Last year, The Independent
reported that thanks to poor financial controls and accounting errors
at leading UK sportswear chain, JJB Sports, the company was left owing HM Revenue and Customs more than £5 million. That's a huge error that could have been avoided if the company's accountants had done things by the book.
The same could be true for your company – especially if you're unsure about how to account for company perks or benefits
Here's how chartered accountant, Henk Heymans of the Practical Accountancy Loose Leaf Service
advices you account for the following four common company perks.
Are you accounting for these company perks correctly?
1: Company cars:
When it comes to company cars
, as far as you're concerned 'the car is an asset that should be capitalised in the company's books together with all the other property, plant and equipment (PPE). The cost of the asset is charged to the income statement as depreciation and, if the asset is financed, interest charges. The provision of a company car to an employee also has a Vat charge cost effect for the employer,' explains Heymans.
And remember, if your employee enjoys the right to private use of the company car
, he'll need to be taxed on the private use component of the cost of the car.
2: Travel allowance:
A travel allowance is paid when the employee is expected to use her own vehicle for business purposes.
'The tax situation,' explains Heymans, 'is similar in principle to that of the company car. The employee is only taxed on the 'private use' component of the allowance paid.'
Your company will normally deduct the full allowance as a company expense and will use different formulae and tables to determine the private usage taxable amount. This will vary depending on:
3: Medical aid:
Whether your company pays for fuel, repairs and maintenance;
Whether a logbook is kept with full details of business kilometres travelled;
The cost of the vehicle; and
The actual kilometres travelled.
As far as the accounting treatment of a medical aid benefit
is concerned, the full medical aid contribution is an expense of the company, regardless of whether you pay the full medical aid fee or not.
'When the company pays the full amount (non-contributory funds) the employee's salary package is normally determined to consider this. And where the company doesn't pay, or only pays a portion, the employee normally earns a higher cash salary. In the end the position to the company is neutral,' explains Heyman.
4: Pension fund contributions
When it comes to accounting for pension fund contributions
, there are two types of retirement funds you need to consider:
Defined benefits contributions
: The benefits you need to pay on retirement are fixed according to the rules of the pension fund. This means you must consult an actuary to calculate defined benefit contributions to ensure that sufficient funds will be available when the employee eventually retires.
Defined contribution funds:
The same principles apply as those for medical aid contributions in the case of contributions to defined contribution retirement funds. Although the rules of different types of defined contribution fund structures differ markedly, you can either account the contribution to the fund as a company expense or as a salary that you pay to the employee, which is then paid over to the fund. Once again, the accounting of defined benefit funds is very complex and you should consult an actuary to ensure you're doing this correctly.
Now that you know what you need to do to account for company perks
, speak to an actuary to help you work out how to ensure you do so correctly in your company.
If you need more information on how to account for company perks
correctly get your hands on the Practical Accountancy Loose Leaf.
In the Practical Accountancy Loose Leaf
we've got a dedicated chapter on company perks
. In it you'll discover:
Step-by-step: Accounting for employee costs and contributions
The significance of the 'cost to company' concept
Four common company perks
Medical aid contributions
Pension and provident fund contributions
Get your Practical Accountancy Loose Leaf here.