This week we are looking at company cars and explaining how they are taxed on both the company and the individual.

When a car is made available to an employee, or member of his household, by an employer, he will be charged tax on the value of the car as an employment benefit if he also has private use of the car.  It doesn’t matter how the company finances that car, it is still a benefit in kind to the employee.

The amount of tax the employee pays depends on:

• The list price of the car plus accessories (not the price the company paid for it), and
• Its CO2 emissions

Using this table, https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/532303/TC2b.pdf

each level of Co2 emission is given a percentage and you then multiply that percentage by the list price to give you the taxable benefit.  This value is effectively “additional salary” on which you will pay income tax.   Diesel car owners have a 3% supplement over petrol owners – this was due to be scrapped but will now remain until 2021.  The percentages are set to increase by 2% each year, making company cars even more expensive in the future.

So, as an example, in 2016/17 my company provides me with a diesel car with a manufacturer’s list price of £30,000 and CO2 emissions of 165g/km.  The appropriate percentage is 33%.

The benefit in kind is 33% x 30,000 = £9900.  If I am a basic rate taxpayer, I will therefore pay £1,980 in income tax on this car in this tax year, and if I’m a higher rate taxpayer – £3,960.

If the company also pays for all my fuel (personal and business) there is a further tax charge.  This is worked out by multiplying the same percentage by a fixed amount agreed for each year.  For 16/17 the amount is £22,200 – so for my car above – the additional benefit is £7,326 and my tax bill £1,465 or £2,930.  You need to do a fair few miles in your car to make this worth having!

For the company , they will pay class IA NIC on the value of the benefit, so each year they will pay 13.8% x 30,000 = £4,140 for my company car, though this and the running costs are tax deductible in the accounts.

So a company car is often not a cheap option and you should work out whether it is the right option for you.

Having a company van may be tax efficient than a company car as there is a fixed benefit of £3,170 – but there are strict rules about what is a van – and what is a car!

If the car is a genuine “pool car” then it can be provided tax free – but the qualifying conditions of being a pool car must be met.  These are:

The car

• Is used for business purposes and any private use of the car is incidental.
• Private use should account for no more than 5% of the car’s annual mileage on an irregular basis.
• The same car not used exclusively by one or two employees in a tax year.
• The car is not normally taken to an employee’s home at night.

HMRC will look at any pool car arrangement closely – and will expect mileage logs, written agreements, place for keys to be kept at work, employees personal cars etc so if you do think you have a pool car – make sure your records accurately detail its movements!

Buy to let investors will see a big change to the way they calculate their profits, and therefore their tax bills from April 17.  Although this is still a year away, you need to understand the changes and how they may affect you if you considering a buy to let or already own one.

What are the changes?

Currently, landlords get tax relief for their finance costs against their rental business.

Put simply, you can offset the amount of interest you pay on your buy to let mortgage, (and related fees, commissions and legal expenses) against the rental income from the property.

This reduces the profit of the rental business – and hence your tax bill.  If you are a higher rate tax payer, then you are effectively getting 40 or 45% tax relief on your mortgage interest.

From April 17, new rules mean that all finance costs will no longer be an allowable cost of the business.  Instead, you will have to make a “tax return adjustment” that will give you a basic rate deduction of up to 20% of the finance cost.

So in practise – what on earth does that mean?

Let’s look at example to show what the effects are.

If you had rental income of £10,000 in 2016/17 and paid £2,000 in mortgage interest, under the current rules you would have rental profit of £8,000.  If you were a higher rate tax payer, you would pay tax on that at 40%, so £3,200.

The new rules are being phased in over 4 years from April 17 so by April 21 – with the same numbers above, you would have rental profit of £10,000 (as you now get no relief for the mortgage interest).  Tax on this at 40% is £4,000 – and then you get your “adjustment” of 20% of the finance cost (so 20% of £2000 = £400) deducted to give you a final bill of £3,600.  £400 more than it is now.

For basic rate taxpayers there is no change to the tax due BUT you cannot ignore it – as you may find that you actually become a higher rate taxpayer as a result of the changes.

Will I become a higher rate taxpayer?

Once the finance costs are disallowed in your rental accounts, obviously your rental profit is going to be higher –and depending on your personal circumstances, this could mean that your total income is pushed into the higher income bracket for tax. This potentially has knock on effects:

• There could be an impact on tax credits, or child benefit
• You could end up paying tax at 40%, or capital gains could be taxed at 28% instead of 18%

As I said above, the changes are being phased in over 4 years from April 17 as follows, so there are going to be some complicated tax computations ahead!

What can I do about it?

If the loss of higher rate tax relief is going to be really costly to you – the popular alternative solution is to hold and manage your rental property through a limited company, as limited companies are not affected by these new rules.

This could be an option but needs careful consideration as it brings its own set of tax issues.

Transferring existing property into a limited company will give rise to both stamp duty and a capital gain based on market value.  The limited company will only pay corporation tax on its profit (currently 20% and falling to 18% from 2020,) so a lot less than 40% or 45% personal tax, but you still need to extract the money from the company to get it into your hands via either salary or dividends –and there are new tax rules for dividends from April 16 as well!  If the property is sold, the funds go into the company and the company pays the tax, and then you need to extract the money from the company.

If buying a new property through a limited company – you will probably find mortgages harder to find and at higher rates and higher stamp duty in some circumstances.

There are also the admin costs of running a limited company to consider.

As if that’s not enough bad news…..

Stamp duty is also changing from 1 April 2016 for second homes or buy to lets so you will pay an additional 3% over the current rates for your main home.  This applies to transactions completed after 1 April 2016 where contracts were exchanged after 25 November 2015 – hence the current rush for completion on deals before 1 April!

The rules are complicated but will affect a lot of buy to let investors.  You need to work through how it is going to affect you personally over the next few years so you can plan accordingly.

For more information please contact Rosie Forsyth at Wilkins & Co.

Sole Trader or Limited Company?

Feb 14, 2016

Should I set up as a sole trader or a limited company?

Each have their own advantages and disadvantages, and there is no “one size fits all answer” so it’s vital you understand what each offers you so you can make the right decision for you and your business.

Here we look at some of the differences between the 2 structures.

Ownership

If you operate as a sole trader, then you are the business and you are personally liable for the debts of the business.  A limited company, on the other hand, is a separate legal entity and you will own shares in the company.  Unless you have given personal guarantees you will not be personally liable for the debts of the company.

This is an important distinction – if you operate a limited company it is vital to keep the company’s money and your personal finances completely separate.  You must have a separate business bank account and remember that this is not “your money!”

Set up and filing requirements

A sole trader is simple to set up – you register with HMRC and off you go.  You need to file a personal tax return each year which will include the profits of the business on the “self-employment” page.  Your actual accounts aren’t automatically filed with HMRC and there is no set layout.

A limited company has to be incorporated at Companies House and you are appointed as a director.  The company needs to file annual accounts that are in a set format complying with Company Law and also file a corporation tax return with HMRC.  An annual return must also be filed online each year.

You will also then file a personal tax return each year with details of the income you have taken out of the company.

Tax

A sole trader pays:

• Income tax on the profit of the business, over your personal allowance (£11,000 for 2016/17)
• class 2 National Insurance at a flat rate of £2.80 per week – and class 4 National Insurance based on the profit of the business at a rate of 9% on profit over £8,060 (for 2016/17)

Any amounts you withdraw from the business as “wages” do not affect your tax bill – you pay tax on the profit of the business, irrespective of how much you have actually taken out for yourself.

A limited company pays corporation tax at 20% on its profit.  Directors will then pay tax on the money that they have taken out of the business for personal use and this is where there is more scope to save tax within a limited company.

Directors can withdraw money from the company as either “salary” or “dividends” and basic tax planning can usually structure the total amount withdrawn so that less tax is payable overall when compared to a sole trader.

The new dividend tax rules which come into effect from April 16 mean the savings are not as great as they were.

Summary

A sole trader is the simpler option in terms of set up and filing requirements.  A limited company will give you limited liability but is a more formal structure.  There are more deadlines to meet and as a director you have a responsibility to act in the best interest of the company.

A limited company can be more tax efficient, especially where reasonable profits are generated.

There is no right or wrong answer – just one that suits your personal requirements best.  To discuss your options further, please contact Rosie Forsyth at Wilkins & Co.

What travel and subsistence costs can I claim from my business?

Feb 8, 2016

One of the most frequently asked questions from a sole trader is in relation to travel expenses and what can be claimed against the business.

The general rule is that the cost of business travel is an allowable cost.  The question then is what is business travel?

This will depend on how you work and where your base of operation is.

Commuting is not business travel and therefore cannot be claimed. So, if you go the same place every day to work, such as an office or clinic, then that is commuting.  If you do work from home, but also have another regular and predictable place of business, then travel to that place is deemed commuting. eg a hairdresser may see some clients at home but also work in the same salon twice a week.  If you store equipment in a depot and go there to pick it up before working elsewhere, travel to the depot is also deemed commuting.

It is important therefore to determine where you base of operation is as mistakes can be costly.   Everyone’s situation will be different but where you keep your files and accounting records, where you do your admin, keep your tools, where you source new work would all be contributing factors.

What about my daily dose of caffeine in the local coffee shop while I work?

HMRC’s view is that refreshments purchased away from the normal place of business are not an allowable cost of running the business – as they have a dual purpose (you must eat to live!)

Note this is different to the treatment of employees subsistence and for limited companies.

The only time when you will be able to claim these is when occasional business journeys are made outside the normal pattern of work (eg you live and work in London but you go to Birmingham for the day to an exhibition) or where your work is of an “itinerant nature” – so you are constantly on the road.

If your trip requires you to stay away from home overnight, then hotel and reasonable subsistence costs are allowable.

So if you are meeting clients in coffee shops, rather than home, then all those coffees and cakes are not going to be an allowable cost to the business.  You maybe surprised by this – as a couple of coffee’s is cheaper than renting a meeting room – but those are the rules!

For more information please contact Rosie Forsyth at Wilkins & Co.