The Fizz! Blog

Fuel-only mileage rates change tomorrow

Taxman-approved fuel-only mileage rates change tomorrow (in fact, the diesel ones are changing - the petrol ones haven't changed).  These are the rates that HMRC are happy for employers to use a) to reimburse staff for fuel used for company business that they've paid for and put in company cars, or b) reclaim from staff the cost of company fuel they've used for their own private motoring.  But they're also the rates that businesses can use to reclaim VAT on some of the mileage allowances paid to employees and directors.

Employers can pay a mileage allowance of up to 45p a mile, tax-free, when employees use their own car for business.  That hasn't changed, it remains 45p.

You can’t reclaim VAT on all of the 45p, but you can reclaim VAT on the part that represents fuel, as long as you retain VAT receipts covering the cost.  As fuel costs have increased so sharply, the approved rates - the part of the 45p that the taxman is happy to accept as representing the cost of fuel - have just been increased once more.  The new list of rates is here:

http://www.hmrc.gov.uk/cars/advisory_fuel_current.htm

If you're VAT registered, not on the flat-rate scheme, and failing to reclaim VAT on your mileage costs at all, you should start.  You can even reclaim some of the VAT you've missed out on in the past - get in touch with us to find out how.

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There's nothing new about government staff being paid via limited companies

Limited companies tend to be the structure of choice for most reasonably profitable businesses, as they allow the owner to minimise tax and National Insurance liabilities.  The principal ways of achieving that are a) by being paid via NI-free dividends and b) perhaps by sharing the income with a spouse or partner to use a second person's tax allowances.  It's not the right solution for every business, but it's standard tax planning for many.

Through the 1990s, more and more highly paid employees started to use this structure as well, particularly in the IT industry.  The man on the street would probably have though that many of these people weren't really running a small business, but really just had a job, but there was nothing to stop them from exploiting this same limited company structure to save tax and NI.  They were giving up employment rights, but the often massive decrease in tax and NI bills generally made up for that many times over.

After a while, HMRC got fed up with employees going home on a Friday with their P45, then coming back on Monday, sitting at the same desk, doing the same work, but invoicing their former employer via a limited company, with a consequent drop in the tax and NI going to the Exchequer.  In 2000, a rule known as IR35 came in.  In very basic terms, it said: if what you're doing really amounts to a job, you can't use dividends to save NI and you can't split income with your spouse to save tax.  Your company has to pass pretty much all its income on to you via PAYE salary, meaning the tax and NI take is pretty much what it would have been if you had been on PAYE in the first place.

IR35 hasn't worked that well.  Firstly, there are a lot of grey areas in many people's relationship with their customer/employer.  Some people had some of the characteristics of employment, but some of self-employment as well.  If HMRC decided to try and impose IR35 upon them, it could take years to resolve, and HMRC generally seemed to lose the argument in the end anyway.  Secondly, the initial onus is on the taxpayer to put their hand up and pay any tax and NI due under IR35.  Almost nobody put their hand up, and HMRC had nothing like the resources to police it.  Overall, I would think that even HMRC themselves would have to acknowledge IR35 as somewhere between a disappointment and a failure as legislation.

There's now an attempt to portray as a scandal the number of people being paid via these arrangements by the government itself.  It's being painted as a coalition problem, but the truth is that this story could have come out any time in the last 15 years - these arrangements have been commonplace for ages.  I completely agree that they are undesirable - it's grossly unfair that highly paid people can afford to put these arrangements in place but that it isn't economical for someone on £15,000 a year - but they're normal.  For them to be stopped, it will need either a) IR35 to be changed so that it works or b) tax and NI to be fundamentally changed so that the company route offers no material tax savings.  Probably, neither of things will happen.  What will actually happen is that a few high profile arrangements will be changed now, words will be spoken about lessons learned, the media will get bored, and then it will be business as usual.

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Rangers and the problem with aggressive tax saving schemes

It's been well publicised over the last few days that Glasgow Rangers FC are on the verge of administration due to disputed tax bills.  It's actually a story that's been ongoing for some time now, without making the headlines.

Very broadly, Rangers used an tax planning scheme involving Employee Benefits Trusts - EBTs.  Rather than paying their players via PAYE, they paid the money into trusts.  The trusts then lent the money to the players, enabling them to avoid paying most of the tax that they would normally be due to pay.

Ever since these schemes were introduced, they were controversial and many advisors wouldn't recommend them.  There's a spectrum of tax planning, from the safe as houses (e.g. ISAs) to the very aggressive and borderline abusive.  It was known that HMRC considered the EBT schemes to be off the scale at the abusive end and would try to prevent their use if they possibly could.

We've always said that a big problem with aggressive tax schemes like this is the years of uncertainty you'll have to endure before being sure they've succeeded - seven to eight years is a good rule of thumb before the processes available to HMRC and taxpayers are exhausted.  For most of us, it's better to spend seven or eight years getting on with running our businesses, not worrying about tax schemes that may or may not work and very clearly lie outside the spirit of the law.  Even if you do go ahead with such a scheme, you're well advised to keep the tax saved to one side, in case the scheme collapses.

Amazingly, Rangers are now attempting to blame HMRC for this drawn out process:

"Even if Rangers wins the tribunal, HMRC has made it plain that they will ‘appeal, appeal and appeal' the decision.  The practical effect of this will be to plunge the club into years of ongoing uncertainty. It would also mean the club having to pay immediately a range of liabilities to HMRC."

Well, tough.  That appeal process and the time it takes would (or at least should) have been laid out to them as a basic caveat when the scheme was put in place.  It's no use crying about it now.  If you attempt to use such aggressive tax planning, you have to be aware of the risks.  Unfortunately, many taxpayers get blinded by the tax savings - which may, in this case as in many others, turn out to be illusory.

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Could a Childcare Voucher scheme work for your business?

Childcare Vouchers are a pretty decent perk that employers can provide to their employees.  They effectively enable a company to pay for a certain amount of childcare for an employee, without any need for the employee to pay tax on that amount.  Most employees can receive up to £55 a week of vouchers, tax-free - that's £2,860 a year, tax-free, which isn't bad.

The scheme can be used even if you're the director of your own company and have no other employees.

This is a pretty good resource for further reading.

A few points to bear in mind.

1. You do actually have to be paying a registered child carer or nursery for care.  You can't just take the money and keep it, or give it to a (non-registered) family member!
2. This may seem obvious, but it's the biggest single reason that tax planning strategies fail - you need to actually do it properly.  Some people think it's OK if they just get their company to pay for all their childcare costs, and if HMRC have a look at the arrangement it'll probably be OK.  It won't. You need to have everything in place and done correctly.  If that seems too much hassle, then tax-efficient childcare is not for you, unfortunately!
3. You can't use the scheme for your own childcare costs if you're a sole trader or partner.
4. You have to make the scheme available to all employees (broadly speaking).
5. It's possible that receipt of vouchers could have a negative impact on receipt of state benefits - specifically the childcare element of Working Tax Credits.  So look out.  There's a calculator which may help here.

If you'd like to explore this further, get in touch.

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The problem with the VAT Flat Rate Scheme

When the Flat Rate Scheme (FRS) for VAT was introduced, it was intended to make completing accurate VAT returns easier for small businesses.  Rather than a) adding up all the VAT that they'd received from customers, b) adding up all the VAT that they'd paid out to suppliers and then c) paying over the difference to HMRC, they could just add up their gross income from customers and then pay over a fixed percentage of that income to HMRC, the percentage being dependent upon their industry sector.

The idea is that the percentages for each business sector should pretty much reflect how small businesses in those sectors typically operate.  In industries (say management consulting) where businesses have minimal VATable costs, their VAT payments tend to be quite high, and so the FRS gives them a high percentage.  In businesses with greater VATable costs (say a shop), VAT payments tend to be low, and so the FRS gives them a lower percentage.

That sounds fair enough in theory, but in practice there's only one real reason why some businesses sign up to the scheme, and that's to pay over less VAT to HMRC each quarter.  There's a big problem with the table of percentages, which is that it's really poorly put together.  It's pretty likely that there will be two categories which seem appropriate, and very likely that there are none.  It's often the case that sloppy drafting means that a rate that's plainly intended for one type of business can be used by another.  Plus, since many pretty common types of business are omitted entirely, they can choose the "Other" category where that really gives a lower percentage than is really appropriate for their business model.

No blame should be attached to businesses that go for as low a percentage as is realistic, of course - they'd be mad not to.  This thread shows an accountant who's been able to claim (somewhat implausibly, to my mind) that he's not really an accountant, and he appears to have persuaded HMRC to agree.  The problem lies with the conception and execution of the scheme itself.  Keeping accurate records under the traditional system is no big deal - you've got to track your costs in the end, in order to get your year-end accounts done - and, apart from anything else, to know how much money you're making.  So the scheme wasn't really needed.  But what makes it worse is that hopeless table of rates.

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