplier has been proposed by the government for 2013-14 by 2% above the rate of inflation. c. Changes on Capital allowances and lease rental restriction According to HMRC, first year capital allowance on the car expenditure which is usually 100% has its period extended by the government to April 2015. On the other hand, the threshold on emissions will decrease from 110g/km to 95g/km starting April 2013. Also, as from April 2013, the threshold for expenditure on cars to fall into the main pool which is 18% per annum, rather than the special rate pool of 8% per annum decreases from 160g/km to 130g/km. On lease rentals for cars with over 130g/km emissions, tax relief available to employers is restricted at 15%. On lease rentals for cars with over 130g/km emissions, tax relief available to employers is restricted at 15% (Melville 2012). d. Changes on Vehicle Excise Duty (VED) As from April 2012, VED rates were increased in line with the Retail Prices Index. A report from Deloitte points out that the government will consider whether to reform VED calculations over the medium term by seeking motoring groups’ views first. Q 1.2 Total cost to the company in purchasing and running the vehicle   ? Initial price 18,000 discount @ 15% (2,700)   15,300 Add:   Tax expense 120 Insurance expense 400 other running costs 300 Total cost 16,120     Capital allowance According to HMRC, Capital allowance is a deductible expense for tax purposes, unlike depreciation. Assets reduce their value once they are put into usage. Therefore, the cost of the capital asset is written off against taxable income. In computing capital allowance for business cars, the guidelines below are considered specifically for cars bought after 6th April 2012 For cars with CO2 emissions above 160 g/km, their expenditure is included in the special rate pool and attracts a 10% writing down allowance ((WDA). For cars with CO2 emissions of 160 g/km or below, their expenditure attracts 18% written down allowance (WDA) as part of the main pool. For cars with CO2 emissions of 110g/km or less qualifies for 100% allowance, but they should be new cars and not second –hand. The car is 139g/km which is less than 160g/km Capital allowance = 16,120*18%   = 2,902 “Benefit in kind” have to be calculated for tax purposes when an employer provides a company car, regardless of whether fuel is provided for private use to the employee. Summary of details:   Year of taxation: 2012/2013 Availability of the car during the tax year: From: 06/04/2012     To: 31/03/2013 Number of unavailable days in the period above: 5   List price (including VAT and accessories): ?15300   Capital contribution of employees: ?   Payment done by employees towards private use: ?500   Date first registered: 1998 onwards   Fuel type: Petrol     Approved CO2 emissions figure: 139 Q 1.3 It will be cheaper for the company to provide the car for a number of reasons. One, the cost of the car will be subject to capital allowance which is a deductible expense against taxable income. The company can also provide fuel for private use which attracts tax on car fuel benefit. Therefore, tax payable by the director is reduced (Melville 2012). The cost for the car will be as follows:   ? Initial price 9,600   9,600 Add:   Tax expense 0 Insurance expense 500 other running costs 300 Total cost 10,400     The car to be bought has Carbon dioxide emission of 99g/km which is below 110g/km. therefore the capital allowance will be 100% on the cost of the car. Q 2.Company vans Currently the drivers use the vehicle for business purposes as they have signed a declaration to that effect. If the driver is given the van to move house, this will entail private usage. The other driver is also using the van for personal use as he takes items to the dump site over the weekend. Private usage of company vans attracts tax charge. For company vans made available to a director or an employee earning ?8,500 in a year or to a member of their family or household for private use, there is a tax charge. As from 2007/08, a further tax charge is made if free or subsidized fuel is provided for private use in a company van (Melville 2012). Until years 2004/05, a company van that is provided for personal use, regardless of whether actual or no actual use was made on it. When the drivers’ salaries are below the threshold of ?8,500 in a year, no tax is charged on the private use of the company van Q3. Provision of Staff Lunches Meals provided at a canteen are open to all staff at a free cost or subsidized cost at a particular location and not provided under any salary arrangements. No tax or NICs payable on meals offered at a canteen. In our case, the company wants to offer free meals to the directors and senior managers on a separate dining room. When this is introduced, the effect of tax will be felt. This is because this is a different category of other meals and not meals offered at a canteen. Other meals are characterized by: Meals are only available to specific employees particularly the directors or senior managers and not to the general employees Meals are provided on an unreasonable scale. For example, they involve an elaborate menu Meals are provided separately. For example, at a restaurant or a bar or dining table The system that the company is contemplating has all these characteristics. The tax will be as follows: No reporting requirements, tax or NICs for employees earning at a rate of less than ?8,500 rate per year, you have: In the case of employees or company directors who earn a rate of ?8,500 or more per year, reporting and tax or NICs are mandatory. The report is to be shown on form P11D - section M while tax will be shown under Class 1A NICs on the value of the benefit. References Melville, Alan, 2012. Taxation: Finance Act 2012. Pearson Education, Limited Read More