Company Cars and Benefit in Kind Forms
Q: I run a small business and we have a number of employees who use company vehicles for private travel and others who receive various expense payments. Can you advise me on the type of records we should keep for P11D benefit in kind purposes and what HM Revenue & Customs might target in an investigation?
A: Small businesses are often targeted for in-depth reviews of their compliance systems and procedures by HM Revenue & Customs. When completing the employer year end forms P11D and P11D(b), you should pay careful attention to all expenses reimbursed to employees or directors, especially if any are in the name of an individual rather than that of the business. In addition, any expenses paid directly by the business on behalf of an employee/director must be reviewed.
Unless you have an agreed dispensation in place with HM Revenue & Customs, you must include all travel, subsistence and entertaining expenses paid to employees and directors on the year end forms P11D, even if the expenses have been incurred for business purposes. If you are registered for VAT, the figures reported on the P11Ds records have to be VAT inclusive.
You should keep full mileage logs for every vehicle, whether owned privately or by the company as they can be requested by HM Revenue & Customs in an investigation. You should also ensure that you keep separate figures for each car where there is a change during the year, or where more than one vehicle is available to an employee. The fuel benefit is an ‘all or nothing’ benefit, so if the business pays for any private fuel and is not fully reimbursed by the employee, the employee must accept the corresponding fuel benefit.
We would suggest you retain all records and information relating to payroll, benefits for six years, which is the period for which the HM Revenue & Customs has powers to investigate your business accounts.
Construction Industry Deductions for a Limited Company
Q: I run a small building company and most of the work we do falls under the Construction Industry Scheme. Consequently, some of our customers deduct 20% tax at source under the scheme on the amounts we invoiced for labour. How do we claim relief for this?
A: Where a sole trader suffers tax deductions at source through the Construction Industry Scheme (CIS) a claim for relief for that tax is made on the annual self assessment tax return. A limited company does not, however, claim relief against the annual corporation tax liability.
Where a limited company receives income that has had tax deducted through the Construction Industry Scheme, that tax can be offset against certain monthly or quarterly payments that are due to HM Revenue & Customs. The tax suffered is set against the PAYE and NIC amounts you are paying on behalf of any employees that you may have and, if applicable, from any CIS deductions you have made from subcontractors you use.
HMRC will repay any deductions that the company is not able to set off against its PAYE liabilities during the tax year when the company sends in its Employer Annual Return (form P35) at the end of the tax year.
If you require any further advice in relation to this, or any other aspect of the Construction Industry Scheme regulations, you shoukd seek advice from us, as fines and penalties for not dealing with payments correctly can be severe.
Are My Subscriptions Allowable for Tax
Q: I am employed as a nurse with the NHS and pay a number of annual subscriptions to professional bodies such as the Royal College of Nursing. Am I entitled to tax relief on these payments?
A: If you are employed, you are entitled to claim a deduction for costs you have incurred that relate “wholly, exclusively and necessarily” to your employment, which have not been reimbursed by your employer.
Annual subscriptions paid to professional bodies will be allowable provided they are paid to a body approved by HM Revenue & Customs. The activities of the body must directly benefit or concern the profession practiced by the employee in the performance of their duties of employment.
HM Revenue & Customs publish a list of the approved bodies for which they allow tax relief for annual subscriptions. The Royal College of Nursing is on the list, together with a number of other bodies relating to your profession, so if you have not been reimbursed in full by your employer you should submit a claim. You are also entitled to make a claim for up to six previous tax years if these also have not been reimbursed.
Employer Providing Cash Loans to Staff
Q: My employers have offered me a temporary loan at a discounted rate to help me buy a new car to get to work. Are there any tax implications that I should be aware of if I choose to accept this rather generous offer?
Where an employee is given an interest free or reduced interest rate loan from their employer, a ‘benefit in kind’ charge will arise. The charge is calculated based on the difference between any interest paid by the employee and the ‘official rate’ of interest used by HM Revenue & Customs. The current ‘official rate’ is 4.75% and this is usually reviewed each year in the Chancellor’s Budget statement.
If you are given a loan of £8,000 at a reduced rate of interest of 2%, you will pay interest of £160 per year. Using the ‘official rate’ a loan of £8,000 should attract an annual interest charge of £380. You would then be taxed on a ‘benefit in kind’ value of £220, being the difference between the amount actually paid and the amount that would be charged at the ‘official rate’.
Tax will be charged on the benefit in kind at your marginal rate of tax, so if you are a higher rate taxpayer at 50%, you will have to pay tax of £110, a 40% taxpayer will have a liability of £88 and a basic rate taxpayer will have a liability of £44. The banafit in kind will be reported to HM Revenue & Customs on the employer year end form P11D, a copy of which will be given to you. In addition, your employer will also need to pay Class 1A National Insurance at 12.8% on the value of the benefit.
Bad Paying Customers
Q: I have a particular customer who has a history of bad payments with me. I am considering taking legal action against this customer to try and recover this debt. Can my solicitor’s fees and other legal costs be regarded as a legitimate business expenses for tax purposes and are there different procedures depending on the size of the debt?
A: Legal and professional costs that a business incurs are allowable when they are incurred wholly and exclusively for the purposes of the trade.
Legal fees incurred in attempting to recover bad debts are deemed to be incurred for the purpose of the trade and are therefore considered to be allowable expenditure in establishing your business profit for the year.
In addition to being an allowable deduction in the accounts, as the debt relates to a specific customer, the legal fees incurred in respect of that debt recovery will be also be allowable as a deduction for tax purposes.
It should also be noted that where a bad debt relating to ordinary trade transactions with a specific customer is written off, that amount is also an allowable deduction. This contrasts with the rules for a general bad debt provision, which is not an allowable deduction for tax purposes.
Staff Suggestion Scheme
Q: We have a staff suggestion scheme in place and one of the staff has come up with a really good idea to save us about £14,000 over the next twelve months and about £10,000 a year in the future. What is the maximum that I can pay him without having to deduct tax?
A: It is important to note that there are some qualifying criteria that must be met in order that rewards paid to employees as a result of a staff suggestion scheme benefit from a tax free amount. The main requirements are that there must be a formally constituted scheme open to all employees on equal terms; any reward that is awarded by the employer must be outside the employee’s normal duties; the suggestion must be implemented and the payment must be awarded to the employee who made the suggestion. For full details of all requirements, or for details on how to deal with an award that is to be shared between a number of employees, you should contact us for further advice.
Providing that the payment meets the qualifying criteria, there are two ways that you can deal with this type of award.
One option available to you is to pay 50% of the expected savings for the first 12 month period. The first £5,000 of such a lump sum can be paid gross to your employee, with any excess then being subject to PAYE.
The second option available to you is to make a payment to the employee of ten percent of the expected savings that are likely to be achieved over the next five years. Again there is a limit of £5,000 that can be paid tax free.
Tax Returns and Providing Information Over the Phone
Q: My tax affairs are quite simple in that I am employed and my only other source of income is approximately £2,600 per annum from a rental property that I own jointly with my brother. He has received a tax return to complete for the 2009/10 tax year. Should I also have one to complete?
A: Many individuals with relatively simple tax affairs are now able to deal directly with HM Revenue & Customs (HMRC) by telephone and this can dispense with the need to file an annual tax return.
You can notify HMRC of any changes in personal circumstances by telephone, including changes which may affect any claims to personal allowances you are entitled to and of any changes to your employment or self-employment status. This service can also be used to advise HMRC of any sources of untaxed income where that income will not exceed £2,500 per annum.
Where untaxed income exceeds £2,500, it is necessary for the individual to complete and file a self assessment tax return. As your rental income is £2,600, you should therefore contact your local tax office and ask them to issue a tax return form to you. Before completing your tax return form you should consider seeking advice from an accountant. They will be able to review your circumstances to ensure that you claim any reliefs and deductions available, in order to minimise your liability to tax.
Private Use of A Company Van
Q: I work for a building contractor and have been offered the use of a company van outside of work hours. Are there any tax implications I need to be aware of if I use the vehicle privately?
A: Employees only pay tax on a company van made available to them for private use if they actually use it for private journeys other than commuting (travelling between home and the main place of work).
The taxable benefit in kind for unrestricted private use is £3,000 and this means that a basic rate taxpayer who has private use of a van will pay tax of £600 per year. Private use is classified as using the van for purely private journeys, such as going shopping or for social activities.
If you also receive free or subsidised fuel, a further benefit in kind of £500 will be due, resulting in a further tax liability of £100 for a basic rate taxpayer.
Employees who have to take the company van home, but are allowed no further private use, or have insignificant private use, will not be subject to a benefit in kind charge.
Examples of insignificant use include an employee who stops at a newsagent on the way to work or calls at the dentist on the way home. If this does apply, ensure you keep mileage records relating to the use of your van, ask your employer to amend your contract of employment, and ensure you sign an agreement about the van use only being allowed for home to work travel.
Disclaimer – advice shared in this column is intended to inform rather than advise. Taxpayer’s circumstances do vary and if you feel that the information provided is beneficial it is important that you contact us before implementation. If you take, or do not take action as a result of reading this column, before receiving our written endorsement, we will accept no responsibility for any financial loss incurred.