Sanity check - Ltd Co company car "dividend sacrifice"

[Director76]

Hi All - first post, I've trawled the search but can't find anything to help, so thought I'd pick the collective brains.

I have asked my accountant this, and whilst he's usually very good he seems reluctant to get off the fence on this one! I'm owner/director of small firm and looking at ways to be more tax efficient on dividends, which were payable at the 32.5% rate this year and will likely be for the foreseeable.

I'm exploring whether taking some money which would otherwise be payable as part of the dividend in the form of a low emission hybrid company car. I've got modelling spreadsheets full of numbers behind this but would like to share some headline figures please (the costs, BIK, NIC, VAT etc are 'checked' by the accountant, so assuming correct). I'm ignoring mileage as this would effectively be a perk car, with long distance company mileage done on another privately owned small diesel.

I'm comparing the cost getting a hybrid version of the car (a Volvo) on a business contract hire, vs a diesel version on personal contract hire. My calcs seem to show that it is significantly advantageous to go for the company car, but this is at odds with almost all the general advice out there....hence I'm questioning my logic.


A. Personal cost / tax position (private lease car diesel)
Car lease cost net (6 + 35) +£20,440.55
VAT payable on whole lease +£4,088.11
Car expenses (net) +£3,215.83
Vat payable on expenses +£313.17
SUB-TOTAL +£28,057.66

income tax payable on gross dividend equivalent to privately funded car (32.5% rate) (i.e. a gross dividend of +£41,566.90) = +£13,509.24

A. GRAND TOTAL +£41,566.90

B. Company cost /tax position (hybrid)
Car lease cost net (6 + 35) +£26,185.88
Reduction in corporation tax on net lease (19%) -£4,975.32
Non-recoverable VAT (50%) +£2,618.59
Car expenses (net) +£3,515.83
Reduction in corporation tax on net expenses (19%) -£668.01
NIC contribution on BIK (13.8%) +£3,695.63

B. GRAND TOTAL +£30,372.61

C. Personal tax position (Company car hybrid)
Income Tax on BIK (40%) +£10,711.98
Sub-total +£10,711.98

Reduction in income tax through reduced dividend equivalent to privately funded car (32.5% rate) -£13,509.24
Income tax payable on dividend equivalent to fund BIK tax charge (32.5%) +£5,157.62
C. GRAND TOTAL +£2,360.36

SUMMARY POSITION OVERALL
Diesel private car - company cost (£0) + personal total cost (£41,566.90) = +£41,566.90
Hybrid company car - company cost (+£30,372.36) + personal tax position (+£2,360.36) = +£32,732.97

Taken in the round, a hybrid company car could be £8,833.93 cheaper over three years than the cheaper diesel equivalent (for a more expensive, and arguably interesting car).

I'm sure there must be a flaw in my logic here...so what am i missing...?!
Cheers all, any thoughts welcome

[robbob]

I have asked my accountant this, and whilst he's usually very good he seems reluctant to get off the fence on this one!

I don't blame him its very technical, easy to omit something material and takes alot of time to crunch the full numbers - give me a tax return any day of the week rather than this question.

Anyway this is like some kind of head scratching nightmare - where is my fancy spreadsheet that sorts this all out (oops dont have one to hand)


i am struggling to get my head round this bit

Reduction in income tax through reduced dividend equivalent to privately funded car (32.5% rate) -£13,509.24

example one 41k spent nowt left - simples

example 2

business has spent 30,372 - simples ignoring minor issues and factoring in all rebates received ref vat and corp tax


you however you still have a 10.7k tax bill to pay personally thats a real extra cost to pay - the business would need to pay you dividend of 15.868 k - to fund the personal tax bill and also pay the extra tax due on the dividend voted.

so is that not total cost 30.3k company and 15.8k paid across in personal tax total cost 46.1k

its late i need watermelon and my head is starting to hurt so take my calcs with a pinch of salt tonite.

Note class 1 a when paid will reduce profits subject to corp tax and similar principle applies for non allowable vat payment (i think from memory)


i am presuming all car benefit escalator increases have been factored in !!!!!!!! - benefit charge is nowt like one years charge now * 3 for 3 years .

[Director76]

I don't blame him its very technical, easy to omit something material and takes alot of time to crunch the full numbers - give me a tax return any day of the week rather than this question.

I'll let him off then - he's very good to me!

Anyway this is like some kind of head scratching nightmare

You're not kidding, I've been going round in circles on this for several weeks

....i am struggling to get my head round this bit

Reduction in income tax through reduced dividend equivalent to privately funded car (32.5% rate) -£13,509.24

Me too!...my thinking was that personally I'm reducing my dividend tax liability by the amount of tax that I'd otherwise have to pay (£13,509.24) to take enough dividend to personally fund and run the diesel equivalent car (i.e. £41,566.90). Because the company is paying for the car, the company profit is reduced thus a smaller dividend would be taken. This theoretical gain is reduced though (by £5,157.62) because I couldn't reduce the dividend entirely by the personal car cost - as you say I have the real cost of a £10,711.98 income tax liability on the the BIK to fund.

you however you still have a 10.7k tax bill to pay personally thats a real extra cost to pay - the business would need to pay you dividend of 15.868 k...so is that not total cost 30.3k company and 15.8k paid across in personal tax total cost 46.1k

Yes! I think you are correct (I hadn't factored that in) so when taking your next point into account (which I also hadn't factored in)

Note class 1 a when paid will reduce profits subject to corp tax and similar principle applies for non allowable vat payment

It does alter the final calculation:

B. Company cost /tax position (hybrid)
Car lease cost net (6 + 35) +£26,185.88
Reduction in corporation tax on net lease (19%) -£4,975.32
Non-recoverable VAT (50%) +£2,618.59
Car expenses (net) +£3,515.83
Reduction in corporation tax on net expenses (19%) -£668.01
NIC contribution on BIK (13.8%) +£3,695.63
Corporation tax savings from Class 1a NIC and irrecoverable VAT (19%) -£1,119.70
Dividend cost to provide funds to cover personal tax bill +£15,869.60

B. GRAND TOTAL +£45,042.51 (previously +£30,372.61)

so...

NEW SUMMARY POSITION OVERALL
Diesel private car - company cost (£0) + personal total cost (£41,566.90) = +£41,566.90
Hybrid company car - company cost (+£45,042.51) + personal tax position (+£2,360.36) = +£47,402.87

Now it appears the total cost of a hybrid company car is +£5835.97 more than the diesel personal car equivalent.

But...that is maybe not so surprising as there is £12,050 difference in list price. I'm rather drawn to a hybrid (it aligns with our company line of work...) so, out of curiosity, if I re-base the calcs, and compare the total private cost of leasing the hybrid version including tax on the dividend to pay for it (+£51,780.82), and then 'claim' that tax amount as a personal 'dividend sacrifice' saving (i.e. -£16,828.77, rather than -£13,509.24 in the original calculation) it all flips around again making a company hybrid appear to be £7,697.47 cheaper than a privately leased hybrid (nb. the basic net private vs business monthly lease cost is the same). I can share the full calc if anyone is interested


And finally...

i am presuming all car benefit escalator increases have been factored in !!!!!!!! - benefit charge is nowt like one years charge now * 3 for 3 years .

Yes - all very accurately I believe 9-13-16-14% BIK from 01.12.17 - 30.11.20

Thank you very much for your response, it much appreciated!

[Director76]

Right - i think my revised calc from yesterday was wrong The entire dividend to cover the employees BIK tax is not a cost in the model when the net dividend flows to the owner/shareholder; the costs to the company comprise either taxes or supply of equipment / services.

I've gone back to first principles and modelled the flow of money from pre-tax profit sum down for each scenario to £ zero, i.e. fully spent on car provision either private or company.

Here is a pdf file showing the flow and numbers graphically:

https://1drv.ms/b/s!AkUZ3wM4oMRdgvNIUDaMKoqEnYFq7w

Numerically I think it is:

Diesel private lease
Company
£51,317.17 (pre-tax profit) minus 19% CT (£9,750.26) = £41,566.90 (net profit) - paid as a dividend to owner.
Total tax and expenditure for business = £9,750.26
Personal
£41,566.90 dividend received, subject to tax at 32.5% (£13,509.24); net dividend = £28,057.66
Total cost private lease and running for 3 years = £23,656.38 + £4,401.28 (VAT) = £28,057.66
Balance = £0.
Total personal costs £41,566.90

Total cost company + personal = £51,317.17 (£9,750.26 + £41,566.90), comprising £27,660.78 in taxes and £23,656.38 to suppliers.

Hybrid company lease (more complicated!)
£51,934.52 (pre-tax profit) minus Class 1A NIC (£3,695.63), minus irrecoverable VAT (£2,618.59), minus £29,701.71 (net total cost business lease and running for 3 years) = £15,918.58 (reduced pre-tax profit)
£15,918.58 (reduced pre-tax profit) minus 19% CT (£3,024.53) = £12,894.05 (net profit) - paid as a dividend to owner.
Total tax and expenditure for business = £39,040.46
Personal
£12,894.05 dividend received, subject to tax at 32.5% (£4,190.57); net dividend = £8,703.49
BIK tax @ 32.5% highest marginal rate = £8,703.49
Balance = £0
Total personal costs £12,894.06

Total cost company + personal = £51,934.52 (£39,040.46 + £12,894.06), comprising £22,232.81 in taxes and £29,701.71 to suppliers.


So slightly higher total cost for the business run hybrid (delta = £613.75) but less paid out to the tax man collectively between company and individual.

This feels more logical and removes the virtual tax savings I was trying to factor into my last model. The PDF on the link has a mirror calc showing private lease hybrid vs business lease hybrid and that shows a big saving on the company route.

The $m question....what have I missed, what gaping hole is there in my non-accountants logic!!

Thanks again