HM Revenue & Customs is stepping up its investigations of the way car dealerships, vehicle rental firms and other businesses implement rules to average out benefit in kind tax charges on staff using multiple company cars.

National accountancy group UHY Hacker Young says that HMRC is checking that companies calculating an average for use of a variety of cars accurately reflect the kinds of cars actually driven by the employee.

UHY Hacker Young warns that potential extra tax liabilities could go back three years or even more for those that get it wrong.

Although the liability technically rests with the employee concerned, in reality it is often the employers who administer the scheme who will pay out.

HMRC’s company car averaging scheme was introduced in spring 2009 to simplify and improve consistency in the way that businesses with company car fleets and car pooling arrangements account for the benefit in kind charge by allowing firms to calculate the benefit in kind on an average basis.

However, UHY Hacker Young says that six years on, HMRC is now targeting its attention on this area, as evidenced by various live HMRC enquiries in the automotive sector.

Car dealerships and vehicle rental and leasing firms are most likely to be affected, but other businesses which use the scheme because staff frequently switch vehicles and take them home, such as estate agents, sales teams and construction firms, could also be at risk.

Matthew Hodgson, tax partner and automotive specialist at UHY Hacker Young said: “It’s taken an unusually long time for HMRC to start reviewing company car averaging schemes, but now that they have, we expect to see it become a far more wide ranging issue for businesses, and the automotive industry in particular.”

“We expect HMRC to take a tough stance where they find guidance for operating the scheme has not been followed correctly. They will be looking in particular at whether use of large or high end luxury vehicles have been accounted for correctly.”

“HMRC are coming to realise that there can be major inconsistencies in the way different dealerships, rental firms and other businesses have been implementing and administering the scheme. This will no doubt lead to assessments for additional tax which could go back three years or more.”

“If the employer settles the liability on behalf of the employee, this will be seen as a second benefit in kind, incurring tax on top of tax!”

UHY Hacker Young advises companies to ensure they have a policy outlining how they have designed and implemented the scheme.

“It’s important that dealerships and other businesses whose staff enjoy the benefits of car fleets or pools take steps to spot any issues early on and rectify them prior to an HMRC visit,” says Hodgson.

“Often simple things like a carefully drafted one-page policy will be enough to give HMRC some comfort that the rules have been considered.”