Uninsured Drivers and the chaos they cause

A real example

I write from bitter personal experience. Last year a 16 year old youth was permitted to drive a car by another slightly older qualified driver who was named on the insurance policy covering that vehicle. The 16 year old was over the limit and lost control of the car on a bend demolished a garden wall ending up in our front garden. The car was obviously written off and the total damage to our property and a car parked in the drive was in the region of £7 – £8K. Add the cost of writing of the third party car and its recovery and the time spent by the third party's insurer, our household insurer and our car insurer, the total costs exceed £10K. The wrangling is still going on as the third party insurer is considering action against the named driver and the youth but do not expect to make any significant recovery. Ultimately the claim will probably be met through the Uninsured Drivers Fund, something every insurer pays into and is obviously then included in the premiums that we all pay.

What would I do

Where  underage drivers cause accidents they should be made to pay. However young unisnsured drivers say aged 16  cannot be expected to have the money to pay. Why ultimately should everyone else?

I would therefore arrange for the Unisured Drivers Fund to loan the Uninsured driver the cost of the claim. If they were an adult and working then as part of the criminal court prosecution, I would through the court system set an attachment of earnings order to the uninsured driver, so they had to pay back the loan to the Uninsured driver fund together with interest and administration costs. If they could not pay then the normal recovery action should be carried out culminating in seizure of goods and ultimately bankruptcy.

For a young uninsured driver with no income, I would treat the loan from the Uninsured Drivers Fund similar to a Student loan except that once they were working the repayment would be made in the same way as an attachment of earnings order. Again interest and administration charges would be passed on until the loan was repaid.

Why is this idea important?

A real example

I write from bitter personal experience. Last year a 16 year old youth was permitted to drive a car by another slightly older qualified driver who was named on the insurance policy covering that vehicle. The 16 year old was over the limit and lost control of the car on a bend demolished a garden wall ending up in our front garden. The car was obviously written off and the total damage to our property and a car parked in the drive was in the region of £7 – £8K. Add the cost of writing of the third party car and its recovery and the time spent by the third party's insurer, our household insurer and our car insurer, the total costs exceed £10K. The wrangling is still going on as the third party insurer is considering action against the named driver and the youth but do not expect to make any significant recovery. Ultimately the claim will probably be met through the Uninsured Drivers Fund, something every insurer pays into and is obviously then included in the premiums that we all pay.

What would I do

Where  underage drivers cause accidents they should be made to pay. However young unisnsured drivers say aged 16  cannot be expected to have the money to pay. Why ultimately should everyone else?

I would therefore arrange for the Unisured Drivers Fund to loan the Uninsured driver the cost of the claim. If they were an adult and working then as part of the criminal court prosecution, I would through the court system set an attachment of earnings order to the uninsured driver, so they had to pay back the loan to the Uninsured driver fund together with interest and administration costs. If they could not pay then the normal recovery action should be carried out culminating in seizure of goods and ultimately bankruptcy.

For a young uninsured driver with no income, I would treat the loan from the Uninsured Drivers Fund similar to a Student loan except that once they were working the repayment would be made in the same way as an attachment of earnings order. Again interest and administration charges would be passed on until the loan was repaid.

HMRC Investigation Commonsense please

As a professional dealing with HMRC on a daily basis, many do a good job on a daily basis. However, when it comes to Tax Investigations into Accounts the same old issues come up time and time again. The main bugbears are:-

  • Stock and Work in Progress. Invariably HMRC try to change a basis of a valuation particularly where a professional independent valuation has not been obtained on the grounds of cost. It they successfully change the basis, then the opening and closing valuations are uplifted. The result is very actual little increase in profits.
  • Debtors. These are receipts that have not been received at the year end but the work done was in the year. Technically HMRC are correct under accounting principles. If the work was done in the year then it should be recognised in the Accounts for that year. However many businesses that are under Cash Accounting for VAT only record income when received not when the work was done.
  • Private Use. Where a proprietor of a small business works from home it is inevitable that there will be mixed use of domestic services. Many an hour has been spent arguing about proportions.

In the case of the first two the issue is one of timing. Over the lifetime of a business all the income of that business is recorded and taxed. The simplification of Cash Accounting has not been extended to Direct Taxation.  The third is one of cost effectiveness. Is it really worthwhile arguing? Why should Joe Public have to concede that it is not. I would introduce the following Investigation standards.

  • Where a business is either very small or is under Cash Accouting I would exclude Stock, Work in Progress, Debtors and Creditors from any HMRC Investigation. The main check should be that income is being declared.
  • For Private Use I would introduce de minimus limits whereby HMRC will not even bother looking at expenses based on turnover of the business and average bill levels and for payments over that level accept a split that the Taxpayer and his Accountant can demonstrate is a just and reasonable split between business and private use.

 

Why is this idea important?

As a professional dealing with HMRC on a daily basis, many do a good job on a daily basis. However, when it comes to Tax Investigations into Accounts the same old issues come up time and time again. The main bugbears are:-

  • Stock and Work in Progress. Invariably HMRC try to change a basis of a valuation particularly where a professional independent valuation has not been obtained on the grounds of cost. It they successfully change the basis, then the opening and closing valuations are uplifted. The result is very actual little increase in profits.
  • Debtors. These are receipts that have not been received at the year end but the work done was in the year. Technically HMRC are correct under accounting principles. If the work was done in the year then it should be recognised in the Accounts for that year. However many businesses that are under Cash Accounting for VAT only record income when received not when the work was done.
  • Private Use. Where a proprietor of a small business works from home it is inevitable that there will be mixed use of domestic services. Many an hour has been spent arguing about proportions.

In the case of the first two the issue is one of timing. Over the lifetime of a business all the income of that business is recorded and taxed. The simplification of Cash Accounting has not been extended to Direct Taxation.  The third is one of cost effectiveness. Is it really worthwhile arguing? Why should Joe Public have to concede that it is not. I would introduce the following Investigation standards.

  • Where a business is either very small or is under Cash Accouting I would exclude Stock, Work in Progress, Debtors and Creditors from any HMRC Investigation. The main check should be that income is being declared.
  • For Private Use I would introduce de minimus limits whereby HMRC will not even bother looking at expenses based on turnover of the business and average bill levels and for payments over that level accept a split that the Taxpayer and his Accountant can demonstrate is a just and reasonable split between business and private use.

 

P11d Return of Expenses & Benefits – Directors Beneficial Loans

The P11d(b) Return of Expenses & Benefits in kind is an annual Return that employers have to complete to declare any Taxable Benefit in Kind of Expense payments paid in a Tax year. This has to be returned to HMRC by the 6th July and any resulting Class 1A National Insurance Contributions paid by 19th July. Whilst many of the questions are factual and should pose no problem from a Tax point of view, there is one area that can be very difficult to deal with.

This is where in close companies Directors tend to use a Current Account with the Company to meet their personal expenditure. The idea is that an Annual Dividend is declared (but not withdrawn from the Company) which in theory is used to meet those personal expenses. Once the Accounts are produced a further dividend is declared to top up the Current Account. Problems arise when the Director spends more than what is in the Account and it becomes overdrawn. From the Company point of view a Section 419 liability is incurred which is payable if the excessive borrowing cannot be repaid within 9 months of the end of the Accounting year when the Corporation Tax liability is due. If not cleared within 9 months the Section 419 liability is repayable 9 months after the Accounting year in which the excess borrowings are cleared.  Therefore apart from the fact that a Company has to wait for its Section 419 refund the system is workable.

The difficulty arises in that the excessive borrowings are until repaid an interest free loan, and that unless the total borrowings are below £5,000 they are reportable as a benefit in kind and the equivalent of the interest is subject to Class 1A National Insurance Contributions. The difficulty is that many small Companies do not know their way around the benefits code and have great difficulty in quantifying the total of any directors personal expenditure on a tax year basis and in many cases will not be aware that they have spent too much many months later when their Accountant tells them after the Accounts are done and also sometimes has to inform them that the Company has not made sufficient profits to clear the loan by way of dividend. In those cases where a beneficial loan has not been declared on the P11d Return months earlier, they become liable for a late declaration penalty and interest on late paid Class 1A NIC and will also likely to be the target of an Employer Compliance Review by HMRC.

To remove this difficulty which causes problems for Close Companies, their advisers and HMRC, I would take the following action

  1. Remove the question on Beneficial Loans to Directors and family members of Small & Medium Close Companies from the P11d Return.
  2. Amend the Company Tax Return so that Beneficial Loans for Small & Medium Companies can be declared on an Accounting year basis including a charge equivalent to the Employer's Class 1A rate in force for the Financial Year that ends on the 31 March in which the Accounting year ends in on the Return.
  3. I would give the Company two options: Either gross up the value of the beneficial loan at the marginal rate of the Director concerned for the tax year that ended in the year that the Accounts cover and add the amount to the total tax payable through the Corporation Tax system, so that in effect the Company is meeting the personal Tax liabilities of the Director or for the director to declare the value of the beneficial Self Assessment Tax Return for the Tax Year that ends in the Company Financial Year (by amendment without penalty if appropriate)

Why is this idea important?

The P11d(b) Return of Expenses & Benefits in kind is an annual Return that employers have to complete to declare any Taxable Benefit in Kind of Expense payments paid in a Tax year. This has to be returned to HMRC by the 6th July and any resulting Class 1A National Insurance Contributions paid by 19th July. Whilst many of the questions are factual and should pose no problem from a Tax point of view, there is one area that can be very difficult to deal with.

This is where in close companies Directors tend to use a Current Account with the Company to meet their personal expenditure. The idea is that an Annual Dividend is declared (but not withdrawn from the Company) which in theory is used to meet those personal expenses. Once the Accounts are produced a further dividend is declared to top up the Current Account. Problems arise when the Director spends more than what is in the Account and it becomes overdrawn. From the Company point of view a Section 419 liability is incurred which is payable if the excessive borrowing cannot be repaid within 9 months of the end of the Accounting year when the Corporation Tax liability is due. If not cleared within 9 months the Section 419 liability is repayable 9 months after the Accounting year in which the excess borrowings are cleared.  Therefore apart from the fact that a Company has to wait for its Section 419 refund the system is workable.

The difficulty arises in that the excessive borrowings are until repaid an interest free loan, and that unless the total borrowings are below £5,000 they are reportable as a benefit in kind and the equivalent of the interest is subject to Class 1A National Insurance Contributions. The difficulty is that many small Companies do not know their way around the benefits code and have great difficulty in quantifying the total of any directors personal expenditure on a tax year basis and in many cases will not be aware that they have spent too much many months later when their Accountant tells them after the Accounts are done and also sometimes has to inform them that the Company has not made sufficient profits to clear the loan by way of dividend. In those cases where a beneficial loan has not been declared on the P11d Return months earlier, they become liable for a late declaration penalty and interest on late paid Class 1A NIC and will also likely to be the target of an Employer Compliance Review by HMRC.

To remove this difficulty which causes problems for Close Companies, their advisers and HMRC, I would take the following action

  1. Remove the question on Beneficial Loans to Directors and family members of Small & Medium Close Companies from the P11d Return.
  2. Amend the Company Tax Return so that Beneficial Loans for Small & Medium Companies can be declared on an Accounting year basis including a charge equivalent to the Employer's Class 1A rate in force for the Financial Year that ends on the 31 March in which the Accounting year ends in on the Return.
  3. I would give the Company two options: Either gross up the value of the beneficial loan at the marginal rate of the Director concerned for the tax year that ended in the year that the Accounts cover and add the amount to the total tax payable through the Corporation Tax system, so that in effect the Company is meeting the personal Tax liabilities of the Director or for the director to declare the value of the beneficial Self Assessment Tax Return for the Tax Year that ends in the Company Financial Year (by amendment without penalty if appropriate)