A client ( car mechanic) was involved in legal proceedings for delays in finishing work on an expensive car.
The Courts decision was that the mechanic paid the owner £5500, but ownership of the vehicle passed to him
This decision was based on the courts ruling that the vehicle could not be seen as fit for purpose due to the (very) long delay in it being in the garage, where it still is.
This was not a fine , but damages in the sum of £5500
Would it be appropriate to offset this against business profits, and which category?
The second issue is the client's business now has ownership of the car, with a valuation of £5500.
Whilst it may not be working, it is still effectively an expensive business asset.
I assume in due course it will be repaired and retained by the mechanic or sold.
However I will need to prepare 2015/2016 Accounts and cannot see how to account for this asset whilst it sits in the garage.
My initial thoughts on this is that the mechanic is effectively buying the car. If he is going to sell it, it would go to stock. If he intends to keep it then it may become a company car (is this an incorporated business?) and go to assets.
I sorry I should have mentioned it was a sole trader.
I initially considered treating this as a purchase but it not really correct
The client paid damages awarded by the Court, he did not buy the vehicle, and could not produce a receipt for its purchase if required to do so.
That being said , part of the order for damages specified that the car now belonged to him, so I can see your line of thought.
If I take that line i would then dismiss the payment for damages and claim the value of the Vehicle via AIA and deal with the sale if he every gets it working?
Looking at this again, I'm still not sure regarding the damages being treated as payment for the car
I have had a look at BIM 38500 as follows :
The courts have considered many cases where the issue has been the deductibility of a fine, a penalty or damages. The statutory test under S34(1)(a) Income Tax (Trading and Other Income) Act 2005 for unincorporated businesses and S54(1)(a) Corporation Tax Act 2009 for companies is whether the expense was incurred wholly and exclusively for the purposes of the trade, profession or vocation. This involves mainly factual issues and the importance of establishing the facts before entering into argument cannot be overstressed.
Where a penalty is intended as punishment then it will not be allowable on the rationale set out by Lord Hoffmann in McKnight v Sheppard [1999] 71 TC 419 (see BIM37965). Where the payment is intended to provide restitution for damages caused by normal trading operations then it will be allowable.
My client paid damages as he undertook work on a classic car, and once dismantled the neccassary parts were not longer available.So he was not being punished but ordered to pay restitutionfor damages caused by trading operations.
Is the car worth £5,500? If it is then does that not resolve the issue?
One point that I would add is that there is no obligation for your client to now complete the work so no liability can be recognised for the remainder of the work to make the vehicle sellable (Classic cars are often sold as prewtty much a bucket of bits so in itself it has value even though it cannot be used as a car).
Also, as a classic car I would consider it to be more akin to an art work or other investment than a motor vehicle.
Out of interest, what sort of car is it?... i.e. is the word classic being used in the vaguest possible sense of the word!
__________________
Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
The valuation was made by an independent valuer for the court. In its current condition I would guess its worth very little and that is why his customer took legal action. Until he can obtain the correct parts then it may well just rot away over time.
Knowing my client this may well be the case, and that's why he finds himself in this situation. I also think my client has called it a "classic car" in its widest sense. The solicitors letters that I have refer to "the said vehicle".
I fully accept the payment made for damages offsets the cost if he purchased the car.
However, if the damages paid to the court can be claimed, then is it not a case that this method should be used?
That would account for the payment and tax relief claimed as an expense.
The vehicle then belongs to his business, and when and if sold the sale price is treated as a "sale"
I've had that where a client did not understand the principle of offsetting insurance against the issue to which it related (now beaten into them).
__________________
Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
I also think my client has called it a "classic car" in its widest sense. The solicitors letters that I have refer to "the said vehicle".
Nothing to do with accounting, but 'classic' definition often depends on which car club you belong to and who you are talking to, although I always understood the definition to be age related. My Dad had a 1952 MG TD until a few years back, all restored by him from original parts after finding it in an old bosses hay shed. Once returned to prime condition he joined the MG car club - they used to get all angsty about such titles - I seem to recall his fell into 'classic' status by about 12 months or so, but would need to double check with him. He used to do lots of shows with the car and was asked if it could be used for films and such but refused after seeing the way filming companies showed no respect for such cars, never mind the actors who used to have no clue how to drive!!! He ditched the car club and shows due to the crazy rules they inflicted on people, but not before racing the car round the Nürburgring race track, which he couldnt have done without being a member of some kind of car club.
__________________
Joanne
Winner of Bookkeeper of the Year 2015, 2016 & 2017
Thoughts are my own/not to be regarded as official advice,which should be sought from a suitably qualified Accountant.
You should check out answers with reference to the legal position
The client has not replied so yesterday I when "passing" the garage I had a look at the vehicle simply to satisfy my curiosity.
A camper van! It looked pretty old but no number plate on the front and I was reluctant to go into the outbuilding to check for a rear number plate.
I will update if and when I get any information from the client.
I spoke with another Accountant yesterday and he felt we should not treat the damages as a business expense and then what happens to the vehicle is of no concern.
However my view is that it was a business expense in accordance with BIM 38500. so tax relief can be claimed this year. It was not a purchase but a consequence that the ownership passed to my client.
To me, it's a business expense. I can not see how it is not. If it was a fine for producing cut and shuts, then obviously not. Nothing illegal here, just bad luck.
__________________
Johnny - Owner of an overly-active keyboard.
A man who can read, yet doesn't, is in no way wiser than a man who can't.
If its a Volkswagon camper van they are very much a classic and are appreciating in value... However, I don't imagine that it is one of those as there is certainly no shortage of parts for them so it would be a pretty poor mechanic that couldn't source the bits to repair it. (Plus they are the motoring equivalent of Jigsaw for three to five year olds!).
So, assuming that this is not a classic but in reality closer to the breaking bad mobile meth lab (so the compensation was disproportionate to value).
If the mechanic is limited and the court awarded against them personally then it is their responsibility and nothing to do with the business.
If the mechanic is limited and the court awarded against the business then see #1 below
If the mechanic is self employed they are one and the same with the business to see #1 below.
#1 Expense
If the court order was for restitution (to put the owner of the van in the position that they would have been in had the work not been carried out) then it may be expensed unless there is an insurance payment pending (see #2 below).
If the court order was for compensatory damages then such is not allowable for tax purposes and if put through the business it would need to be added back much the same as depreciation in the tax calculation.
From everything that you have said I am reading it as closer to damages (you are actually arguing that it is damages in your question) than restitution (which of course is what you may have meant by damages in your question) and therefore it would not be allowable.
The case law for this is McKnight v Sheppard (1999)
Also, in CIR v Alexander von Glehn Ltd (1920) the arguement was used that the damages were not incurred wholly and exclusively in the purpose of the trade... I believe that one ended up as the basis as to why fines born by the business are not tax deductible.
#2 Insurance If there is an insurance payment pending then such will (sort of) annul the ability to expense the payment (it does not matter that it has not been received yet). You may also find that the camper van now belongs to the insurance company unless the mechanic bought it back from the insurance company.
Where an insurance payment is guaranteed to be received then a contingent asset may be recognised and offset against the damages to which it relates (offsetting is allowable in the income statement but not the statement of financial position where the asset and liability need to be shown seperately).
Hope that helps,
kindest regards,
Shaun.
__________________
Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
I have not seen the Court order despite it being requested numerous times, but I have a early solicitors letter that states "Accordingly damages were awarded in the sum of £5500".
Looking further into the letter, reference is made that the order of the Court was to put the "owner" back in to the position they enjoyed before the repairs commenced.
So its a case of obtaining the actual Order then all will be resolved (?)
Regarding Insurance, my client has not passed any paperwork regarding this, nor is there in insurance payment into the Business Bank Account.
This has also been requested to no avail.
So I have today written to him advising that in the absence Court order being available I will not be in a position to make any decision regarding whether relief may be claimed.
I have also asked him to confirm the Insurance situation as part of my decision making process.
