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Tax FAQ’s

with you on the journey to a brighter future

Here you will find some answers to the questions we are often asked.

We have popped these into categories to make them easier to find. Click on the category to get going.

Capital Gains Tax

If you own a business as a sole trader or in partnership, a Capital Gain will arise if your business is transferred into a company structure, ie you become a Company..

The gain will be assessed by reference to the market value of the business assets, including goodwill, at the date of transfer. This could give rise to a chargeable gain based broadly on the difference between the market value of the assets and their original cost.

In most cases, the incorporation of the business will be completed so that incorporation relief can be claimed. The claim for incorporation relief should defer any tax until you sell your shares in the business.In order to qualify for incorporation relief, all your business assets other than cash must be transferred as a going concern, wholly or partly in exchange for shares in the new company.It is important to note that where the necessary conditions are met, incorporation relief is given automatically and there is no need to make a claim. The relief works by reducing the base cost of the new assets by a proportion of the gain arising from the disposal of the old assets.

Although the relief is automatic, it is possible to make an election in writing for incorporation relief not to apply. An election must be made before the second anniversary of 31 January next, following the tax year in which the transfer took place e.g. an election in respect of a transfer made in the current 2019-20 tax year must be made by 31 January 2023.

The election deadline is reduced by one year if the shares are disposed of in the year following that in which the business was incorporated.

Incorporation Relief is just one possible strategy that can be used to minimise tax liabilities if you incorporate your business. However, there are other planning options. If you are considering incorporation, be sure to contact me.

Please contact us for further information.

Disclaimer:  This App and its contents have been produced as a helpful reference point. The information should be used as a guide only and your specific circumstances are best discussed directly with us.

No reliance should be placed on this material and no action should be taken without seeking the appropriate professional or legal advice. Although the authors make reasonable efforts to ensure the content of this App is accurate and up-to-date, the authors make no representations, warranties or guarantees that the content is accurate, complete or up-to-date and accept no responsibility whatsoever for any loss occasioned by anyone acting on information within this App.

Employers

The cost of a staff party or other entertainment event such as a Summer BBQ is generally allowed as a deduction for tax purposes. If you meet the various criteria outlined below there is no requirement to report anything to HMRC or pay tax and National Insurance.

There will also be no taxable benefit charged to employees on:

  • An annual Christmas party or other annual event offered to staff generally and is not taxable on those attending provided that the average cost per head of the function does not exceed £150.
  • Provided the event must be open to all employees.
  • If a business has multiple locations, then a party open to all staff at one of the locations is allowable.
  • You can also have separate parties for separate departments, but employees must be able to attend one of the events.
  • There can be more than one annual event. If the total cost of these parties is under £150 per head, then there is no chargeable benefit. However, if the total cost per head goes over £150 then whichever functions best utilise the £150 are exempt and the others taxable.
  • Note, the £150 is not an allowance and any costs over £150 per head are taxable on the full cost per head. It is not necessary to keep a running total by employee but a cost per head per function.
  • All costs including VAT must be taken into account. This includes the costs of transport to and from the event, food and drink and any accommodation provided.

It is highly recommended when planning a staff party or other annual event to try and stick to the tax rules above. This should ensure that your party does not have an extra tax cost for you or your employees.

If you need help in crunching the numbers to make sure you do not exceed the allowable limits, please call me.

Disclaimer:  This App and its contents have been produced as a helpful reference point.  The information should be used as a guide only and your specific circumstances are best discussed directly with us. 

No reliance should be placed on this material and no action should be taken without seeking the appropriate professional or legal advice. Although the authors make reasonable efforts to ensure the content of this App is accurate and up-to-date, the authors make no representations, warranties or guarantees that the content is accurate, complete or up-to-date and accept no responsibility whatsoever for any loss occasioned by anyone acting on information within this App.

General

IR35 was brought in to prevent the payment of less tax and national insurance by using a personal service company or partnership to provide services through rather than being a direct employee.

For example, by using a personal service company it has been possible to extract income from the company in the form of dividends rather than salary so saving substantial amounts of national insurance. In addition, shares of the company may be split with the spouse of the worker to help avoid higher rate tax and there is far more that can be deducted in the way of tax-deductible expenses by operating through a company rather than as an employee.

The regulations are applied where a worker supplies services through a relevant intermediary (which can be a company, partnership or individual), to a client and had the worker contracted directly with the client, the income would have been treated as employment income for tax purposes. The status tests outlined below are used to help determine whether the worker would have been treated as an employee or self-employed if they had contracted directly.

Large amounts of tax and NIC are at stake. Every case needs to be judged on its merits and several factors need to be considered in concluding on whether a contract is caught or not.

HMRC can provide an opinion on whether the contract is caught by IR35 or not, but do not provide opinions on draft contracts. Unsurprisingly perhaps, the view of HMRC often tends to come down on the side that the contract is caught by IR35 but very often their view has been shown to be wrong and should not be accepted without further investigation. Whether HMRC should also be asked for their opinion also needs consideration.

We can help advise you on how to stay on the right side of the law.

A company is a relevant intermediary for the IR35 rules if…

  • the worker (together with his close family and business partners) controls more than 5% of the company; OR
  • the worker receives payments or benefits which are not salary, but which could reasonably be taken to be payment for services provided to the client

For partnerships the IR35 rules are only applied when any of the following apply…

  • a partner (together with his close family) has more than 60% of the profits;
  • most of the partnership profits come from the work of a single client;
  • where a partner share of the profits is based on their income from the relevant contracts.

The Calculation

Any salary paid during the year has PAYE operated on it in the normal way during the year.

However, where there is income that is caught by IR35, then to the extent that it exceeds any salary to which PAYE is already applied plus taxable benefits, the excess will be treated as a deemed salary and is treated as pay on 5th April, and is liable to PAYE and Class1 NIC’s accordingly. This makes the extra tax and NIC payable on 19th April following the tax year concerned, which is a very short timescale, so contractors need to be organised. Interest runs on underpayments from this date.

In arriving at the excess salary, certain expenses can be deducted from the income derived from IR35 contracts as follows…

  • a flat rate allowance of 5% of the net of VAT income;
  • expenses that would have been allowable as an employee – this includes travel from home to the client’s premises as long as the job is expected to and does not last more than 24 months;
  • employer pension contributions;
  • employer national insurance contributions;
  • some capital allowances.

The excess amount is treated as being inclusive of employer’s Class 1 NIC, so these are deducted to arrive at the deemed salary on which tax and NIC is calculated.

The deemed payment and employers NIC payment thereon are then deductible expenses for the intermediary company, treated as if paid on 5th April.

If actual salaries are paid later of amounts that were included in the deemed salary calculation, they cannot be paid free of tax and NI as they only reduce the salary payment of the actual year in which they are paid. To avoid potential double taxation, it is better to use dividends.

If caught by IR35, the method of extracting funds from the company once the deemed payment calculation has been applied needs to be considered. For example…

  • A salary could be paid during the year to avoid a large tax and NIC payment on 19th April, but it does mean you pay the tax earlier.
  • It is possible to borrow from the company and then repay the borrowing out of a salary nearer the 5th April. There can be tax and NIC on the notional interest on the loan and it is possible a payment to HMRC of 25% of the loan will be required if the loan is not repaid in full within nine month of the company’s year end.
  • Paying interim dividends in the tax year following the deemed payment and then claiming for the dividend not to be treated as a dividend for tax purposes relieved to avoid any double taxation – this is often the best way forward.

Status Tests

In determining whether the contract is caught by IR35 it is necessary to consider the existing tests developed over the years to determine whether an individual is employed or self-employed. These tests can be summarised in one question: Is the individual in business on his own account when offering services to the client? If the answer is not a definite ‘yes’ the following factors need to be considered…

Requirement to provide a personal service

  • Must you complete the work personally?
  • Can you send substitute to do the work?

Control and supervision of the worker by the client

  • Can you work at times to suit you?
  • Does the client control how you do the work?

Mutuality of obligation between the parties for the duration of the contract

  • Do you have the option to turn down work offered and does the client have the option not to offer work?
  • Is each side obliged to offer work and accept work?

Financial risk of the worker

  • Do you correct defective work in your own time, at your own cost?
  • Are invoices raised by reference to the job rather than hours worked?
  • Is public liability insurance in place?
  • Is work carried out for more than just one or a very small number of clients?

Provision of equipment and materials by the worker

  • Do you use your own equipment?
  • Are materials supplied by you?
  • Do you work from your own premises?
  • Does your company have its own business stationery?

Trappings of employment

  • Is holiday and sick pay paid to you by the client?
  • Are any employment type benefits provided to you by the client?
  • How long have you been working for the client?
  • Is there a notice period to end the arrangement?

Intention of the parties

  • What was the intention of the parties in forming the contract?

The first three factors are the most important. If one of these does not exist the contract does not have the attributes of an employment contract so must be another type of contract, such as a self-employment relationship. However, to determine whether the worker is self-employed the other factors also need to be considered.

HRMC Business Status Tests

HMRC think they can generalise about what makes some companies fall within IR35 and other escape it. In May 2012 they have drawn-up a set of business entity tests, complete with a scoring system, to help you to judge whether your business would be at high, medium, or low risk of being investigated for falling under IR35.

These business entity tests are not derived from the tax law. They merely represent the Taxman’s view of the risk of a business falling within IR35.

The scoring attached to the tests is controversial, as it penalises businesses that have no bad debts, never pay to advertise and operate from the owner’s home. These IR35 business entity tests do not change the IR35 law one bit, and will probably be ignored by the Tax Tribunal.

If you choose to use the IR35 business entity tests, you don’t have to declare your score to the Taxman, the tests are merely for your own guidance. However, if you are concerned that the business entity tests produce a high risk score for your businesses, we should discuss why this is the case. Are they any changes which can be made to the way your business operates which would make it less likely to be caught by IR35?

Dragonfly Consulting Tax case

The Dragonfly Consulting tax case established that the Tax Inspector can question the relationship between the end client and the worker, and if he decides that it is really one of employee and employer, in spite of all the various contracts, agency and service company in place, the extra tax due will fall on the worker’s own company.

The case demonstrated how the contract between the agency and the final client can knock for six any clever contract drawn up between the worker’s company and the agency. HMRC have proved that the entire stream of contracts needs to be considered and compared to what actually happens on the ground.

For example, the agency may agree to include a substitution clause in the contract with the worker’s company, but if this clause is not reflected in the contract with the final client it is ineffective. Even if a substitution clause does exist in the agency/client contract it will be ignored if the client tells HMRC or the tax tribunal that it would never actually accept a substitute for the worker.

To ensure your working arrangement with your client will stand up to challenge by HMRC you need to see all the contracts in the chain and be sure your client would agree to accepting a substitute if asked to.

It should be noted that in a recent case with judgement issued on 5 Jan 2011 (MBF Design Services Ltd) where a hypothetical contract was sought to be created to examine the relationship between the end client and the worker, the three key status tests of personal service, control and mutuality of obligations led to the decision in favour of the taxpayer. It was particularly noted that the ability to cancel the contract without notice and the fact that contractors were sent home without pay whilst employees had to remain on site meant there was a lack of mutuality of obligations.

Managed Service Companies

A Managed Service Company differs to a Personal Service Company in that there is normally a scheme provider that operates the company on behalf of the worker. Often these are known as “composite companies” with perhaps 10 to 20 workers being put through the same company or “managed personal service companies” with one for each worker but managed by the scheme provider on behalf of the worker.

From 2007/08 the Government has taken action to tackle Managed Service Company (MSC) schemes which are used to disguise arrangements that should be treated as employment arrangements for tax purposes and are used to avoid paying the employed levels of tax and national insurance.

Income that is received by workers through MSCs is now subject to employment levels of tax and NI. It is the responsibility of the MSC to operate PAYE and deduct the necessary tax and NI on the income.

In addition, the rules for tax relief on travel expenses are the same as for other employed workers.

Whilst in many cases these companies should be caught by the IR35 legislation, they did not follow the legislation and when caught they simply liquidate as they have no assets and start up another company the next day. To stop MSCs avoiding payment of these taxes, recovery of underpaid taxes and NICs will be possible from appropriate third parties, principally those behind the company operating such schemes including directors, shadow directors and connected or controlling parties.

These individuals will also be easier to catch as there will be no need to consider the specific relationship between each individual worker and the end client which was proving too labour intensive for HMRC.

The IR35 intermediaries legislation remains in place for personal service companies where the worker operates the company himself. The MSC rules are not targeted at these companies.

Please contact us for further information

Disclaimer:  This App and its contents have been produced as a helpful reference point.  The information should be used as a guide only and your specific circumstances are best discussed directly with us.

No reliance should be placed on this material and no action should be taken without seeking the appropriate professional or legal advice. Although the authors make reasonable efforts to ensure the content of this App is accurate and up to date, the authors make no representations, warranties or guarantees that the content is accurate, complete or up-to-date and accept no responsibility whatsoever for any loss occasioned by anyone acting on information within this App.

Categories: General, Limited Company

The meaning of goodwill for a business and CGT purposes is complex.

The term ‘goodwill’ is rarely mentioned in legislation and there is no definition of ‘goodwill’ for the purposes of Capital Gains legislation. In fact, most definitions of goodwill are derived from case law.

At its simplest you could describe goodwill as the ‘extra’ value of a business over and above its tangible assets. In the vast majority of cases when a business is sold a significant proportion of the sale price will be for the intangible assets or goodwill of the company. This is essentially a way of putting a monetary value on the business’s reputation and customer relationships.

Valuing goodwill is complex and there are many different methods which are used and that vary from industry to industry.

HMRC’s internal manual states that:

‘Most businesses can be expected to have goodwill even though its value is likely to fluctuate from time to time. The fact that goodwill may not be reflected in the balance sheet of a business does not mean that it does not exist. In the same way, the writing off of purchased goodwill in the accounts of a business does not mean that its value has decreased or that it has ceased to exist.’

Please contact us for further information. 

Disclaimer:  This App and its contents have been produced as a helpful reference point.  The information should be used as a guide only and your specific circumstances are best discussed directly with us. 

No reliance should be placed on this material and no action should be taken without seeking the appropriate professional or legal advice. Although the authors make reasonable efforts to ensure the content of this App is accurate and up-to-date, the authors make no representations, warranties or guarantees that the content is accurate, complete or up-to-date and accept no responsibility whatsoever for any loss occasioned by anyone acting on information within this App.

Here I provide you with an overview of the information to provide to your accountant (me) to enable completion of your end of year accounts. 

Every business is different, and you should discuss your own bookkeeping requirement with me. Between us we can decide what you can prepare for me and agree a time schedule for when you will provide the records and for when I will have your accounts ready for discussion. 

Basic ways in which you may find you can help me…

·         Adding up and balancing your books such as cross casting of column totals

·         analysing your payments and receipts

·         filing your invoices in sensible system so that relevant invoices can be easily found 

If you’re feeling more adventurous, you can also assist by

·         preparing a bank reconciliation that reconciles the balance on your bank statement to that derived from your records after adjusting for unpresented receipts and payments

·         using control accounts for key nominal accounts such as debtors and creditors that reconcile to your year end list of debtors and creditors 

By using reconciliations and control accounts on a regular basis during the year, you help to ensure there are no errors in the records. 

Records to provide to me

Not every business will have all of the following records but if you do, you should provide them to me covering the year (plus one month after)… 

·         Access to your Cloud Accounting records.

·         Your cash book if you have one

·         Petty cash records.

·         Sales and purchase day books if operated.

·         Any ledgers that you keep.

·         Bank statements covering the whole financial year for all business accounts.

·         Purchase invoices.

·         Sales invoices.

·         Cheque books and paying in stubs if used.

·         Copies of VAT returns covering the year together with any workings.

·         Your payroll records for the year together with details of PAYE calculations for payments to HMRC.

·         Copies of any new loan or HP agreements taken out during the year.

·         Details of any business income or expenditure that didn’t go through your business bank account.

·         Anything else you feel may be relevant – if in doubt, include it. 

Schedules to provide to me 

In addition, the following schedules will assist me in completing your end of year accounts. I can prepare these myself but if you wish to do so, it would reduce the time I spend preparing your accounts… 

·         A list of fixed asset additions with copy purchase invoices provided.

·         A year end stock list. This should be at the lower of cost and net realisable value.

·         Details of work in progress at the year end.

·         A list of debtors at the year end, their age and an indication of any that unlikely to pay

·         Sales ledger control account reconciliation.

·         Reconciliations for all bank and cash accounts.

·         A list of trade creditors at the year end and their age.

·         Purchase ledger control account reconciliation.

·         Details of PAYE owed at the year end.

·         Details of VAT owed at the year end.

·         Schedules of key and tax sensitive profit and loss accounts such as repairs, sundry expenses, entertainment, etc. 

How I Can Help You 

I can help you avoid all of the above by moving you to online cloud accounting. There are many benefits to online accounting, and it also means I can work with you throughout the year, giving advice and providing reports when you need it most, not after the year end when it could be too late.   

Please contact us for further information 

Disclaimer:  This App and its contents have been produced as a helpful reference point.  The information should be used as a guide only and your specific circumstances are best discussed directly with us. 

No reliance should be placed on this material and no action should be taken without seeking the appropriate professional or legal advice. Although the authors make reasonable efforts to ensure the content of this App is accurate and up to date, the authors make no representations, warranties or guarantees that the content is accurate, complete or up-to-date and accept no responsibility whatsoever for any loss occasioned by anyone acting on information within this App.

Special tax rules apply to the construction industry and workers which are detailed in The Construction Industry Scheme (CIS).

The Construction Industry Scheme

CIS uses a verification system for contractors to confirm whether a subcontractor should be paid gross or net.

Construction Activities

The definition of construction activities is widely drawn and so most businesses working in construction will be caught by CIS. It applies to sole traders, partnerships and Limited Companies but not to private householders who are paying contractors.

Contractors are businesses that carry out “construction operations” as part of their business and subcontractors are those who carry out such work for the contractor, but it does not include employees of the contractor. Some businesses will be both a contractor and a subcontractor.

Registration

New subcontractors have to register with HMRC but as well as calling into the local office it can also be done by phone or online if HMRC already know about you.

The subcontractor will be informed whether they can receive payments gross or net. To qualify to be paid gross a subcontractor must pass the Business Turnover and Compliance Tests. In summary these are…

  • It is run in the UK with a bank account;
  • It has a construction turnover, excluding VAT and the cost of materials, of at least £30,000 each year (more for partnerships and companies);
  • It has complied with all its tax obligations to date.

Verification

When a contractor engages a subcontractor who has not worked for them in the current or previous two tax years, they must get the name, unique taxpayer reference and national insurance number of the subcontractor in the case of an individual and contact HMRC to ascertain if the subcontractor should be paid gross or net, this is called verification. The contractor must also decide the contract proposed is one of self-employment, or whether the worker should be treated as an employee.

It is important to ensure that the status of the worker in terms of self-employment or employment is correctly established. This is a question of fact and not what the parties want it to be. The CIS scheme only applies to self-employment situations, but because a subcontractor is registered under the CIS it does not mean that he should be treated as self-employed for every job he does.

If the subcontractor is registered with HMRC the contractor will be told to pay the subcontractor gross or to apply the standard rate of deduction (20%) to all payments to the subcontractor. If the subcontractor has not registered with HMRC, a higher rate of tax deduction of 30% will be required.

The deductions count as payments on account of the eventual tax and Class 4 NI liability of the subcontractor. If the subcontractor has an accounting period ending early in the tax year, for example 31 Dec they can apply for an in-year repayment where the deductions already taken will exceed the total tax and Class 4 NI bill for the year. Arrangements exist for subcontractors that are companies to be able to set-off deductions against any PAYE, NIC and CIS deductions that they owe.

Contractors will be given a verification number for the subcontractor, or group of subcontractors, that is matched to the HMRC records in one query or phone call. This number is for the contractor’s reference only.

For each subcontractor that cannot be matched either because they are not registered or the wrong details have been given, a special verification number will be given for each unmatched subcontractor and this number must be recorded on the subcontractor’s payment statement. This will be needed to get refunds later.

Records

Payment Statement – Contractors must give a statement to each subcontractor that a deduction has been made from his payments, either done once a month to cover all payments or for each payment, and this must be issued within 14 days of the end of the month in which the payment was made. Statements can be in any format as long as they contain the necessary information. They are not required for subcontractors who are paid gross.

Monthly Return – The contractor will submit a monthly return to HMRC that shows all subcontractors that payments have been made to, the amount paid and where net payments are made, the amount of materials and deductions. The return must be filed with HMRC within 14 days of the month end, with nil returns made if there were no payments in the month.

There are penalties for filing returns late.

There is no annual return required under the new CIS.

Real Time Information (RTI)

Under the rules of RTI you cannot process subcontractors through PAYE. RTI does not change how CIS is reported. Employers will still file monthly returns (CIS300). But for Limited Companies acting as a subcontractor, on the Employer Payment Summary (EPS) each month you are required to declare ‘CIS deductions suffered’, to offset any liability due to HMRC.

Please contact us for further information

Disclaimer:  This App and its contents have been produced as a helpful reference point.  The information should be used as a guide only and your specific circumstances are best discussed directly with us.

No reliance should be placed on this material and no action should be taken without seeking the appropriate professional or legal advice. Although the authors make reasonable efforts to ensure the content of this App is accurate and up to date, the authors make no representations, warranties or guarantees that the content is accurate, complete or up-to-date and accept no responsibility whatsoever for any loss occasioned by anyone acting on information within this App.

When is a car a pool car?

Rather than allocating specific cars to particular employees, some employers find it preferable to operate a carpool and have a number of cars available for use by employees when they need to undertake a business journey.

From a tax perspective, provided that certain conditions are met, no benefit in kind tax charge will arise where an employee makes use of a pool car.

The conditions

There are five conditions that must be met for a car to be treated as a pool car for tax purposes.

1. The car is made available to, and actually is used by, more than one employee.

2.In each case, it is made available by reason of the employee’s employment.

3.The car is not ordinarily used by one employee to the exclusion of the others.

4.In each case, any private use by the employee is merely incidental to the employee’s business use of the car.

5. The car is not normally kept overnight on or in the vicinity of any of the residential premises where any of the employees was residing (subject to an exception if kept overnight on premises occupied by the person making the cars available).

The tax exemption only applies if all five conditions are met.

When private use is ‘merely incidental’

To meet the definition of a pool car, the car should only be available for genuine business use. However, in deciding whether this test is met, private use is disregarded as long as that private use is ‘merely incidental’ to the employee’s business use of the car. HMRC regard the test as being a qualitative rather than a quantitative test. It does not refer to the actual private mileage, rather the private element in the context of the journey as a whole.

For example, if an employee is required to make a long business journey and takes the car home the previous evening in order to get an early start, the private use comprising the journey from work to home the previous evening would be regarded as ‘merely incidental’. The car is taken home to facilitate the business journey the following day.

Kept overnight at employee’s homes – the 60% test

For a car to meet the definition of a pool car, it must not normally be kept overnight at employees’ homes. In deciding whether this test is met, HMRC apply a rule of thumb – as long as the total number of nights on which a car is taken home by employees, for whatever reason, is less than 60% of the total number of nights in the period, HMRC accept that the condition is met.

When a benefit in kind tax charge arises

If the car does not meet the definition of a pool car and is made available for the employee’s private use, a tax charge will arise under the company car tax rules.

Please contact us for further information.

Disclaimer:  This App and its contents have been produced as a helpful reference point. The information should be used as a guide only and your specific circumstances are best discussed directly with us.

No reliance should be placed on this material and no action should be taken without seeking the appropriate professional or legal advice. Although the authors make reasonable efforts to ensure the content of this App is accurate and up-to-date, the authors make no representations, warranties or guarantees that the content is accurate, complete or up-to-date and accept no responsibility whatsoever for any loss occasioned by anyone acting on information within this App.

Categories: General, Limited Company

Can we deduct entertaining expenses?

The tax rules on the deductibility of entertaining expenses are harsh and often misunderstood – the fact that the expenditure is incurred for businesses purposes does not make it deductible.

Subject to certain limited exceptions, no deduction is allowed for business entertaining and gifts in calculating taxable profits.

What counts as business entertainment?

Business entertainment is the provision of free or subsidised hospitality or entertainment. Hospitality includes the provision of food drink or similar benefits for which no payment is made by the recipient. It also extends to subsidised hospitality whereby the charge made to the recipient does not cover the costs of providing the entertainment or hospitality.

Examples of business entertaining would include taking a supplier to lunch, taking customers to a day at the races, or inviting them to a box at rugby match, and suchlike. The definition is wide.

Exception 1: Entertaining employees

One of the main exceptions to the general rule that entertaining expenses cannot be deducted is in relation to staff entertainment. A deduction is allowed for the cost of entertaining staff, as long as the costs are incurred wholly and exclusively for the purposes of the trade and the entertaining of the staff is not merely incidental to the entertaining of customers. So, for example, a company would be able to deduct the cost of the staff Christmas party in calculating its taxable profits. However, if a company takes customers to Wimbledon, the fact that a number of employees also attended is not enough to guarantee a deduction as the entertaining provided for the employees is incidental to that for customers.It should be noted that unless an exemption is in point, employees may suffer a benefit in kind tax charge on any entertainment provided.

Exception 2: Normal course of trade

The disallowance does not apply where the business is that of providing hospitality, and as such a deduction is allowed for the costs incurred in providing that hospitality as long as they are incurred wholly and exclusively for the purposes of the business. Businesses such as restaurants and events management companies would fall into this category.

Exception 3: Contractual obligation to provide entertainment

Where entertainment is provided under a contractual obligation, this is not treated as business entertainment and a deduction is allowed for the cost. A common example would be where hospitality is provided as part of a package. However, the business should be able to demonstrate that they have received a full return for the entertainment provided.

Exception 4: Small gifts carrying an advert

The provision of business gifts is treated as business entertaining with the result that a deduction for the costs is not generally allowed. However, there is an exception for gifts costing not more than £50 per year per recipient which bear a conspicuous advert for the business. An example of a deductible gift would be a diary or a water bottle featuring an advert for the business.

Remember…Just because entertaining is incurred for business purposes does not mean that it is allowable and business entertaining needs to be added back in the corporation tax computation.

Please contact us for further information.

Disclaimer:  This App and its contents have been produced as a helpful reference point. The information should be used as a guide only and your specific circumstances are best discussed directly with us.No reliance should be placed on this material and no action should be taken without seeking the appropriate professional or legal advice. Although the authors make reasonable efforts to ensure the content of this App is accurate and up-to-date, the authors make no representations, warranties or guarantees that the content is accurate, complete or up-to-date and accept no responsibility whatsoever for any loss occasioned by anyone acting on information within this App.

Limited Company

IR35 was brought in to prevent the payment of less tax and national insurance by using a personal service company or partnership to provide services through rather than being a direct employee.

For example, by using a personal service company it has been possible to extract income from the company in the form of dividends rather than salary so saving substantial amounts of national insurance. In addition, shares of the company may be split with the spouse of the worker to help avoid higher rate tax and there is far more that can be deducted in the way of tax-deductible expenses by operating through a company rather than as an employee.

The regulations are applied where a worker supplies services through a relevant intermediary (which can be a company, partnership or individual), to a client and had the worker contracted directly with the client, the income would have been treated as employment income for tax purposes. The status tests outlined below are used to help determine whether the worker would have been treated as an employee or self-employed if they had contracted directly.

Large amounts of tax and NIC are at stake. Every case needs to be judged on its merits and several factors need to be considered in concluding on whether a contract is caught or not.

HMRC can provide an opinion on whether the contract is caught by IR35 or not, but do not provide opinions on draft contracts. Unsurprisingly perhaps, the view of HMRC often tends to come down on the side that the contract is caught by IR35 but very often their view has been shown to be wrong and should not be accepted without further investigation. Whether HMRC should also be asked for their opinion also needs consideration.

We can help advise you on how to stay on the right side of the law.

A company is a relevant intermediary for the IR35 rules if…

  • the worker (together with his close family and business partners) controls more than 5% of the company; OR
  • the worker receives payments or benefits which are not salary, but which could reasonably be taken to be payment for services provided to the client

For partnerships the IR35 rules are only applied when any of the following apply…

  • a partner (together with his close family) has more than 60% of the profits;
  • most of the partnership profits come from the work of a single client;
  • where a partner share of the profits is based on their income from the relevant contracts.

The Calculation

Any salary paid during the year has PAYE operated on it in the normal way during the year.

However, where there is income that is caught by IR35, then to the extent that it exceeds any salary to which PAYE is already applied plus taxable benefits, the excess will be treated as a deemed salary and is treated as pay on 5th April, and is liable to PAYE and Class1 NIC’s accordingly. This makes the extra tax and NIC payable on 19th April following the tax year concerned, which is a very short timescale, so contractors need to be organised. Interest runs on underpayments from this date.

In arriving at the excess salary, certain expenses can be deducted from the income derived from IR35 contracts as follows…

  • a flat rate allowance of 5% of the net of VAT income;
  • expenses that would have been allowable as an employee – this includes travel from home to the client’s premises as long as the job is expected to and does not last more than 24 months;
  • employer pension contributions;
  • employer national insurance contributions;
  • some capital allowances.

The excess amount is treated as being inclusive of employer’s Class 1 NIC, so these are deducted to arrive at the deemed salary on which tax and NIC is calculated.

The deemed payment and employers NIC payment thereon are then deductible expenses for the intermediary company, treated as if paid on 5th April.

If actual salaries are paid later of amounts that were included in the deemed salary calculation, they cannot be paid free of tax and NI as they only reduce the salary payment of the actual year in which they are paid. To avoid potential double taxation, it is better to use dividends.

If caught by IR35, the method of extracting funds from the company once the deemed payment calculation has been applied needs to be considered. For example…

  • A salary could be paid during the year to avoid a large tax and NIC payment on 19th April, but it does mean you pay the tax earlier.
  • It is possible to borrow from the company and then repay the borrowing out of a salary nearer the 5th April. There can be tax and NIC on the notional interest on the loan and it is possible a payment to HMRC of 25% of the loan will be required if the loan is not repaid in full within nine month of the company’s year end.
  • Paying interim dividends in the tax year following the deemed payment and then claiming for the dividend not to be treated as a dividend for tax purposes relieved to avoid any double taxation – this is often the best way forward.

Status Tests

In determining whether the contract is caught by IR35 it is necessary to consider the existing tests developed over the years to determine whether an individual is employed or self-employed. These tests can be summarised in one question: Is the individual in business on his own account when offering services to the client? If the answer is not a definite ‘yes’ the following factors need to be considered…

Requirement to provide a personal service

  • Must you complete the work personally?
  • Can you send substitute to do the work?

Control and supervision of the worker by the client

  • Can you work at times to suit you?
  • Does the client control how you do the work?

Mutuality of obligation between the parties for the duration of the contract

  • Do you have the option to turn down work offered and does the client have the option not to offer work?
  • Is each side obliged to offer work and accept work?

Financial risk of the worker

  • Do you correct defective work in your own time, at your own cost?
  • Are invoices raised by reference to the job rather than hours worked?
  • Is public liability insurance in place?
  • Is work carried out for more than just one or a very small number of clients?

Provision of equipment and materials by the worker

  • Do you use your own equipment?
  • Are materials supplied by you?
  • Do you work from your own premises?
  • Does your company have its own business stationery?

Trappings of employment

  • Is holiday and sick pay paid to you by the client?
  • Are any employment type benefits provided to you by the client?
  • How long have you been working for the client?
  • Is there a notice period to end the arrangement?

Intention of the parties

  • What was the intention of the parties in forming the contract?

The first three factors are the most important. If one of these does not exist the contract does not have the attributes of an employment contract so must be another type of contract, such as a self-employment relationship. However, to determine whether the worker is self-employed the other factors also need to be considered.

HRMC Business Status Tests

HMRC think they can generalise about what makes some companies fall within IR35 and other escape it. In May 2012 they have drawn-up a set of business entity tests, complete with a scoring system, to help you to judge whether your business would be at high, medium, or low risk of being investigated for falling under IR35.

These business entity tests are not derived from the tax law. They merely represent the Taxman’s view of the risk of a business falling within IR35.

The scoring attached to the tests is controversial, as it penalises businesses that have no bad debts, never pay to advertise and operate from the owner’s home. These IR35 business entity tests do not change the IR35 law one bit, and will probably be ignored by the Tax Tribunal.

If you choose to use the IR35 business entity tests, you don’t have to declare your score to the Taxman, the tests are merely for your own guidance. However, if you are concerned that the business entity tests produce a high risk score for your businesses, we should discuss why this is the case. Are they any changes which can be made to the way your business operates which would make it less likely to be caught by IR35?

Dragonfly Consulting Tax case

The Dragonfly Consulting tax case established that the Tax Inspector can question the relationship between the end client and the worker, and if he decides that it is really one of employee and employer, in spite of all the various contracts, agency and service company in place, the extra tax due will fall on the worker’s own company.

The case demonstrated how the contract between the agency and the final client can knock for six any clever contract drawn up between the worker’s company and the agency. HMRC have proved that the entire stream of contracts needs to be considered and compared to what actually happens on the ground.

For example, the agency may agree to include a substitution clause in the contract with the worker’s company, but if this clause is not reflected in the contract with the final client it is ineffective. Even if a substitution clause does exist in the agency/client contract it will be ignored if the client tells HMRC or the tax tribunal that it would never actually accept a substitute for the worker.

To ensure your working arrangement with your client will stand up to challenge by HMRC you need to see all the contracts in the chain and be sure your client would agree to accepting a substitute if asked to.

It should be noted that in a recent case with judgement issued on 5 Jan 2011 (MBF Design Services Ltd) where a hypothetical contract was sought to be created to examine the relationship between the end client and the worker, the three key status tests of personal service, control and mutuality of obligations led to the decision in favour of the taxpayer. It was particularly noted that the ability to cancel the contract without notice and the fact that contractors were sent home without pay whilst employees had to remain on site meant there was a lack of mutuality of obligations.

Managed Service Companies

A Managed Service Company differs to a Personal Service Company in that there is normally a scheme provider that operates the company on behalf of the worker. Often these are known as “composite companies” with perhaps 10 to 20 workers being put through the same company or “managed personal service companies” with one for each worker but managed by the scheme provider on behalf of the worker.

From 2007/08 the Government has taken action to tackle Managed Service Company (MSC) schemes which are used to disguise arrangements that should be treated as employment arrangements for tax purposes and are used to avoid paying the employed levels of tax and national insurance.

Income that is received by workers through MSCs is now subject to employment levels of tax and NI. It is the responsibility of the MSC to operate PAYE and deduct the necessary tax and NI on the income.

In addition, the rules for tax relief on travel expenses are the same as for other employed workers.

Whilst in many cases these companies should be caught by the IR35 legislation, they did not follow the legislation and when caught they simply liquidate as they have no assets and start up another company the next day. To stop MSCs avoiding payment of these taxes, recovery of underpaid taxes and NICs will be possible from appropriate third parties, principally those behind the company operating such schemes including directors, shadow directors and connected or controlling parties.

These individuals will also be easier to catch as there will be no need to consider the specific relationship between each individual worker and the end client which was proving too labour intensive for HMRC.

The IR35 intermediaries legislation remains in place for personal service companies where the worker operates the company himself. The MSC rules are not targeted at these companies.

Please contact us for further information

Disclaimer:  This App and its contents have been produced as a helpful reference point.  The information should be used as a guide only and your specific circumstances are best discussed directly with us.

No reliance should be placed on this material and no action should be taken without seeking the appropriate professional or legal advice. Although the authors make reasonable efforts to ensure the content of this App is accurate and up to date, the authors make no representations, warranties or guarantees that the content is accurate, complete or up-to-date and accept no responsibility whatsoever for any loss occasioned by anyone acting on information within this App.

Categories: General, Limited Company

The cost of a staff party or other entertainment event such as a Summer BBQ is generally allowed as a deduction for tax purposes. If you meet the various criteria outlined below there is no requirement to report anything to HMRC or pay tax and National Insurance.

There will also be no taxable benefit charged to employees on:

  • An annual Christmas party or other annual event offered to staff generally and is not taxable on those attending provided that the average cost per head of the function does not exceed £150.
  • Provided the event must be open to all employees.
  • If a business has multiple locations, then a party open to all staff at one of the locations is allowable.
  • You can also have separate parties for separate departments, but employees must be able to attend one of the events.
  • There can be more than one annual event. If the total cost of these parties is under £150 per head, then there is no chargeable benefit. However, if the total cost per head goes over £150 then whichever functions best utilise the £150 are exempt and the others taxable.
  • Note, the £150 is not an allowance and any costs over £150 per head are taxable on the full cost per head. It is not necessary to keep a running total by employee but a cost per head per function.
  • All costs including VAT must be taken into account. This includes the costs of transport to and from the event, food and drink and any accommodation provided.

It is highly recommended when planning a staff party or other annual event to try and stick to the tax rules above. This should ensure that your party does not have an extra tax cost for you or your employees.

If you need help in crunching the numbers to make sure you do not exceed the allowable limits, please call me.

Disclaimer:  This App and its contents have been produced as a helpful reference point.  The information should be used as a guide only and your specific circumstances are best discussed directly with us. 

No reliance should be placed on this material and no action should be taken without seeking the appropriate professional or legal advice. Although the authors make reasonable efforts to ensure the content of this App is accurate and up-to-date, the authors make no representations, warranties or guarantees that the content is accurate, complete or up-to-date and accept no responsibility whatsoever for any loss occasioned by anyone acting on information within this App.

The meaning of goodwill for a business and CGT purposes is complex.

The term ‘goodwill’ is rarely mentioned in legislation and there is no definition of ‘goodwill’ for the purposes of Capital Gains legislation. In fact, most definitions of goodwill are derived from case law.

At its simplest you could describe goodwill as the ‘extra’ value of a business over and above its tangible assets. In the vast majority of cases when a business is sold a significant proportion of the sale price will be for the intangible assets or goodwill of the company. This is essentially a way of putting a monetary value on the business’s reputation and customer relationships.

Valuing goodwill is complex and there are many different methods which are used and that vary from industry to industry.

HMRC’s internal manual states that:

‘Most businesses can be expected to have goodwill even though its value is likely to fluctuate from time to time. The fact that goodwill may not be reflected in the balance sheet of a business does not mean that it does not exist. In the same way, the writing off of purchased goodwill in the accounts of a business does not mean that its value has decreased or that it has ceased to exist.’

Please contact us for further information. 

Disclaimer:  This App and its contents have been produced as a helpful reference point.  The information should be used as a guide only and your specific circumstances are best discussed directly with us. 

No reliance should be placed on this material and no action should be taken without seeking the appropriate professional or legal advice. Although the authors make reasonable efforts to ensure the content of this App is accurate and up-to-date, the authors make no representations, warranties or guarantees that the content is accurate, complete or up-to-date and accept no responsibility whatsoever for any loss occasioned by anyone acting on information within this App.

If you are an employee or in some cases a Company Director and use your own money to buy things you need for your job, you can sometimes claim tax relief for the associated costs.

It is usually only possible to claim tax relief for the cost of items used solely for your work and you may also be able to claim tax relief for using you own vehicle, be it a car, van, motorcycle or bike. As a general rule, there is no tax relief for ordinary commuting to and from your work but the rules are different for temporary workplaces where the expense is usually allowable and if you use your own vehicle to do other business related mileage.

Employers usually make payments based on a set rate per mile depending on the mode of transport used and there are approved mileage rates published by HMRC. The approved mileage allowance payment rates are available where you use your own car on a business trip and where the approved mileage rates are used, the payments to you are not regarded as a taxable benefit.

Where an employer pays less than the published rates, you could claim tax relief for the shortfall using mileage allowance relief.

For all cars the approved mileage allowance payment for the first 10,000 business miles is 45p per mile and 25p per mile for every additional business mile.

The approved mileage rates are 20p per mile for bicycle travel and 24p per mile for motorcycle travel.

There is an additional passenger payment you can receive of 5p per passenger per business mile from your employer. This is available if you carry fellow employees in your car or van on journeys which are also work journeys for your colleagues. 

Like all things tax the rules around what you can claim can be complicated so if we can help please get in touch. 

Please contact us for further information

Disclaimer: This App and its contents have been produced as a helpful reference point. The information should be used as a guide only and your specific circumstances are best discussed directly with us.

No reliance should be placed on this material and no action should be taken without seeking the appropriate professional or legal advice. Although the authors make reasonable efforts to ensure the content of this App is accurate and up to date, the authors make no representations, warranties or guarantees that the content is accurate, complete or up-to-date and accept no responsibility whatsoever for any loss occasioned by anyone acting on information within this App.

Here I provide you with an overview of the information to provide to your accountant (me) to enable completion of your end of year accounts. 

Every business is different, and you should discuss your own bookkeeping requirement with me. Between us we can decide what you can prepare for me and agree a time schedule for when you will provide the records and for when I will have your accounts ready for discussion. 

Basic ways in which you may find you can help me…

·         Adding up and balancing your books such as cross casting of column totals

·         analysing your payments and receipts

·         filing your invoices in sensible system so that relevant invoices can be easily found 

If you’re feeling more adventurous, you can also assist by

·         preparing a bank reconciliation that reconciles the balance on your bank statement to that derived from your records after adjusting for unpresented receipts and payments

·         using control accounts for key nominal accounts such as debtors and creditors that reconcile to your year end list of debtors and creditors 

By using reconciliations and control accounts on a regular basis during the year, you help to ensure there are no errors in the records. 

Records to provide to me

Not every business will have all of the following records but if you do, you should provide them to me covering the year (plus one month after)… 

·         Access to your Cloud Accounting records.

·         Your cash book if you have one

·         Petty cash records.

·         Sales and purchase day books if operated.

·         Any ledgers that you keep.

·         Bank statements covering the whole financial year for all business accounts.

·         Purchase invoices.

·         Sales invoices.

·         Cheque books and paying in stubs if used.

·         Copies of VAT returns covering the year together with any workings.

·         Your payroll records for the year together with details of PAYE calculations for payments to HMRC.

·         Copies of any new loan or HP agreements taken out during the year.

·         Details of any business income or expenditure that didn’t go through your business bank account.

·         Anything else you feel may be relevant – if in doubt, include it. 

Schedules to provide to me 

In addition, the following schedules will assist me in completing your end of year accounts. I can prepare these myself but if you wish to do so, it would reduce the time I spend preparing your accounts… 

·         A list of fixed asset additions with copy purchase invoices provided.

·         A year end stock list. This should be at the lower of cost and net realisable value.

·         Details of work in progress at the year end.

·         A list of debtors at the year end, their age and an indication of any that unlikely to pay

·         Sales ledger control account reconciliation.

·         Reconciliations for all bank and cash accounts.

·         A list of trade creditors at the year end and their age.

·         Purchase ledger control account reconciliation.

·         Details of PAYE owed at the year end.

·         Details of VAT owed at the year end.

·         Schedules of key and tax sensitive profit and loss accounts such as repairs, sundry expenses, entertainment, etc. 

How I Can Help You 

I can help you avoid all of the above by moving you to online cloud accounting. There are many benefits to online accounting, and it also means I can work with you throughout the year, giving advice and providing reports when you need it most, not after the year end when it could be too late.   

Please contact us for further information 

Disclaimer:  This App and its contents have been produced as a helpful reference point.  The information should be used as a guide only and your specific circumstances are best discussed directly with us. 

No reliance should be placed on this material and no action should be taken without seeking the appropriate professional or legal advice. Although the authors make reasonable efforts to ensure the content of this App is accurate and up to date, the authors make no representations, warranties or guarantees that the content is accurate, complete or up-to-date and accept no responsibility whatsoever for any loss occasioned by anyone acting on information within this App.

Special tax rules apply to the construction industry and workers which are detailed in The Construction Industry Scheme (CIS).

The Construction Industry Scheme

CIS uses a verification system for contractors to confirm whether a subcontractor should be paid gross or net.

Construction Activities

The definition of construction activities is widely drawn and so most businesses working in construction will be caught by CIS. It applies to sole traders, partnerships and Limited Companies but not to private householders who are paying contractors.

Contractors are businesses that carry out “construction operations” as part of their business and subcontractors are those who carry out such work for the contractor, but it does not include employees of the contractor. Some businesses will be both a contractor and a subcontractor.

Registration

New subcontractors have to register with HMRC but as well as calling into the local office it can also be done by phone or online if HMRC already know about you.

The subcontractor will be informed whether they can receive payments gross or net. To qualify to be paid gross a subcontractor must pass the Business Turnover and Compliance Tests. In summary these are…

  • It is run in the UK with a bank account;
  • It has a construction turnover, excluding VAT and the cost of materials, of at least £30,000 each year (more for partnerships and companies);
  • It has complied with all its tax obligations to date.

Verification

When a contractor engages a subcontractor who has not worked for them in the current or previous two tax years, they must get the name, unique taxpayer reference and national insurance number of the subcontractor in the case of an individual and contact HMRC to ascertain if the subcontractor should be paid gross or net, this is called verification. The contractor must also decide the contract proposed is one of self-employment, or whether the worker should be treated as an employee.

It is important to ensure that the status of the worker in terms of self-employment or employment is correctly established. This is a question of fact and not what the parties want it to be. The CIS scheme only applies to self-employment situations, but because a subcontractor is registered under the CIS it does not mean that he should be treated as self-employed for every job he does.

If the subcontractor is registered with HMRC the contractor will be told to pay the subcontractor gross or to apply the standard rate of deduction (20%) to all payments to the subcontractor. If the subcontractor has not registered with HMRC, a higher rate of tax deduction of 30% will be required.

The deductions count as payments on account of the eventual tax and Class 4 NI liability of the subcontractor. If the subcontractor has an accounting period ending early in the tax year, for example 31 Dec they can apply for an in-year repayment where the deductions already taken will exceed the total tax and Class 4 NI bill for the year. Arrangements exist for subcontractors that are companies to be able to set-off deductions against any PAYE, NIC and CIS deductions that they owe.

Contractors will be given a verification number for the subcontractor, or group of subcontractors, that is matched to the HMRC records in one query or phone call. This number is for the contractor’s reference only.

For each subcontractor that cannot be matched either because they are not registered or the wrong details have been given, a special verification number will be given for each unmatched subcontractor and this number must be recorded on the subcontractor’s payment statement. This will be needed to get refunds later.

Records

Payment Statement – Contractors must give a statement to each subcontractor that a deduction has been made from his payments, either done once a month to cover all payments or for each payment, and this must be issued within 14 days of the end of the month in which the payment was made. Statements can be in any format as long as they contain the necessary information. They are not required for subcontractors who are paid gross.

Monthly Return – The contractor will submit a monthly return to HMRC that shows all subcontractors that payments have been made to, the amount paid and where net payments are made, the amount of materials and deductions. The return must be filed with HMRC within 14 days of the month end, with nil returns made if there were no payments in the month.

There are penalties for filing returns late.

There is no annual return required under the new CIS.

Real Time Information (RTI)

Under the rules of RTI you cannot process subcontractors through PAYE. RTI does not change how CIS is reported. Employers will still file monthly returns (CIS300). But for Limited Companies acting as a subcontractor, on the Employer Payment Summary (EPS) each month you are required to declare ‘CIS deductions suffered’, to offset any liability due to HMRC.

Please contact us for further information

Disclaimer:  This App and its contents have been produced as a helpful reference point.  The information should be used as a guide only and your specific circumstances are best discussed directly with us.

No reliance should be placed on this material and no action should be taken without seeking the appropriate professional or legal advice. Although the authors make reasonable efforts to ensure the content of this App is accurate and up to date, the authors make no representations, warranties or guarantees that the content is accurate, complete or up-to-date and accept no responsibility whatsoever for any loss occasioned by anyone acting on information within this App.

When is a car a pool car?

Rather than allocating specific cars to particular employees, some employers find it preferable to operate a carpool and have a number of cars available for use by employees when they need to undertake a business journey.

From a tax perspective, provided that certain conditions are met, no benefit in kind tax charge will arise where an employee makes use of a pool car.

The conditions

There are five conditions that must be met for a car to be treated as a pool car for tax purposes.

1. The car is made available to, and actually is used by, more than one employee.

2.In each case, it is made available by reason of the employee’s employment.

3.The car is not ordinarily used by one employee to the exclusion of the others.

4.In each case, any private use by the employee is merely incidental to the employee’s business use of the car.

5. The car is not normally kept overnight on or in the vicinity of any of the residential premises where any of the employees was residing (subject to an exception if kept overnight on premises occupied by the person making the cars available).

The tax exemption only applies if all five conditions are met.

When private use is ‘merely incidental’

To meet the definition of a pool car, the car should only be available for genuine business use. However, in deciding whether this test is met, private use is disregarded as long as that private use is ‘merely incidental’ to the employee’s business use of the car. HMRC regard the test as being a qualitative rather than a quantitative test. It does not refer to the actual private mileage, rather the private element in the context of the journey as a whole.

For example, if an employee is required to make a long business journey and takes the car home the previous evening in order to get an early start, the private use comprising the journey from work to home the previous evening would be regarded as ‘merely incidental’. The car is taken home to facilitate the business journey the following day.

Kept overnight at employee’s homes – the 60% test

For a car to meet the definition of a pool car, it must not normally be kept overnight at employees’ homes. In deciding whether this test is met, HMRC apply a rule of thumb – as long as the total number of nights on which a car is taken home by employees, for whatever reason, is less than 60% of the total number of nights in the period, HMRC accept that the condition is met.

When a benefit in kind tax charge arises

If the car does not meet the definition of a pool car and is made available for the employee’s private use, a tax charge will arise under the company car tax rules.

Please contact us for further information.

Disclaimer:  This App and its contents have been produced as a helpful reference point. The information should be used as a guide only and your specific circumstances are best discussed directly with us.

No reliance should be placed on this material and no action should be taken without seeking the appropriate professional or legal advice. Although the authors make reasonable efforts to ensure the content of this App is accurate and up-to-date, the authors make no representations, warranties or guarantees that the content is accurate, complete or up-to-date and accept no responsibility whatsoever for any loss occasioned by anyone acting on information within this App.

Categories: General, Limited Company

Firstly, a dormant company isn’t simply a closed company. There are a few rules to owning a dormant company you must meet if you wish your company to be classified as dormant.

So, what is a dormant company and what reasons are there for becoming dormant? We delve into this and other frequently asked questions below.

There are two definitions of ‘dormant’ according to HMRC, one for Corporation Tax and one for Companies House.

A dormant company for Corporation Tax is one which:

·         Has stopped trading and has no other income (such as investments)

·         Is a new limited company that has not yet begun trading

·         Is an ‘unincorporated association’ or club owing less than £100 Corporation Tax

·         Is a flat management company

A dormant company for Companies House is a company which is registered with Companies House but which has had ‘no significant accounting transactions’ during its financial year. A ‘significant accounting transaction’ may be defined by any transaction which should be entered in a company’s accounting records. 

For a company to be dormant for Companies House, its transactions must be limited to: 

·         Payment for shares

·         Fees paid to Companies House for a change of company name

·         Re-registration of a company

·         Filing annual returns

·         Payment of penalties imposed by Companies House 

There are certain exceptions to these such as some financial companies who are required to file their full accounts regardless of their company status.

Why become dormant? 

There a many reason why a company may become dormant either for Corporation Tax or for Companies House including: protecting a brand name or trademark, restructuring an existing business or to hold assets or intellectual property. 

One of the main benefits is that whichever description a dormant company falls under, you will have fewer filing responsibilities, reducing the statutory burden on your company. 

A dormant company is also exempt from paying Corporation Tax, provided it is dormant according to the description above. However, you must pay any outstanding tax liabilities before you can become dormant.

Filing requirements

A company may be dormant as soon as it is formed, or it may become dormant. Either way, it is important to continue managing it in the correct way. 

Each dormant company is still required to meet certain filing requirements.

As a dormant company you will still need to file annual accounts and a confirmation statement to Companies House. You must do this whether your company is dormant for Corporation Tax or for Companies House.

Making an active company dormant

To make an active company dormant, you must inform HMRC that your company is dormant as soon as possible. However, you will not be required to inform Companies House that your company is dormant until you need to file your annual accounts.

To inform HMRC, you can send a letter or contact them by phone. You must do so within three months of your company becoming dormant. 

If your company had employees, you will be required to pay any remaining wages and close your existing PAYE scheme. 

You must also deregister for VAT within 30 days of becoming dormant. 

If you want to be dormant only temporarily and plan to begin trading again in the future, you need to continue sending empty VAT returns while your company is dormant. 

As dormant companies cannot spend or receive any money without becoming active for Corporation Tax, it is best to close business bank accounts to ensure no income is received.

Making a dormant company active

If you have a dormant company and wish to become active, you must inform HMRC within three months of the company becoming active. 

For companies which have been active in the past, this is as simple as signing into your HMRC account and changing the status of the company to ‘active’ for Corporation Tax. 

For companies who have never traded, you will need to register for Corporation Tax. 

You may also need to register for VAT if you expect your turnover to be over the VAT threshold (£85,000 for 2019/20 tax year). 

You do not need to inform Companies House when your company becomes active again, as this will be clear when you submit your annual accounts.

Please contact us for further information

Disclaimer:  This App and its contents have been produced as a helpful reference point.  The information should be used as a guide only and your specific circumstances are best discussed directly with us.

No reliance should be placed on this material and no action should be taken without seeking the appropriate professional or legal advice. Although the authors make reasonable efforts to ensure the content of this App is accurate and up to date, the authors make no representations, warranties or guarantees that the content is accurate, complete or up-to-date and accept no responsibility whatsoever for any loss occasioned by anyone acting on information within this App.

Category: Limited Company

Taking money from the business for personal use when trading as a sole trade or partnership is normally easy and straightforward and unless proprietors’ drawings are a major drain on the business’ assets, there are generally no tax implications.

However, a company is a separate legal entity and, therefore, making withdrawals from a company (even if you’re a director or shareholder) requires far more consideration.

In this article, we take a closer look at the consequences of an overdrawn director’s loan account and how their impact can be reduced or avoided.

What is an overdrawn Director’s Loan Account?

If a payment is made to a director and it does not form part of their normal remuneration package (typically salary and dividends), the payment is usually set against their director’s loan account. Generally, the only other alternative would be to declare the payment is a bonus, but bonuses can be costly in tax and National Insurance.

If the director has a balance available on their director’s loan account, they can merrily draw down on their loan account with no tax implications or reporting requirements. It’s like they’ve got a bank account they can just dip into, provided the account remains in credit.

However, once the available funds are exhausted, the director is in default and, therefore, a debtor of the company. This can have two implications:

Corporation tax charge – S455

Firstly, if a balance remains outstanding on their loan account at the company’s year end, this can lead to a tax charge on the company called S455. This only applies to ‘close companies’ though – generally speaking a company with less than five shareholders/directors.

The loan account balance must be shown on supplementary pages of the company’s corporation tax return (CT600) and the S455 charge is calculated as 32.5% of whatever balance was outstanding on the director’s loan account at the period end. The S455 tax is payable nine months and one day from the end of the relevant accounting period.

An overdrawn director’s loan account is effectively an interest-free loan, so S455 is supposed to deter the company from providing such generous perks to its directors. However, S455 is rather unusual in that it is temporary – it is repaid back to the company by HM Revenue & Customs (HMRC), as the director repays the loan back to the company.

Furthermore, you only pay S455 on any advances on the loan; not the whole loan balance. So, if the loan balance went from £15,000 last year to £18,000 this year, you’d only pay S455 this year on the additional £3,000; not the entire £18,000.

Where the loan is repaid within nine months of the end of the accounting period though, relief is due immediately, i.e. the S455 is never physically paid (although disclosure is still required in the company’s tax return).

Beneficial Loan Benefit in Kind

The second implication of an overdrawn director’s loan account is that it can trigger a benefit in kind for the so-called ‘beneficial loan’. As mentioned above, an overdrawn director’s loan account is effectively an interest-free loan. Consequently, the director is taxed on the interest that would have been due if it had been a normal loan on the open market (the calculation of which is stipulated by HMRC).

There are a few exceptions, when a taxable benefit for a beneficial loan does not arise:

·         The loan is used for certain ‘qualifying’ purposes by the director, such as buying an interest in a partnership

·         The company charged the director interest (there are criteria surrounding this)

·         The loan is deemed ‘small’, i.e. it is under £10,000 throughout the tax year

Benefit in Kind P11D’s

The returns for Benefits in Kind are called P11D’s. You must supply copies and the P11D(b) (which shows the company’s Class 1A National Insurance liability) to HMRC by 6th July. The P11Ds will summarize what’s happened to the overdrawn director’s loan account across the tax year (not the company’s accounting year end).

This means if your company’s year end is not 31st March (i.e. the tax year), you will need to draw up your books mid-year to complete your P11Ds if you have an overdrawn director’s loan account.

If your director’s loan account is overdrawn and you think it may exceed £10,000 at any point in the tax year, it is important to complete the P11Ds and P11D(b) on time. If your P11D(b) is late, you will be charged a penalty of £100 per 50 employees for each month or part month the return is overdue. You’ll also be charged penalties and interest if you pay HMRC late.

The interaction between S455 and the benefits code

The interaction between S455 and the benefits code can lead to some unexpected consequences:

A S455 charge may be mitigated by an election of a dividend after the year end. However, if the balance on the loan was over £10,000 at some point, then a benefit in kind would arise.

A loan remains under £10,000 throughout the year but does not get repaid by the year end or within the nine months following. This would result in a S455 charge payable but no benefit in kind arising.

As you can see, an overdrawn director’s loan account could result in a S455 charge or a benefit – or both.

Record Keeping and Disclosure

Good record keeping with regards to a director’s loan account is essential. Poor records could result in the misallocation of expenses/ payments and ultimately, the right taxes not being paid.

Record keeping is also important because disclosure of the balance on each overdrawn director’s loan account at the year end must be made in the company’s accounts, as well as the highest, overdrawn balance at any point in the period. 

Overall, the key is to keep timely, accurate records and to keep the transactions relating to each of the directors and each of their loans separate.

How to deal with an overdrawn director’s loan account

As with a lot of scenarios, it’s hard to give one solution that will suit everyone’s circumstances. But as a rule, the triggering of a benefit in kind and S455 charge can be fairly painless provided the director is intending to repay the loan quickly. 

However, if the overdraft persists for some time, it may be preferable for the company to declare dividends (profits permitting). Although there will almost certainly be personal tax due on the dividends, it should be a one-off hit, whereas the impact of an overdrawn director’s loan account can go on year-after-year.  Dividends also do not attract National Insurance, so it is also likely to be a cheaper option too.

Please contact us for further information

Disclaimer:  This App and its contents have been produced as a helpful reference point.  The information should be used as a guide only and your specific circumstances are best discussed directly with us.

No reliance should be placed on this material and no action should be taken without seeking the appropriate professional or legal advice. Although the authors make reasonable efforts to ensure the content of this App is accurate and up to date, the authors make no representations, warranties or guarantees that the content is accurate, complete or up-to-date and accept no responsibility whatsoever for any loss occasioned by anyone acting on information within this App.

Category: Limited Company

The general rule is that a dividend is preferred to salary/bonus because less tax is paid on a dividend. There are several reasons why this is the case but, on the whole, the tax saving is driven by the fact that NICs are not payable in respect of a dividend.

That is not to say that a dividend should be paid in preference to salary/a bonus in all cases – the tax position will depend on the particular circumstances and there are other considerations; for example, company law requirements; payments must be made by reference to shareholdings; the impact of the settlements legislation and the fact that dividends are not earnings.

It is important that the tax liability is calculated for both options and that the client is made aware of all the implications of his/her decision.

The following example illustrates the tax saving that may be achieved where a company pays profits of £50,000 as a dividend rather than additional salary/a bonus. It is assumed that the individual receives a salary for the year of £8,632 per annum.

 SalaryDividend
Company:  
Profits£58,632£58,632
Less, basic salary(£8,632)(£8,632)
Less, bonus(£43,937)£nil
Less, employer’s NICs(£6,063)£nil
Taxable profits£nil£50,000
Corporation tax£nil(£9,500)
Profits after tax / Dividend paid£nil£40,500
  Individual:  
Employment income£52,569£8,632
Dividend income£nil£40,500
Total income£52,569£49,132
Less, income tax payable(£8,528)(£2,597)
Less, employee’s NICs(£5,015)£nil
Net amount received£39,026£46,535
Additional funds under dividend route £7,509

In other words, the individual will be better off by roughly £7,500 if he extracts the company’s profits of £50,000 as a dividend rather than as salary/a bonus; and a saving of this order is generated at a range a profit levels.

Please contact us for further information.

Disclaimer:  This App and its contents have been produced as a helpful reference point.  The information should be used as a guide only and your specific circumstances are best discussed directly with us.No reliance should be placed on this material and no action should be taken without seeking the appropriate professional or legal advice. Although the authors make reasonable efforts to ensure the content of this App is accurate and up-to-date, the authors make no representations, warranties or guarantees that the content is accurate, complete or up-to-date and accept no responsibility whatsoever for any loss occasioned by anyone acting on information within this App.

Category: Limited Company

As a Director / shareholder of your own Limited Company you will have heard a lot about how tax efficient it can be to combine a salary with dividends to form your income.

When you make a dividend payment however you need to ensure that you’ve sufficient funds available to do so. Otherwise the dividend could be “illegal” which could cause a number of issues later down the track.

How to work out your dividend

To establish if you can pay a dividend and how much you can take there are some very simple rules to follow:

Start by working out the company profits

Income less allowable costs = company profit

Then take off the estimated Corporation Tax

The current rate of corporation tax is 19% So profits x 19% = corporation tax

Work out the “Distributable Profits”

The amount left after taking off the corporation tax is what you can take out of the company in dividends. This is known as distributable profits; a term that it’s worth being familiar with.

Quick rule of thumb calculation for distributable profits

After corporation tax at 19% then 81% of profits are distributable as dividends.

Final things to bear in mind

To arrive at the amount that you can take out of the business as distributable profits at this point in time you need to add on any Retained Profits brought forward and deduct any dividends taken already this financial year. The retained profits brought forward will be found in your last set of accounts. This figure will be nil if this is your first year of trading.

Remember that you should have a record of your dividends taken to date and they should be shown in your accounting records.

Here’s a quick recap

Income less costs = profit X 19% = Corporation Tax

Profit – Corporation Tax = distributable profits

Distributable profits + Retained Profits brought forward less dividends taken this year = Profits available to take as dividends (Distributable Profits)

Of course if this is a negative figure then you have no available profits to take as a dividend. Any dividend payments at this stage will be illegal.

The importance of up-to-date Accounting Records

Clearly to even attempt the above requires your accounting records to be completely up to date.  If you are using a digital accounting system there should be a report available to show your company profits. Some systems even show you the available distributable profits but if you haven’t got records like this it will be almost impossible.

Disguised remuneration

Dividends are not like paying a salary and should try not to fall into a trap of paying out the same amount every month.

With this in mind avoid setting up a regular payment for the same amount on the same day and make sure you perform a check on “available profits” before you withdraw any dividends.

If you need any help with this just get in touch. 

Please contact us for further information.

Disclaimer:  This App and its contents have been produced as a helpful reference point. The information should be used as a guide only and your specific circumstances are best discussed directly with us.

No reliance should be placed on this material and no action should be taken without seeking the appropriate professional or legal advice. Although the authors make reasonable efforts to ensure the content of this App is accurate and up-to-date, the authors make no representations, warranties or guarantees that the content is accurate, complete or up-to-date and accept no responsibility whatsoever for any loss occasioned by anyone acting on information within this App.

Category: Limited Company

You might think that once you have set up your limited company, you’re free to dip into and out of the company’s profits as you see fit – it’s your company after all.

In reality, directors who employ this ‘what’s yours is mine’ attitude to their company profits could find themselves in a lot of trouble.

Limited companies become a legal entity in their own right when they are incorporated at Companies House. That means the company’s assets and profits belong to the company, not the business owner. Therefore, you cannot simply take money out of the business like a sole trader, whose personal and business assets are one and the same.

Money can only be taken out of a limited company in one of three ways, and all three of these methods must be recorded and accounted for. You must also be careful to only take money out of a company if it is making a profit and once tax and all other financial liabilities have been accounted for.

Three Ways you can Take Money out of a Limited Company

The first thing you should ask yourself is not can I take money from the company but should I? The vast majority of directors who contact me have not set aside any cash buffer to counter when things go wrong. Notice I said when things go wrong not if ! Ok you may be regarded as being a pessimist to expect everything to go wrong all the time but only a fool expects everything to go right all the time too. Get the balance right and set aside 10% off the top of your sales revenues and put it to one side for a proactive cash account. This account should be in addition to setting aside taxes – each month! Yes each month – do not wait until the end of the year. Then and only then if you have sufficient revenues should you consider taking bonuses or dividends and even then pay them quarterly.

Money can be Drawn in the Following Ways:

  • Director’s salary, expenses and benefits
  • Dividends
  • Director’s loan

The careful use of a combination of these methods can be an extremely tax efficient way to minimise personal tax liabilities and run a business. This is due to the fact that corporation tax is payable at just 19 percent, while income tax on earnings over £50,000 (with the £12,500 personal allowance) sits at 40 percent.

Salary

The most familiar method of taking money out of a limited company is for the directors to pay themselves a salary. Company directors are employees of the business just like anyone else, so they will have to be registered with HMRC for PAYE and will also have to pay National Insurance Contributions on their earnings. Most company directors choose to take a very small salary, up to the National Insurance Contributions threshold of £8,628, and instead take the lion’s share of their pay in dividends. Paying this level of salary ensures a director qualifies for the state pension and benefit entitlements, but does not incur a personal tax liability.

I will say up front that I am not a great lover of the way dividends are taken and or accounted for by most one man limited companies. This is for a variety of reasons but suffice it to say that if you are taking dividends monthly and you are not setting aside corporation tax and paying VAT and PAYE you should not be taking dividends. I know this may upset some directors but any director paying him/herself dividends monthly and cannot or will not pay taxes is setting themselves up for a big fall.

Dividends

If you cannot afford to pay your taxes then the company is not viable, possibly insolvent, and dividends should not be taken. All the director is doing by taking dividends is building up a negative balance which will have to be repaid at some point if the company is liquidated insolvently. Therein lies the rub – some directors will just bury their heads in the sand and hope the problem will go away. It won’t.

The majority of directors of limited companies will also be shareholders in profitable companies who do pay taxes and have a proactive cash buffer. In this case, income can be taken out of the company in the form of dividends, which are paid out of the company’s profits after corporation tax has been deducted.

Solvent Companies

It is essential to remember that a company cannot pay out more in dividends than it has in retained profits from current and previous financial years. You can learn more about the level of tax you pay on dividends here.

Directors’ Loans

A director’s loan is another efficient way to take money out of a company, although it can be fraught with hazards if the process is not handled correctly. If you take money out of a business and it is not a salary or a dividend, you have what is known as a director’s loan. All transactions of this type must be recorded in a directors’ loan account, which keeps a running balance of the transactions between a director and the company itself. Account balances can be ‘in credit’, if the director has paid more into the company than he has taken out, or ‘overdrawn’ if the director has withdrawn more money than he has paid in. Overdrawn directors’ loan accounts are a common problem in insolvent companies, but in the normal course of viable solvent businesses they can be repaid in full or in the correct circumstances even written off by the company.

All transactions in a director’s loan account have to be accounted for in the company’s balance sheet, and may also have to be included in the company tax return and the director’s self-assessment return.

In most cases, directors with overdrawn loan accounts will not have to pay any tax as long as the sum is repaid within nine months and one day of the company’s account reference date. If a director’s loan account is overdrawn by more than £10,000, the sum will have to be declared on the director’s self-assessment tax return, and the appropriate rate of tax will apply.

Is There a way to take Money out of a limited Company Without Paying Tax?

As this article explains, there is no way not to pay tax, however depending on your situation there will more efficient or less tax efficient methods. This is where I can assist you the most but please take early advice. Please contact us for further information.

Disclaimer:  This App and its contents have been produced as a helpful reference point.  The information should be used as a guide only and your specific circumstances are best discussed directly with us. 

No reliance should be placed on this material and no action should be taken without seeking the appropriate professional or legal advice. Although the authors make reasonable efforts to ensure the content of this App is accurate and up-to-date, the authors make no representations, warranties or guarantees that the content is accurate, complete or up-to-date and accept no responsibility whatsoever for any loss occasioned by anyone acting on information within this App.

Category: Limited Company

As well as filing accounts with Companies House, there is a further requirement to check that the information Companies House holds about your company is correct every year.

This is done by the filing of an annual company confirmation statement which replaced the annual return a few years ago.

A confirmation statement must usually be filed at Companies House once every 12 months and rather than resubmitting data every year, the confirmation statement only needs to be updated if you have changes to report. If there are no changes then you just need to confirm the information is correct and submit the statement. Failure to submit the statement is an offence which could lead to a fine or the Company being struck off the register.

The following details need to be checked:

  • the details of your registered office, directors, secretary and the address where you keep your records
  • your statement of capital and shareholder information if your company has shares
  • your SIC code (the number that identifies what your company does)
  • your register of ‘people with significant control’ (PSC)

Any necessary updates to the statement of capital, shareholder information and SIC codes can be made when submitting the confirmation statement.

However, the confirmation statement cannot be used to report changes to your company’s officers, the registered office address, the address where you keep your records and people with significant control. These changes must be filed separately with Companies House and this should be done at the same time or prior to submitting the confirmation statement.

Please contact us for further information.

Disclaimer:  This App and its contents have been produced as a helpful reference point. The information should be used as a guide only and your specific circumstances are best discussed directly with us.

No reliance should be placed on this material and no action should be taken without seeking the appropriate professional or legal advice. Although the authors make reasonable efforts to ensure the content of this App is accurate and up-to-date, the authors make no representations, warranties or guarantees that the content is accurate, complete or up-to-date and accept no responsibility whatsoever for any loss occasioned by anyone acting on information within this App.

Category: Limited Company

If you own a business as a sole trader or in partnership, a Capital Gain will arise if your business is transferred into a company structure, ie you become a Company..

The gain will be assessed by reference to the market value of the business assets, including goodwill, at the date of transfer. This could give rise to a chargeable gain based broadly on the difference between the market value of the assets and their original cost.

In most cases, the incorporation of the business will be completed so that incorporation relief can be claimed. The claim for incorporation relief should defer any tax until you sell your shares in the business.In order to qualify for incorporation relief, all your business assets other than cash must be transferred as a going concern, wholly or partly in exchange for shares in the new company.It is important to note that where the necessary conditions are met, incorporation relief is given automatically and there is no need to make a claim. The relief works by reducing the base cost of the new assets by a proportion of the gain arising from the disposal of the old assets.

Although the relief is automatic, it is possible to make an election in writing for incorporation relief not to apply. An election must be made before the second anniversary of 31 January next, following the tax year in which the transfer took place e.g. an election in respect of a transfer made in the current 2019-20 tax year must be made by 31 January 2023.

The election deadline is reduced by one year if the shares are disposed of in the year following that in which the business was incorporated.

Incorporation Relief is just one possible strategy that can be used to minimise tax liabilities if you incorporate your business. However, there are other planning options. If you are considering incorporation, be sure to contact me.

Please contact us for further information.

Disclaimer:  This App and its contents have been produced as a helpful reference point. The information should be used as a guide only and your specific circumstances are best discussed directly with us.

No reliance should be placed on this material and no action should be taken without seeking the appropriate professional or legal advice. Although the authors make reasonable efforts to ensure the content of this App is accurate and up-to-date, the authors make no representations, warranties or guarantees that the content is accurate, complete or up-to-date and accept no responsibility whatsoever for any loss occasioned by anyone acting on information within this App.

Can we deduct entertaining expenses?

The tax rules on the deductibility of entertaining expenses are harsh and often misunderstood – the fact that the expenditure is incurred for businesses purposes does not make it deductible.

Subject to certain limited exceptions, no deduction is allowed for business entertaining and gifts in calculating taxable profits.

What counts as business entertainment?

Business entertainment is the provision of free or subsidised hospitality or entertainment. Hospitality includes the provision of food drink or similar benefits for which no payment is made by the recipient. It also extends to subsidised hospitality whereby the charge made to the recipient does not cover the costs of providing the entertainment or hospitality.

Examples of business entertaining would include taking a supplier to lunch, taking customers to a day at the races, or inviting them to a box at rugby match, and suchlike. The definition is wide.

Exception 1: Entertaining employees

One of the main exceptions to the general rule that entertaining expenses cannot be deducted is in relation to staff entertainment. A deduction is allowed for the cost of entertaining staff, as long as the costs are incurred wholly and exclusively for the purposes of the trade and the entertaining of the staff is not merely incidental to the entertaining of customers. So, for example, a company would be able to deduct the cost of the staff Christmas party in calculating its taxable profits. However, if a company takes customers to Wimbledon, the fact that a number of employees also attended is not enough to guarantee a deduction as the entertaining provided for the employees is incidental to that for customers.It should be noted that unless an exemption is in point, employees may suffer a benefit in kind tax charge on any entertainment provided.

Exception 2: Normal course of trade

The disallowance does not apply where the business is that of providing hospitality, and as such a deduction is allowed for the costs incurred in providing that hospitality as long as they are incurred wholly and exclusively for the purposes of the business. Businesses such as restaurants and events management companies would fall into this category.

Exception 3: Contractual obligation to provide entertainment

Where entertainment is provided under a contractual obligation, this is not treated as business entertainment and a deduction is allowed for the cost. A common example would be where hospitality is provided as part of a package. However, the business should be able to demonstrate that they have received a full return for the entertainment provided.

Exception 4: Small gifts carrying an advert

The provision of business gifts is treated as business entertaining with the result that a deduction for the costs is not generally allowed. However, there is an exception for gifts costing not more than £50 per year per recipient which bear a conspicuous advert for the business. An example of a deductible gift would be a diary or a water bottle featuring an advert for the business.

Remember…Just because entertaining is incurred for business purposes does not mean that it is allowable and business entertaining needs to be added back in the corporation tax computation.

Please contact us for further information.

Disclaimer:  This App and its contents have been produced as a helpful reference point. The information should be used as a guide only and your specific circumstances are best discussed directly with us.No reliance should be placed on this material and no action should be taken without seeking the appropriate professional or legal advice. Although the authors make reasonable efforts to ensure the content of this App is accurate and up-to-date, the authors make no representations, warranties or guarantees that the content is accurate, complete or up-to-date and accept no responsibility whatsoever for any loss occasioned by anyone acting on information within this App.

Whilst there is usually no tax relief for ordinary commuting – home to work – there are a few exceptions. 

The term ‘ordinary commuting’ is defined to mean travel between a permanent workplace and home, or any other place that is not a workplace.

Case law has established the principle that travelling between your home and a permanent workplace is not a travel expense related to the performance of your duties.

The rules are different for temporary workplaces where the expense is allowable. A workplace is defined as a temporary workplace if an employee only goes there to perform a task of limited duration or for a temporary purpose.

Other home to work travel that may be allowed includes:

  • where the employee has a travelling appointment;
  • where the employee’s home is a place of work and the place where the employee lives is dictated by the requirements of the job;
  • where the duties of the employment are carried out wholly or partly outside the UK; where a non-domiciled employee is working in the UK;
  • emergency call-outs.

There are also specific exemptions from tax for works bus services and subsidies paid to public bus services as well as for the provision by an employer of bicycles and cycling equipment in order to encourage environmentally friendly transport between home and work.

Please contact us for further information.

Disclaimer:  This App and its contents have been produced as a helpful reference point. The information should be used as a guide only and your specific circumstances are best discussed directly with us.

No reliance should be placed on this material and no action should be taken without seeking the appropriate professional or legal advice. Although the authors make reasonable efforts to ensure the content of this App is accurate and up-to-date, the authors make no representations, warranties or guarantees that the content is accurate, complete or up-to-date and accept no responsibility whatsoever for any loss occasioned by anyone acting on information within this App.

Many small business, whether incorporated or not, pay family members for working for the business. However, as a recent case shows, it is easy to make mistakes which can prove costly.

The case in question, Nicholson v HMRC (TC06293), concerned the payment of wages by a sole trader to his son while at university. Mr Nicholson was a central heating salesman, who was trying to build up an internet business. His son had worked for his father for many years, and when he went away to university, he continued to work for his father, ‘promoting the business through internet and leaflet distribution and computer work’. He was paid at the rate of £10 per hour for 15 hours’ work a week.

However, there was no evidence to support the payment of wages on this basis and payments were made partly in cash and partly through the provision of goods – Mr Nicholson bought his son food and drink to help him whilst at university and claimed a deduction in his business accounts for this as ‘wages’.

The First Tier Tax Tribunal disallowed a deduction for the wages paid to Mr Nicholson’s son. Although there was no dispute that his son worked in the business, there was no evidence to back up the claim that the payments had been made wholly and exclusively for the purposes of the trade. It was not possible to reconcile what had been paid as wages to the bank statements, and without contemporaneous records to support the payments, HMRC were unable to accept the sums claimed were ‘wages’ incurred as a business expense.

The payments had a dual purpose – the underlying motive was the ‘personal and private’ motive of supporting his son while at university.

Avoiding the pitfalls

Had Mr Nicholson taken a different approach, he would have been able to claim a deduction for the wages paid to his son. The judge noted that had payment been made on a time recorded basis or using some other methodology to calculate the amount payable, and had an accurate record been maintained of the hours worked and the amount paid, it is unlikely that the deduction would have been denied. If instead Mr Nicholson had made payments to his son’s bank account at the rate of £10 per hour for 15 hours’ work a week, leaving his son to buy food and drink etc. from the money he had earned working for his Dad, the outcome would have been different. The bank statements would provide evidence of what had been paid and this could be linked to the record of hours worked.

Maintaining the link is key. When paying family members, it is also important that the amount paid is reasonable in relation to the work done. The acid test is whether payment would be made to a person who was not a family member at the same rate. A deduction may also be denied if the wages paid are excessive. 

Please contact us for further information.

Disclaimer:  This App and its contents have been produced as a helpful reference point. The information should be used as a guide only and your specific circumstances are best discussed directly with us.

No reliance should be placed on this material and no action should be taken without seeking the appropriate professional or legal advice. Although the authors make reasonable efforts to ensure the content of this App is accurate and up-to-date, the authors make no representations, warranties or guarantees that the content is accurate, complete or up-to-date and accept no responsibility whatsoever for any loss occasioned by anyone acting on information within this App.

Becoming a Director ? Here’s what’s involved.

Directors Responsibilities

Whilst shareholders are the owners of limited companies the job of running them rests with the directors and they must do so for the benefit of the shareholders whilst ensuring compliance with the law. Directors can be liable to penalties if information is not sent to Companies House on time. They must approve the annual accounts and are also responsible for all the general day to day running of the company including matters such as health and safety.

Acting improperly can lead to fines, disqualification from being a director, personal liability for the company’s debts or a criminal conviction. Appointment of Directors Appointment of new directors, resignation of directors and change of directors details need to be notified to Companies House on forms AP01, TM01 and CH01 respectively for actual persons within 14 days.

For corporate directors the forms are AP02, TM02 and CH02 respectively.

Private limited companies must have at least one director and public limited companies must have at least two. If a limited company only has one director, the director must be an actual person.

In general anyone can be a director, but all directors must be aged at least 16. A director must also not be disqualified by the court from acting as a director and must not be an undischarged bankrupt – if you are, you need the court’s permission.

The Articles of Association set out the rules for how the company is to be run including for example how many directors there should be, how long they can serve and what happens at the end of their term.

Directors’ powers and financial liabilities

The powers of the directors are limited by the company’s Articles of Association, although these are usually very widely drawn. These can for example restrict the type of business activities allowed or monies that can borrowed, so it is important to check them.

A director is expected to have the skill expected that a reasonable person would do looking after their own business and act in good faith for the company and treat all shareholders equally.

Directors duties include:

  • A duty to act within powers – not to abuse or exceed their powers (usually as defined by the Articles) or use them for an improper purpose;
  • A duty to act as the director considers will promote the success of the company for the benefit of its members as a whole, having due regard.
  • A duty to exercise independent judgement the likely long term consequences of employees’ interests business relations with suppliers, customers and others impact on the community and the environment desirability of a reputation for high standards of business conduct need to act fairly as between members This duty is made subject to any requirement to act in the interests of creditors (e.g. where the company is insolvent and wrongful trading might occur).
  • A duty to exercise reasonable care, skill and diligence (this introduces a minimum standard of competence)
  • A duty to avoid conflicts of interest – but conflicts can be authorised by the board (so long as there are enough “independent” directors)
  • A duty not to accept benefits from third parties – they can still only be approved by the shareholders
  • A duty to declare to other directors any interest in a proposed transaction or arrangement – a “general” notice can be provided at a board meeting dealing with ongoing transactions with a particular company.

A director must declare any potential conflict of interest and if they plan to enter into substantial deals with the company, they must be approved by the shareholders in a general meeting.

Other responsibilities of Directors

Apart from Companies House responsibilities directors are also responsible for the general running of the company such as complying with employment law, health and safety law, tax law, etc. Failure to carry out some of these duties, such as where health and safety is concerned, can result in a criminal conviction.

Filing Documents at Companies House

Directors are responsible for filing documents at Companies House, even though such tasks may be delegated to the Company Secretary. Late filing of accounts leads to an automatic civil penalty, in the range of £150 to £1,500 for a private company, and £750 to £7,500 for a public company. Failing to file accounts or the annual return on time, or not at all, is also a criminal offence. If you are prosecuted and convicted you could end up with a criminal record and a fine of up to £5,000. You may also be disqualified from acting as a director.

The directors also need to check and return the annual return which is the information that Companies House holds on the directors, shareholders and so on. The must also ensure the company produces and files an annual report and accounts. A director must sign the balance sheet and the board must also approve and sign off the directors’ report. If required by law, an audit of the accounts must also take place.

You must advise Companies House if you change your registered office address, using form AD01. You must advise of changes of directors and Company Secretary.

Disqualification of Directors

Directors can be disqualified for any of the following:

  • allowing the company to trade while insolvent;
  • not keeping proper accounting records;
  • failing to prepare and file accounts;
  • not sending returns to Companies House; failing to send tax returns and pay tax.

In some cases, the directors can face criminal charges, fines or be made personally liable for the company’s debts. Disqualification proceedings are handled by the courts and disqualification can be for between 2 and 15 years. While disqualified, you must not: be a director of any company nor act like a director – even without being formally appointed influence the running of a company through the directors be involved in the formation of a new company ignoring a disqualification order is a criminal offence. For that you could be fined and sent to prison for up to two years.

Shadow Directors

Even if you haven’t been appointed as a director, you could possibly be a shadow director if the other directors are ‘accustomed to act’ under your instructions.This can also happen if you resign as a director but continue making decisions and giving instructions. In this case you would have the same responsibilities and potential penalties as if you were a director.

Other Penalties

Failure to properly comply with director responsibilities can lead to the following penalties: 

  • You can be personally liable for illegal acts such as those beyond your powers.
  • You can be liable for company debts incurred through fraudulent or wrongful trading

Wrongful (or even fraudulent) trading occurs when you allow the business to carry on and run up debts when you know or should know there is no reasonable prospect of the company being able to repay them. Just because you are making losses does not necessarily mean it is wrongful trading but all circumstances need consideration.

If as a director you disagree with the decisions made by the board as whole you should ensure this is noted as you can still be joint and severally liable for decisions taken as a collective.

Please contact us for further information. 

Disclaimer:  This App and its contents have been produced as a helpful reference point.  The information should be used as a guide only and your specific circumstances are best discussed directly with us. 

No reliance should be placed on this material and no action should be taken without seeking the appropriate professional or legal advice. Although the authors make reasonable efforts to ensure the content of this App is accurate and up-to-date, the authors make no representations, warranties or guarantees that the content is accurate, complete or up-to-date and accept no responsibility whatsoever for any loss occasioned by anyone acting on information within this App.

Category: Limited Company

Self Employed

The cost of a staff party or other entertainment event such as a Summer BBQ is generally allowed as a deduction for tax purposes. If you meet the various criteria outlined below there is no requirement to report anything to HMRC or pay tax and National Insurance.

There will also be no taxable benefit charged to employees on:

  • An annual Christmas party or other annual event offered to staff generally and is not taxable on those attending provided that the average cost per head of the function does not exceed £150.
  • Provided the event must be open to all employees.
  • If a business has multiple locations, then a party open to all staff at one of the locations is allowable.
  • You can also have separate parties for separate departments, but employees must be able to attend one of the events.
  • There can be more than one annual event. If the total cost of these parties is under £150 per head, then there is no chargeable benefit. However, if the total cost per head goes over £150 then whichever functions best utilise the £150 are exempt and the others taxable.
  • Note, the £150 is not an allowance and any costs over £150 per head are taxable on the full cost per head. It is not necessary to keep a running total by employee but a cost per head per function.
  • All costs including VAT must be taken into account. This includes the costs of transport to and from the event, food and drink and any accommodation provided.

It is highly recommended when planning a staff party or other annual event to try and stick to the tax rules above. This should ensure that your party does not have an extra tax cost for you or your employees.

If you need help in crunching the numbers to make sure you do not exceed the allowable limits, please call me.

Disclaimer:  This App and its contents have been produced as a helpful reference point.  The information should be used as a guide only and your specific circumstances are best discussed directly with us. 

No reliance should be placed on this material and no action should be taken without seeking the appropriate professional or legal advice. Although the authors make reasonable efforts to ensure the content of this App is accurate and up-to-date, the authors make no representations, warranties or guarantees that the content is accurate, complete or up-to-date and accept no responsibility whatsoever for any loss occasioned by anyone acting on information within this App.

The meaning of goodwill for a business and CGT purposes is complex.

The term ‘goodwill’ is rarely mentioned in legislation and there is no definition of ‘goodwill’ for the purposes of Capital Gains legislation. In fact, most definitions of goodwill are derived from case law.

At its simplest you could describe goodwill as the ‘extra’ value of a business over and above its tangible assets. In the vast majority of cases when a business is sold a significant proportion of the sale price will be for the intangible assets or goodwill of the company. This is essentially a way of putting a monetary value on the business’s reputation and customer relationships.

Valuing goodwill is complex and there are many different methods which are used and that vary from industry to industry.

HMRC’s internal manual states that:

‘Most businesses can be expected to have goodwill even though its value is likely to fluctuate from time to time. The fact that goodwill may not be reflected in the balance sheet of a business does not mean that it does not exist. In the same way, the writing off of purchased goodwill in the accounts of a business does not mean that its value has decreased or that it has ceased to exist.’

Please contact us for further information. 

Disclaimer:  This App and its contents have been produced as a helpful reference point.  The information should be used as a guide only and your specific circumstances are best discussed directly with us. 

No reliance should be placed on this material and no action should be taken without seeking the appropriate professional or legal advice. Although the authors make reasonable efforts to ensure the content of this App is accurate and up-to-date, the authors make no representations, warranties or guarantees that the content is accurate, complete or up-to-date and accept no responsibility whatsoever for any loss occasioned by anyone acting on information within this App.

If you are an employee or in some cases a Company Director and use your own money to buy things you need for your job, you can sometimes claim tax relief for the associated costs.

It is usually only possible to claim tax relief for the cost of items used solely for your work and you may also be able to claim tax relief for using you own vehicle, be it a car, van, motorcycle or bike. As a general rule, there is no tax relief for ordinary commuting to and from your work but the rules are different for temporary workplaces where the expense is usually allowable and if you use your own vehicle to do other business related mileage.

Employers usually make payments based on a set rate per mile depending on the mode of transport used and there are approved mileage rates published by HMRC. The approved mileage allowance payment rates are available where you use your own car on a business trip and where the approved mileage rates are used, the payments to you are not regarded as a taxable benefit.

Where an employer pays less than the published rates, you could claim tax relief for the shortfall using mileage allowance relief.

For all cars the approved mileage allowance payment for the first 10,000 business miles is 45p per mile and 25p per mile for every additional business mile.

The approved mileage rates are 20p per mile for bicycle travel and 24p per mile for motorcycle travel.

There is an additional passenger payment you can receive of 5p per passenger per business mile from your employer. This is available if you carry fellow employees in your car or van on journeys which are also work journeys for your colleagues. 

Like all things tax the rules around what you can claim can be complicated so if we can help please get in touch. 

Please contact us for further information

Disclaimer: This App and its contents have been produced as a helpful reference point. The information should be used as a guide only and your specific circumstances are best discussed directly with us.

No reliance should be placed on this material and no action should be taken without seeking the appropriate professional or legal advice. Although the authors make reasonable efforts to ensure the content of this App is accurate and up to date, the authors make no representations, warranties or guarantees that the content is accurate, complete or up-to-date and accept no responsibility whatsoever for any loss occasioned by anyone acting on information within this App.

Here I provide you with an overview of the information to provide to your accountant (me) to enable completion of your end of year accounts. 

Every business is different, and you should discuss your own bookkeeping requirement with me. Between us we can decide what you can prepare for me and agree a time schedule for when you will provide the records and for when I will have your accounts ready for discussion. 

Basic ways in which you may find you can help me…

·         Adding up and balancing your books such as cross casting of column totals

·         analysing your payments and receipts

·         filing your invoices in sensible system so that relevant invoices can be easily found 

If you’re feeling more adventurous, you can also assist by

·         preparing a bank reconciliation that reconciles the balance on your bank statement to that derived from your records after adjusting for unpresented receipts and payments

·         using control accounts for key nominal accounts such as debtors and creditors that reconcile to your year end list of debtors and creditors 

By using reconciliations and control accounts on a regular basis during the year, you help to ensure there are no errors in the records. 

Records to provide to me

Not every business will have all of the following records but if you do, you should provide them to me covering the year (plus one month after)… 

·         Access to your Cloud Accounting records.

·         Your cash book if you have one

·         Petty cash records.

·         Sales and purchase day books if operated.

·         Any ledgers that you keep.

·         Bank statements covering the whole financial year for all business accounts.

·         Purchase invoices.

·         Sales invoices.

·         Cheque books and paying in stubs if used.

·         Copies of VAT returns covering the year together with any workings.

·         Your payroll records for the year together with details of PAYE calculations for payments to HMRC.

·         Copies of any new loan or HP agreements taken out during the year.

·         Details of any business income or expenditure that didn’t go through your business bank account.

·         Anything else you feel may be relevant – if in doubt, include it. 

Schedules to provide to me 

In addition, the following schedules will assist me in completing your end of year accounts. I can prepare these myself but if you wish to do so, it would reduce the time I spend preparing your accounts… 

·         A list of fixed asset additions with copy purchase invoices provided.

·         A year end stock list. This should be at the lower of cost and net realisable value.

·         Details of work in progress at the year end.

·         A list of debtors at the year end, their age and an indication of any that unlikely to pay

·         Sales ledger control account reconciliation.

·         Reconciliations for all bank and cash accounts.

·         A list of trade creditors at the year end and their age.

·         Purchase ledger control account reconciliation.

·         Details of PAYE owed at the year end.

·         Details of VAT owed at the year end.

·         Schedules of key and tax sensitive profit and loss accounts such as repairs, sundry expenses, entertainment, etc. 

How I Can Help You 

I can help you avoid all of the above by moving you to online cloud accounting. There are many benefits to online accounting, and it also means I can work with you throughout the year, giving advice and providing reports when you need it most, not after the year end when it could be too late.   

Please contact us for further information 

Disclaimer:  This App and its contents have been produced as a helpful reference point.  The information should be used as a guide only and your specific circumstances are best discussed directly with us. 

No reliance should be placed on this material and no action should be taken without seeking the appropriate professional or legal advice. Although the authors make reasonable efforts to ensure the content of this App is accurate and up to date, the authors make no representations, warranties or guarantees that the content is accurate, complete or up-to-date and accept no responsibility whatsoever for any loss occasioned by anyone acting on information within this App.

Special tax rules apply to the construction industry and workers which are detailed in The Construction Industry Scheme (CIS).

The Construction Industry Scheme

CIS uses a verification system for contractors to confirm whether a subcontractor should be paid gross or net.

Construction Activities

The definition of construction activities is widely drawn and so most businesses working in construction will be caught by CIS. It applies to sole traders, partnerships and Limited Companies but not to private householders who are paying contractors.

Contractors are businesses that carry out “construction operations” as part of their business and subcontractors are those who carry out such work for the contractor, but it does not include employees of the contractor. Some businesses will be both a contractor and a subcontractor.

Registration

New subcontractors have to register with HMRC but as well as calling into the local office it can also be done by phone or online if HMRC already know about you.

The subcontractor will be informed whether they can receive payments gross or net. To qualify to be paid gross a subcontractor must pass the Business Turnover and Compliance Tests. In summary these are…

  • It is run in the UK with a bank account;
  • It has a construction turnover, excluding VAT and the cost of materials, of at least £30,000 each year (more for partnerships and companies);
  • It has complied with all its tax obligations to date.

Verification

When a contractor engages a subcontractor who has not worked for them in the current or previous two tax years, they must get the name, unique taxpayer reference and national insurance number of the subcontractor in the case of an individual and contact HMRC to ascertain if the subcontractor should be paid gross or net, this is called verification. The contractor must also decide the contract proposed is one of self-employment, or whether the worker should be treated as an employee.

It is important to ensure that the status of the worker in terms of self-employment or employment is correctly established. This is a question of fact and not what the parties want it to be. The CIS scheme only applies to self-employment situations, but because a subcontractor is registered under the CIS it does not mean that he should be treated as self-employed for every job he does.

If the subcontractor is registered with HMRC the contractor will be told to pay the subcontractor gross or to apply the standard rate of deduction (20%) to all payments to the subcontractor. If the subcontractor has not registered with HMRC, a higher rate of tax deduction of 30% will be required.

The deductions count as payments on account of the eventual tax and Class 4 NI liability of the subcontractor. If the subcontractor has an accounting period ending early in the tax year, for example 31 Dec they can apply for an in-year repayment where the deductions already taken will exceed the total tax and Class 4 NI bill for the year. Arrangements exist for subcontractors that are companies to be able to set-off deductions against any PAYE, NIC and CIS deductions that they owe.

Contractors will be given a verification number for the subcontractor, or group of subcontractors, that is matched to the HMRC records in one query or phone call. This number is for the contractor’s reference only.

For each subcontractor that cannot be matched either because they are not registered or the wrong details have been given, a special verification number will be given for each unmatched subcontractor and this number must be recorded on the subcontractor’s payment statement. This will be needed to get refunds later.

Records

Payment Statement – Contractors must give a statement to each subcontractor that a deduction has been made from his payments, either done once a month to cover all payments or for each payment, and this must be issued within 14 days of the end of the month in which the payment was made. Statements can be in any format as long as they contain the necessary information. They are not required for subcontractors who are paid gross.

Monthly Return – The contractor will submit a monthly return to HMRC that shows all subcontractors that payments have been made to, the amount paid and where net payments are made, the amount of materials and deductions. The return must be filed with HMRC within 14 days of the month end, with nil returns made if there were no payments in the month.

There are penalties for filing returns late.

There is no annual return required under the new CIS.

Real Time Information (RTI)

Under the rules of RTI you cannot process subcontractors through PAYE. RTI does not change how CIS is reported. Employers will still file monthly returns (CIS300). But for Limited Companies acting as a subcontractor, on the Employer Payment Summary (EPS) each month you are required to declare ‘CIS deductions suffered’, to offset any liability due to HMRC.

Please contact us for further information

Disclaimer:  This App and its contents have been produced as a helpful reference point.  The information should be used as a guide only and your specific circumstances are best discussed directly with us.

No reliance should be placed on this material and no action should be taken without seeking the appropriate professional or legal advice. Although the authors make reasonable efforts to ensure the content of this App is accurate and up to date, the authors make no representations, warranties or guarantees that the content is accurate, complete or up-to-date and accept no responsibility whatsoever for any loss occasioned by anyone acting on information within this App.

Can we deduct entertaining expenses?

The tax rules on the deductibility of entertaining expenses are harsh and often misunderstood – the fact that the expenditure is incurred for businesses purposes does not make it deductible.

Subject to certain limited exceptions, no deduction is allowed for business entertaining and gifts in calculating taxable profits.

What counts as business entertainment?

Business entertainment is the provision of free or subsidised hospitality or entertainment. Hospitality includes the provision of food drink or similar benefits for which no payment is made by the recipient. It also extends to subsidised hospitality whereby the charge made to the recipient does not cover the costs of providing the entertainment or hospitality.

Examples of business entertaining would include taking a supplier to lunch, taking customers to a day at the races, or inviting them to a box at rugby match, and suchlike. The definition is wide.

Exception 1: Entertaining employees

One of the main exceptions to the general rule that entertaining expenses cannot be deducted is in relation to staff entertainment. A deduction is allowed for the cost of entertaining staff, as long as the costs are incurred wholly and exclusively for the purposes of the trade and the entertaining of the staff is not merely incidental to the entertaining of customers. So, for example, a company would be able to deduct the cost of the staff Christmas party in calculating its taxable profits. However, if a company takes customers to Wimbledon, the fact that a number of employees also attended is not enough to guarantee a deduction as the entertaining provided for the employees is incidental to that for customers.It should be noted that unless an exemption is in point, employees may suffer a benefit in kind tax charge on any entertainment provided.

Exception 2: Normal course of trade

The disallowance does not apply where the business is that of providing hospitality, and as such a deduction is allowed for the costs incurred in providing that hospitality as long as they are incurred wholly and exclusively for the purposes of the business. Businesses such as restaurants and events management companies would fall into this category.

Exception 3: Contractual obligation to provide entertainment

Where entertainment is provided under a contractual obligation, this is not treated as business entertainment and a deduction is allowed for the cost. A common example would be where hospitality is provided as part of a package. However, the business should be able to demonstrate that they have received a full return for the entertainment provided.

Exception 4: Small gifts carrying an advert

The provision of business gifts is treated as business entertaining with the result that a deduction for the costs is not generally allowed. However, there is an exception for gifts costing not more than £50 per year per recipient which bear a conspicuous advert for the business. An example of a deductible gift would be a diary or a water bottle featuring an advert for the business.

Remember…Just because entertaining is incurred for business purposes does not mean that it is allowable and business entertaining needs to be added back in the corporation tax computation.

Please contact us for further information.

Disclaimer:  This App and its contents have been produced as a helpful reference point. The information should be used as a guide only and your specific circumstances are best discussed directly with us.No reliance should be placed on this material and no action should be taken without seeking the appropriate professional or legal advice. Although the authors make reasonable efforts to ensure the content of this App is accurate and up-to-date, the authors make no representations, warranties or guarantees that the content is accurate, complete or up-to-date and accept no responsibility whatsoever for any loss occasioned by anyone acting on information within this App.

Whilst there is usually no tax relief for ordinary commuting – home to work – there are a few exceptions. 

The term ‘ordinary commuting’ is defined to mean travel between a permanent workplace and home, or any other place that is not a workplace.

Case law has established the principle that travelling between your home and a permanent workplace is not a travel expense related to the performance of your duties.

The rules are different for temporary workplaces where the expense is allowable. A workplace is defined as a temporary workplace if an employee only goes there to perform a task of limited duration or for a temporary purpose.

Other home to work travel that may be allowed includes:

  • where the employee has a travelling appointment;
  • where the employee’s home is a place of work and the place where the employee lives is dictated by the requirements of the job;
  • where the duties of the employment are carried out wholly or partly outside the UK; where a non-domiciled employee is working in the UK;
  • emergency call-outs.

There are also specific exemptions from tax for works bus services and subsidies paid to public bus services as well as for the provision by an employer of bicycles and cycling equipment in order to encourage environmentally friendly transport between home and work.

Please contact us for further information.

Disclaimer:  This App and its contents have been produced as a helpful reference point. The information should be used as a guide only and your specific circumstances are best discussed directly with us.

No reliance should be placed on this material and no action should be taken without seeking the appropriate professional or legal advice. Although the authors make reasonable efforts to ensure the content of this App is accurate and up-to-date, the authors make no representations, warranties or guarantees that the content is accurate, complete or up-to-date and accept no responsibility whatsoever for any loss occasioned by anyone acting on information within this App.

Many small business, whether incorporated or not, pay family members for working for the business. However, as a recent case shows, it is easy to make mistakes which can prove costly.

The case in question, Nicholson v HMRC (TC06293), concerned the payment of wages by a sole trader to his son while at university. Mr Nicholson was a central heating salesman, who was trying to build up an internet business. His son had worked for his father for many years, and when he went away to university, he continued to work for his father, ‘promoting the business through internet and leaflet distribution and computer work’. He was paid at the rate of £10 per hour for 15 hours’ work a week.

However, there was no evidence to support the payment of wages on this basis and payments were made partly in cash and partly through the provision of goods – Mr Nicholson bought his son food and drink to help him whilst at university and claimed a deduction in his business accounts for this as ‘wages’.

The First Tier Tax Tribunal disallowed a deduction for the wages paid to Mr Nicholson’s son. Although there was no dispute that his son worked in the business, there was no evidence to back up the claim that the payments had been made wholly and exclusively for the purposes of the trade. It was not possible to reconcile what had been paid as wages to the bank statements, and without contemporaneous records to support the payments, HMRC were unable to accept the sums claimed were ‘wages’ incurred as a business expense.

The payments had a dual purpose – the underlying motive was the ‘personal and private’ motive of supporting his son while at university.

Avoiding the pitfalls

Had Mr Nicholson taken a different approach, he would have been able to claim a deduction for the wages paid to his son. The judge noted that had payment been made on a time recorded basis or using some other methodology to calculate the amount payable, and had an accurate record been maintained of the hours worked and the amount paid, it is unlikely that the deduction would have been denied. If instead Mr Nicholson had made payments to his son’s bank account at the rate of £10 per hour for 15 hours’ work a week, leaving his son to buy food and drink etc. from the money he had earned working for his Dad, the outcome would have been different. The bank statements would provide evidence of what had been paid and this could be linked to the record of hours worked.

Maintaining the link is key. When paying family members, it is also important that the amount paid is reasonable in relation to the work done. The acid test is whether payment would be made to a person who was not a family member at the same rate. A deduction may also be denied if the wages paid are excessive. 

Please contact us for further information.

Disclaimer:  This App and its contents have been produced as a helpful reference point. The information should be used as a guide only and your specific circumstances are best discussed directly with us.

No reliance should be placed on this material and no action should be taken without seeking the appropriate professional or legal advice. Although the authors make reasonable efforts to ensure the content of this App is accurate and up-to-date, the authors make no representations, warranties or guarantees that the content is accurate, complete or up-to-date and accept no responsibility whatsoever for any loss occasioned by anyone acting on information within this App.

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