Written by Ray Coman
A motorbike is often the most practical vehicle for a business to use. The tax consequences of using motorbikes for work are investigated in this article.
Deducting motorbike costs from profits
Since 6 April 2009, a motorbike has not been considered a car for the purposes of capital allowances. Within the annual investment allowance (of £25,000 for 2012-13), a business should be able to deduct the full 100% of the vehicle cost from taxable profits (rather than the less beneficial rates of 8% or 18% per year for cars.) If there is some private use then the annual allowance would be reduced accordingly. For instance, if the bike has a value of £3,000 and is used 25% for personal use then only £2,250 could be deducted from profits for tax purposes.
Selling the motorbike
Any proceeds on disposal of assets used in the business are added back to tax adjusted profits. Any private use percentage is not added back to profits. For instance, if the motorbike is sold, or part exchanged, for £500 and is still used 25% for private purposes, then £375 would be added to taxable profits in the year of sale.
A motorbike is also not considered a car for VAT purposes as it only has two wheels. For cars, input VAT can only be recovered if there is no possibility of the assets being used for business. This stipulation would typically be reflected in the insurance policy. In practice therefore VAT is typically only recovered by businesses such as taxis, driving schools, car hire services and car dealers.
By contrast, there are no special rules that apply to the VAT treatment of motorcycles. Full VAT could be recovered if there was in fact no business use, even if of whether it had been made available for work purposes. If the motorcycle has been used for private purposes, then the amount of VAT to recover would be reduced by the proportion of non-business use. For instance, if a motorcycle cost £10,000 plus VAT of £2,000 and was used 25% for private purposes, then £1,500 could be recovered as input VAT. Miles travelled would typically be the most reliable method for estimating any business use proportion. Incidental or negligible private use can be ignored.
If the business is not VAT registered then there is the benefit that motorcycle helmets are zero rated for VAT purposes.
Benefit in kind
For the purposes of calculating the benefit in kind a motorcycle is not classed as a car.
A taxable benefit would arise on an employee or director with private use of a company owed motorbike. The benefit is calculated on the cash equivalent of the vehicle, and in most cases this is considerably lower than the cash equivalent for a car. To the extent that any VAT recovery is restricted, for instance due to private use, the cost for benefit in kind purposes would include VAT.
In practice, a benefit in kind charge would result in further annual compliance, through the completion of a form P11d. A benefit gives rise to Class 1A employers' national insurance (of 13.8% for 2012-13.) Unlike employers' national insurance on pay, there is no lower limit below which the benefit would be taxable. As an advantage to the motorcyclist, there is no employee's national insurance on the benefit in kind.
The cash equivalent for a motorbike is the same as for any other assets made available to employees, where special rules do not apply. The cash equivalent is, therefore, the highest of 20% of the market value when first provided as a benefit and any hire charges paid by the employer. The cash equivalent is reduced proportionately if the motorcycle is only made available for part of the year.
If the annual running costs, such as servicing, maintenance, road tax, insurance and fuel, are paid for by the company there is an additional benefit, equal to 100% of these costs.
Car, motorcycle and bicycle parking is not a taxable benefit. Cycle helmets and safety equipment are not taxable benefits. Protective clothing in general is an allowable expense, and on this basis may extend to health and safety equipment related to the use of a motorbike for work. The tax treatment of motorcycle clothing would vary depending on each case.
To illustrate the above, if the value of the motorbike was £5,000, and the annual running costs were £1,500, the annual benefit in kind charge would be £2,500. The company would have to pay 13.8% national insurance, i.e. £345. In addition to the employers' NI, the cash equivalent of the assets would be treated as employment earnings. The income tax treatment is explained further in this report.
If the motorcycle is sold or transferred to an employee, there is a benefit equal to the market value, less any amounts paid by the employee. If the donated bike had previously been provided for private use, the benefit is equal to the market value. As an exception, a higher amount would be considered to be a benefit, if the market value when first provided less amounts already taxed as benefit, is higher than market value. For instance a motorbike worth £10,000 is provided to an employee for two years and then transferred to the employee at the start of the third year when it has a value of £3,000. The benefit in kind in year one is £2,000, in year two is £2,000 and in year three is £6,000. If the market value at the start of year three were £7,000, then the benefit would be £7,000.
An employee would be subject to income tax on the cash equivalent of the motorbike at the highest marginal rate. As a result, a basic rate taxpayer would pay 20% less tax on their benefit than a higher rate taxpayer (using rates effective for 2012-13.) Where an employee is a higher rate taxpayer, the case strengthens for owning the motorcycle privately, and deducting motor costs for business use from employment earnings. The main reason is that the corporation tax, VAT and national insurance implications are not likely to be affected by the income tax liability of the employee. Employment benefits are generally taxed at source via adjustment to an employee's tax code.
Unlike the private use rules for capital allowances and VAT recovery, there is no reduction in benefit depending on the private use. Increased business use would tend to lead to higher motor expenses that can be deducted from tax. However, the cash equivalent of the benefit is not reduced according to the proportion of private use.
Avoiding benefit in kind
There are various methods for avoiding the national insurance and compliance consequences of providing a benefit in kind.
The employee or director could own the vehicle personally, and deduct motor costs from their employment earnings. Capital allowances could be deducted from taxable income, however, employees and directors cannot register for VAT, so there would be no opportunity to recover VAT. If the capital allowance would not be particularly generous, for instance because the bike has a low value and is expected to have business use for a relatively long period, then the mileage allowance is a suitable alternative. In most cases tax relief on motor expenses and capital allowances would be obtained via the Tax Return, however where the employee does not complete a Tax return, the tax relief would be obtained by a stand-alone claim.
Where it is practical to own two vehicles, it may be an advantage for instance to have a motorbike for work and a car for social and leisure use. There may be associated non-tax advantages to this set up, for instance related to parking and insurance. Where private use is incidental, there would be no taxable benefit.
If the business operates as a non-company entity, either sole trader, partnership or LLP, there would be no benefit on kind to the partners, although there would still be a potential benefit in kind on assets provided to employees. Certain businesses operate as both partnerships and companies. More complex structures may have certain tax and other advantages, although the related accountancy costs are likely to be higher.
For a one-person company, a director is typically receiving sufficient salary to fully utilise the personal allowance. Any salary would have to be increased by the amount of the capital allowance which would give rise to employers' national insurance. The saving in Class 1A by owning a motorbike privately would be equal to the liability in Class 1 NICs through higher salary. For contractors and other self-employed individuals using a company, greater tax advantages would arise from a company ownership. The advantage would be clearer where there is exclusive business use of the motorbike.
Where the motorbike is privately owned, the employee can opt to use a mileage allowance to obtain tax relief for business use. The allowance is an alternative to deducting capital allowance and motor costs. The mileage allowance is 24 pence per mile (for 2012-13). If the employee is reimbursed the allowance, then any shortfall in the rate is tax-deductible and any surplus is taxable. This mileage allowance is the maximum amount on which tax relief can be obtained and includes all costs except for parking, congestion charge and toll gate costs.
In summary, the tax relief for using a motorbike for business purposes tend to be far greater than for using a car, and the benefits also improve for a sole trader or partnership over a company. As a work vehicle, a motorbike could be considerably more tax efficient than a car. However, where there is private use, it is still likely to be more beneficial for the employee to own the vehicle separately.
Coman & Co. are specialists in accounting for privately owned business. Please contact us for an initial consultation.