Tax Efficient Motoring
Running a car is a significant expense, so where there is a choice of vehicles, or a choice between buying a car yourself, or buying it through your company, it is always worth keeping the tax consequences in mind. Here the bad news is that the rules are always changing but the good news is that the changes tend to be announced years in advance, so at least it is possible to plan sensibly.
The starting point is that a self-employed person can claim capital allowances on a car used for business purposes, and a company can claim the same allowances for a car provided for the use of a director or employee. However, if a director or employee uses his own car for business purposes, he can only claim a set mileage allowance.
The rate of writing-down allowance is 18% a year if the car was bought before April 2009 or has an emission rating of 160 g/km or less, and 8% otherwise. Cars purchased from April 2013 will not qualify for the higher rate of writing-down allowance unless they have an emission rating of 130 g/km or less.
A quirk of the legislation is that it is generally possible to claim an allowance for the difference between tax written down value and the sale proceeds when a self-employed person sells his car, but a company must usually continue to claim at 18% or 8% a year.
The exception (there is always an exception!) is that a 100% first-year allowance, an immediate write-off of the full cost, is available for Qualifying Low Emission Cars (QUALECs). Currently, a car is a QUALEC if it has an emissions rating not exceeding 110 g/km, but this will be reduced to 94 g/km in April 2013.
If a company provides a car for a director or employee, he or she will have to pay an annual benefit-in-kind charge. This charge is calculated as a percentage of the list price of the car when new, generally within the range 10% to 35%, depending on the emissions rating of the vehicle. However, it has already been announced that the charge will rise by one percentage point in April 2013; another percentage point in April 2014; two percentage points in April 2015; and a further two percentage points in 2016, a total of six percentage points, but capped at a maximum charge of 37%.
Petrol or diesel provided for private motoring
There is a further charge if the company pays for fuel used for private motoring (which includes, for tax purposes, home to work mileage). Generally speaking, because there is a flat charge irrespective of the number of miles covered, having the company pay for fuel for private motoring is very tax-inefficient unless there is a high private mileage (business mileage is irrelevant).
Low emission cars
At present, there is no benefit-in-kind charge for the use of a zero emission (battery-powered) company car and a very low charge (based on 5% of the original list price) for cars with an emission rating not exceeding 75 g/km. However, both these groups will be subject to a 13% charge from April 2015 and 15% from April 2016. If you are considering buying a low emission car which you intend to keep for more than say three years, this may well affect the decision whether to buy the car through your company, or in your own name.
So what to do?
For self-employed people there are really two points to watch. The first is that a car bought now will qualify for a higher rate of writing-down allowances if its emissions rating does not exceed 160 g/km. For cars bought on or after 6 April 2013, that ceiling will fall to 130 g/km. Secondly, and contra-intuitively, it will usually be better to ensure that there is some private use of the vehicle. If there is some private use, the car will be a stand-alone asset for capital allowance purposes, so that when it is sold, the difference between its tax written down value and the sale proceeds can be claimed as a balancing allowance. If there is no private use, the car will be pooled with other business assets for tax purposes and the pool as a whole will continue to be written down at 18% or 8% a year.
For a shareholder-director, the decision whether to buy a car in his own name, or through the company, is so complex that it is impossible to give any meaningful general guidance. Matters to be taken into account include the kind of car the director intends to buy, likely business and private mileage, the directors personal circumstances and the companys financial situation. We would of course always be happy to explore the options and crunch some numbers for you.
And finally – a VAT trap
There is a potential VAT trap wherever a trader (or a company) has adopted the VAT Flat Rate Scheme. Usually, input tax cannot be reclaimed on the purchase of a car but equally, tax does not have to be charged when the vehicle is sold on. (This is subject to special rules for driving school cars, etc.)
However, where a trader is using Flat Rate Accounting, even though no input tax could be reclaimed when he bought the car, when he sells the vehicle he has to include the sale proceeds in his flat rate turnover, and so pay VAT on the money received. The solution is simple: Make sure you leave the Flat Rate Scheme before you sell the car!
Tax Credits for Self Employed People
As you have probably heard, the Government is introducing a new Universal Credit to replace both unemployment benefits and Tax Credits. One effect will be to make it more difficult for self-employed people to claim any Credit, and in many cases to reduce the amount they are able to claim.
Universal Credit is designed to respond to changes in earnings on a month-by-month basis thus the benefit paid in (say) May will depend on the amount earned in April. For people in employment, this will be achieved by requiring employers to make monthly PAYE Returns, under a new system called Real Time Information or RTI. To claim Universal Credit, self-employed people will similarly be required to make a monthly declaration of their earnings and business expenses.
The monthly earnings declaration
Self-employed people will have to make their monthly earnings declarations, not for calendar or PAYE months, but for monthly assessment periods beginning with their first claim to Universal Credit. Thus if the first claim was made on 17 June, the monthly assessment periods will be the month to the 16th day of each subsequent month.
If the monthly earnings declaration is not made within seven days of the end of the assessment period (so by 23 July, if the assessment period is the month to 16 July), payment of benefit will be suspended. If the declaration is not made within four weeks of the end of the assessment period, benefit for that month will be lost altogether. In all cases, the declaration will have to be made online.
The declaration will have to be made on a money received and money paid basis. Money received will include the proceeds of selling capital assets (for example, a van used in the business). Allowable expenses (which may include the cost of capital assets) will have to be itemised under seven headings.
Because Universal Credit will be calculated on net (after-tax) income, payments of income tax and National Insurance contributions will also count as allowable expenses.
So far, so good (apart from the very tight timetable for filing the monthly figures), but if payments out exceed payments in, earnings for the month will be taken as zero and it will not be possible to carry the balance of expenditure over income forward to the next month. There are many reasons why expenditure may exceed income for example:
- A client may pay erratically, so that no fee is received one month, but two months fees are received the next
- The six-monthly payment of income tax and Class 4 National Insurance contributions due in January or July may exceed the receipts for that month
- A van or other expensive piece of equipment may be purchased
so the no carry forward rule is very likely to lead to the traders income, as calculated for Universal Credit purposes, being substantially higher than his real profit.
There will also be a rule that no allowance can be claimed for the cost of a motor car used in the business (though whether this will apply where the car is the business, for example a taxi or a driving school car is not yet clear). Instead, the trader will be able to claim either the appropriate proportion of the running expenses or a mileage allowance calculated at 45p a mile for the first 800 miles a month and 25p a mile thereafter.
Unprofitable businesses: no help in hard times
The Government is very concerned that people may claim to be self-employed as a gateway to claiming Universal Credit. Accordingly, self-employed claimants will be interviewed and expected to produce evidence that they really are trading.
They will also be deemed to earn a minimum amount, likely to be 35 hours a week at the National Minimum Wage. This will be waived for the first year of a new business, but for this purpose, a claimant will be allowed only one new business in his lifetime.
No Universal Credit for those with savings or capital
For Tax Credits, interest or other income from savings is taken into account, but there is no absolute bar on people with substantial savings claiming Tax Credits. However, for Universal Credit, the general Social Security benefits rule will apply, that no Credit will be paid if the claimant (together with his/her partner, if he/she has one) has savings of more than £16,000. However, the value of pension plans and life assurance policies will be left out of account.
No Universal Credit for older people
People old enough to qualify for Pension Credit, basically both men and women who have reached State Pension age for women, will not be entitled to Universal Credit (even if they are still working and could, currently, qualify for Tax Credits). However, a couple will qualify if either is too young to qualify for Pension Credit.
At last the good news
After all that bad news, we should mention the one piece of good news. Under the current Tax Credit rules, help with childcare costs is available only to parents who work at least 16 hours a week. Under Universal Credit there will be no minimum working time requirements, so that (for example) a single parent who is able to work just a few hours a week will be able to claim help with childcare costs.
When does it all happen?
Universal Credit will be launched in October 2013 but at first will cover only unemployment benefit claimants. Then from April 2014, no new claims to Tax Credits will be possible, people will have to claim Universal Credit instead. Existing Tax Credit claimants will be switched to Universal Credit between April 2014 and October 2017.
What are HMRC up to?
Over recent months, HMRC have been targeting specific areas where they believe that they are not collecting the tax that is due and there is no doubt that, with the increased use of technology, they are getting better at identifying where issues might exist.
There have been a number of initiatives which identify specific trades or areas at risk and offer taxpayers the opportunity to come clean at a lower than normal penalty rate and sometimes without paying the full amount of tax that is outstanding. So far there have been campaigns directed at plumbers and electricians, self employed tutors and coaches, owners of overseas properties and there are now new campaigns directed at those involved in home improvement, direct selling, such as door to door sales or party sales, and also higher rate tax payers who have income that has not been declared through the normal tax return process.
The publicity that these campaigns have attracted pales into insignificance compared to the recent media frenzy on tax avoidance strategies. The two key points which arose in the recent debate regarding the K2 structure were, firstly, that the strategy was legal and, secondly, the question whether or not it is morally right to seek to avoid tax.
The Courts have held that it is quite in order for an individual to organise their tax affairs to minimise the amount that the state takes. As such, it is the view of many that the government should ensure that the rules are clearly drawn up so that tax payers pay the correct amount of tax. However, the one point that we believe all accountants are fully in agreement with HMRC on, is that tax evasion is illegal and should not be condoned, in any circumstances whatsoever.
Most accountants take a great deal of interest in these questions, partly due to the remit we have from clients to minimise their tax liabilities and also because generally speaking technical arguments do appeal to us!
Although the K2 structure is the one to hit the headlines, there are other areas of tax mitigation which are commonly used and have not received a similar amount of publicity. For example, many individuals form their own limited company to work through, often because the end customer will not employ individuals direct. One common means of withdrawing the profits of those companies is by way of dividend which does not attract national insurance, which reduces the amount that the government take from an individual. In addition, retailers can supply small value goods from overseas to minimise VAT for their customers.
One of the fundamental points in relation to tax avoidance strategies is that they have to be disclosed to HMRC at a very early stage. Given that this is the case, there should be ample opportunity for HMRC to ensure that the government changes legislation to fix any loophole exploited by the particular tax avoidance strategy and thereby stop it working almost at the outset.
Overall, our view is that our clients should be given the information to enable them to make up their own minds whether they wish to take action to reduce the amount of tax they pay. It is essential, however, that any strategy chosen is legal and the sole purpose is not to avoid tax, but has some commercial substance.
Limited Company Matters
There are two current issues that particularly affect limited companies that are worthy of comment.
Personal service companies IR35
Although whether a company falls within the IR35 regulations will depend on the specific facts of the case, HMRC have produced guidance notes addressing what they consider to be key points in judging whether or not a company is caught. These include the following:
- Whether or not the business owns or rents business premises separate from the home of the contractor or the end customer premises.
- Whether the company has professional indemnity insurance.
- Whether the company can increase its revenue by working more efficiently.
- Whether the company employs additional workers who earn over 25% of the turnover.
- Whether the business spends over £1,200 on advertising per year.
- Whether or not the end client has previously employed the director.
- Whether the company has a business plan and cash flow forecast.
- Whether the company has to rectify any mistakes it makes.
- Whether the company suffers bad debts.
- Whether the company has to invoice for its work and negotiate payment terms.
- Whether the company can send a substitute for the director and has actually done so.
HMRC are likely to use these tests to identify companies that might fall within the IR35 rules. We recently calculated the additional liability for a limited company client if they had been caught by these rules in 2011-12 and this amounted to £23,133 for just one year. With HMRC able to go back to earlier years where they can establish the company is subject to these rules and also to seek to collect any additional liabilities from the directors personally, the price of getting this wrong could be extremely costly and if any client has concerns about this matter, please get in touch.
Directors loans and dividends
Over recent years the extent of the information that has to be disclosed in the annual company accounts regarding directors loans has increased substantially. Expect in limited circumstances, directors loans are a breach of the Companies Act and, therefore, there has always been some disclosure, but it is likely that the increased disclosures will be looked at carefully by HMRC to ensure that any necessary P11D entries have been made to reflect any interest free loans from the company.
The disclosures regarding directors dividends have also changed with more detail being included in the accounts. We have mentioned previously the need for limited companies to ensure that they have clear information to demonstrate that there are adequate after tax profits to cover any dividends paid
If there are insufficient after tax profits, a dividend cannot be paid and it is possible in these circumstances that HMRC would assert that any such payment would be net salary and gross this up for the PAYE and NIC, both employee and employer, which would lead to a significant additional liability in relation to the amount drawn.
It is essential therefore, that dividends are only paid out of after tax profits and this can be demonstrated at the time the dividend is paid. Also any amounts that are not dividends, but are considered to be loans to the director, must be correctly identified as such at the time they are paid.
The question of death is one that, understandably, many people do not wish to contemplate. However, the drawing up of a Will is something that should be considered regularly in the light of your individual circumstances and should not be put off. The rules of intestacy, where someone dies without having made a valid Will, may mean that what happens to an estate is not what that person had intended.
It is equally important when drawing up a Will to carefully consider what you wish to happen with your estate and then making sure that the Will reflects this. Although some individuals have relatively straightforward affairs, many have quite complex situations involving businesses, more than one marriage, children with different needs, a desire to benefit charity, the reduction of inheritance tax payable, as well as considering ones own circumstances while still living.
It is worthwhile carefully considering all aspects and ensuring that the Will is properly drawn up. Particular points that need to be considered include:
- Who are to be the executors of the Will and will they be paid for this?
- Who is to receive the benefit of the estate and ensure that they are correctly identified?
- Ensure that all assets that you wish to leave to specific individuals are set out in the Will.
- Consider whether any beneficiaries should receive their entitlement outright, or whether some form of trust to give an element of control is desirable.
- Consider what is to happen if any beneficiaries do not survive you.
- Consider what is to happen to the rest of the estate.
- Consider what should happen to pets.
- Ensure that the Will is reviewed regularly, particularly if circumstances change.
Fuel Rates from 1 June 2012
Where an employer provides a company car, but the employee pays for the fuel, the employer may pay a mileage allowance for business journeys. HMRC accepts that payments not exceeding the advisory fuel rates are reimbursements of expenses, not subject to income tax or Class 1 National Insurance contributions.
The advisory fuel rates (AFRs) are now reviewed quarterly and the AFRs for journeys taking place on or after 1 June 2012 are as follows (old rates in italics):
|Rate per mile|
|* Including petrol hybrid cars|
|Up to 1400cc||15p||15p||11p||10p|
|1401cc to 2000cc||18p||18p||13p||12p|
|Rate per mile|
|Up to 1600cc||12p||13p|
|1601cc to 2000cc||15p||15p|
These rates may be used to reclaim input VAT in respect of fuel used for business journeys (remembering that VAT receipts to cover the amount claimed are required).These rates are scheduled to change quarterly and the current rates can be found on the HMRC website.
Paying Tax Too Early
Often at this time of year tax payments are made on a date other than the normal due date because of holidays. However, paying taxes such as PAYE, or national insurance on benefits in kind, too early can cause a problem due to the way that the HMRC computer system deals with payments.
For example, PAYE is calculated on months that end on the fifth day, so the PAYE and NIC on salaries up to 5 August 2012 is due for payment by 19 August 2012. If it is paid on or before 5 August 2012, the HMRC computer will assume it is for the previous month and allocate it there accordingly, even though that previous month has already been paid.
The first the company will know of this misallocation is when the Collector or Taxes notifies them that they are in default for not paying PAYE and NIC for that month. Although this can usually be sorted out by a phone call or two, it can take time to do so, and as anyone who has tried contacting HMRC on their helpline numbers knows, much of the time will be spent on hold. Therefore, we would recommend that you ensure all tax payments are paid by the due date, but not too early.