The Fizz! Blog

Camping pods, and how tax can be grey

It’s nice to think that everything in tax is black and white.  As this recent questioner says of two accountants’ advice over a garden office, “But surely they can't both be correct. Either it's an allowable expense, or it's not.”  It’s genuinely not always as straightforward as that, though.  Our UK system is essentially principles-based, not rules-based.  Many things will be clear from the legislation, but some will not.  When something isn’t clear, some dispute between taxpayer and HMRC will eventually reach the courts, and then we might get a precedent, indicating the appropriate treatment.  But there’ll then be some other situation that’s similar-but-not-quite-the-same and the thing starts again.  Sometimes there’s no 100% correct answer, and both accountant and client have to weigh up the evidence and decide how comfortable they are with an approach.

The recent Acorn Venture Ltd case is a good example.  The taxpayer provided adventure holidays.  They housed kids in basic camping pods, and teachers in slightly less basic camping pods - the latter were plumbed in and had toilets.

The tax treatment of those things depends on what they are - broadly, were they moveable plant or were they buildings?  A taxpayer would like them all to be plant.  HMRC would like them to all be buildings.  In the end it was a draw - the kids’ pods were plant, the teachers’ pods (not moveable because they were fixed to the plumbing infrastructure) were buildings.

Some cautious accountants might have advised that they were all buildings, with a minimal tax deduction.  Some more gung-ho ones might have advised they should all be claimed as plant, with a much more generous deduction (of course, so might some accountants who were not technically aware enough to even realise there was an issue to consider in the first place).  A cautious client might have decided not to claim, a less risk-averse one might have been happy to go ahead.  The outcome of the case doesn’t in itself mean that an accountant who recommended a claim for the teacher pods would have been “wrong” in some objective way, as long as they explained the grey area to their client, the factors pointing in each direction, and the risks of HMRC looking at a contentious claim.  In fact, we need those accountants in order to get to the interesting and useful verdicts!

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I’m moving abroad - is this going to affect me and my limited company?

20 or 25 years ago, international tax was something you studied a bit when training as an accountant, but in practical terms only those advising the very wealthy really had to engage with it. There was far less global mobility, relatively few freelancers moving to and from the UK, and digital nomads hadn’t been invented yet.

How things have changed! Now it’s really common for people - especially knowledge workers - to move in and out of the UK. International tax is no longer a theoretical subject!

So, it’s very common for us to have clients who arrive in, or leave, the UK. If you’re a sole trader or an employee, it’s probably fairly straightforward; mostly, people making “clean”, permanent moves are going to get something called “split year treatment”. That means that in the year of arrival only their income post-arrival goes on their tax return, and in the year of their departure only their income pre-departure. There can be some minor friction where they’ve moved to a country that considers them to have become resident there before or after they’ve ceased to be resident here, they may have other things going on (like property or investment income) that are more complex, and when moves aren’t so clean the deceptively complicated Statutory Residence Test comes into play, but most cases are pretty simple.

But if you have a limited company it’ll be messier. In our experience, it’s vanishingly rare for the continued use of a UK company to be a good idea post-departure. If you were a non-UK resident starting a new business, the circumstances under which a UK company would be the best vehicle would be somewhere between rare and non-existent. Leaving the UK whilst in possession of an LTD doesn’t change that underlying reality. Sometimes you might need to persist with your UK LTD for a bit (perhaps there’s an ongoing contract in progress that you need to finish), but in the end you’re going to want to set up whatever structure is most advisable in your new home.

Unfortunately, it can be quite difficult to execute this at the other end! It seems to be very common for someone to go to an accountant in France, for example, only to be told to just keep their head down and pay taxes as if they continue to reside in the UK. As UK taxpayers, we are quite happy for people to pay tax money into UK coffers rather than those of another country! However, as Chartered Accountants, that can put us in a difficult position; we can’t collaborate on a setup where we know that taxes aren’t being paid appropriately, or National Insurance credits being built up by someone who is not really entitled to them, or UK pension contributions being made in excess of the modest “run-off” amount available for a few years to someone leaving the UK, and so on.

It can be further complicated because often people won’t know their plans for sure. Someone who expects to be in Portugal for a year or two might not want to go to great efforts to set up a structure that they’re soon going to dismantle. But that’s always been the case; we’re quite likely to advise someone who comes to the UK with the intention of staying for a couple of years differently to someone who intends it as their forever home.

So, if you’re leaving the UK, please go and see an accountant in your new intended home as soon as you can! Your accountant here may be able to tolerate a period where you’re getting things set up at that end and continuing to run things at this end as you have been. But they won’t be able to tolerate it indefinitely.

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Should my company pay for this?

A really common question asked by people who are new to limited companies - should I set up the direct debit for the company’s accounting fees from the company’s bank account, or my own?

The answer (which is - from the company’s bank account) is obvious to us, but it’s asked often enough that it’s clearly a reasonable question for a non-accountant to ask.

Extreme examples of companies paying for things might be helpful: you probably would not imagine that Richard Branson buys aeroplanes personally and then claims them back on his expenses from Virgin Atlantic, or that Mark Zuckerberg rents Facebook’s offices himself and gets reimbursed at the end of the month. Those companies happen to be very big, but it’s the same principle for smaller ones too. If an accountancy firm is providing services to a company, the company pays for the service. If the company needs a laptop for a director or employee to use, the company buys a laptop for them to use. If the company needs an office for directors or staff to work in, the company rents space for them to occupy. In fact, generally, directors need pay absolutely no company-related costs themselves at all. If you just set things up so that the company pays for all its own costs in the first place, you’ll have less admin to do - everything gets recorded once and once only. And you’ll have a better idea of where you stand financially - you’re not temporarily impoverished until your expenses are reimbursed, and your company doesn’t look richer than it really is because you’ve temporarily borne a bunch of costs yourself.

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Travel and subsistence scale rates are an estimating technique, not an allowance!

Although the rules around the tax-free reimbursement of travel and subsistence costs to employees and directors are complicated, it’s often very appropriate for an employer to pay such expenses. When it is, it’s common for the individual to make an expense claim for the costs they’ve incurred, backed up by receipts (though if it’s your own company it’s easier for the company to just pay the costs in the first place, of course).

There’s an alternative system - fixed “scale rate” expenses, based on typical costs in the place being visited. HMRC are content for these to be used instead of actual costs, as long as there’s some reasonable review process in place before the expenses are paid out. There are costs for accommodation, along with the costs of meals, drinks and travel within the city (the total of those last three things being known as the “residual” costs.

However, this is a shortcut to making a reasonable but admin-light reimbursement of costs that really were incurred. It’s an estimating technique that HMRC are content with, not a flat-rate allowance. If no costs have been incurred, there’s nothing to estimate!

There are only a couple of exceptions to this.

• If the individual is having their accommodation and meals provided for them by a customer, HMRC will permit a payment of 10% of the residual costs. It’s the same if they’re staying with a friend.
• If the individual is being provided with self-catering accommodation, then they can claim 80% of the residual costs for the first week, and 50% thereafter.

HMRC have a bunch of other examples, which are quite helpful if you’re dealing with these situations.

If you’re not paying for your own accommodation and meals, you cannot legitimately be paid the full scale rates tax-free! The daily scale rate for someone paying for their own accommodation and meals in New York is $318.50. If you’re not paying for your own accommodation and meals, then the 10% of the residual costs that you’re allowed to claim is $10.25. Quite a difference! Be careful.

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I've been told my contract is inside IR35 - but what does that mean in practical terms?

Previously on IR35:

• The legislation informally known as IR35 was introduced 23 years ago.  It aimed to prevent those billing via a limited company whilst performing an employee-style role for a customer from benefiting from any of a limited company’s tax advantages; instead they were to pay full employment taxes.
• It didn’t work, because it was self-assessed, and turkeys rarely vote for Christmas.
• In 2017, as a result, the responsibility for making the call changed - if you worked for a public body, the public body would decide if IR35 applied.  If it did, full employment taxes would apply and you’d just be paid the net.
• In 2021 (having been postponed for one year due to COVID), this was extended to large customers - similarly, it became their call on IR35 and their risk if they decided not to account for employment taxes.

If you’re a contractor or freelancer working longish projects with big or public sector customers, it’s therefore quite likely you’ll encounter IR35 these days.  But, if a customer or agency tells you that a contract is inside IR35, what does this mean to you in practice?   This isn’t necessarily a simple question, as there are a number of routes that the customer may take, with the literal implementation of the IR35 rules being the least common by far:

1. They might just put you on PAYE.
2. They might pay you via an umbrella company (from your point of view, this is to all intents and purposes exactly the same as PAYE).
3. They just might actually implement the IR35 process - we don’t see it often, but we do see it occasionally.  If they do, then you’ll send them invoices from your limited company as normal, but they’ll pay the invoices net of tax and National Insurance relating to you personally.  This is obviously a very weird concept, and since all three routes are designed to get to the same split of the money between you and HMRC, the well-worn road of PAYE/umbrella generally looks much more appealing to all concerned.

If you get the choice, your accountant will thank you for picking #1 or #2!  We don’t need the hassle of #3 either.

Here are three practical points to be aware of:

1. Make sure you know whether a contract is inside or outside IR35 before you sign it!
2. Be aware that an inside IR35 contract will leave you with less money in your pocket than an outside IR35 one.  How much less?  That will vary depending on the bigger picture of your whole situation, but as a rule of thumb you might consider that you’d need a 25% day rate hike to stand still.
3. You should talk to your accountant at the outset of the new gig, not later on down the line - as well as the decision on whether to accept the contract, there will very likely be other actions to take too.  It might well be appropriate to pause salary or dividends from your own company whilst working on an inside IR35 contract, and that can’t legitimately be done retrospectively.

It’d be nice if everyone had a common understanding of what inside IR35 means, and the steps we’ll all take when that’s the case.  Until then, you’ll always need to press until you find out what’s actually going to happen in practical terms.

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Is there a cap on holding investments through your company?

Company owners are fairly frequently under the impression that there’s some cap on the proportion of their company’s assets that can be held in investments, as opposed to cash.  This isn’t the case, although we know why the misapprehension exists.

It’s to do with Business Asset Disposal Relief (the relief previously known as Entrepreneurs’ Relief).  When originally introduced, Entrepreneurs’ Relief was fairly exciting.  It could reduce the tax you paid when you sold (or liquidated) your company from 40% to 10%!  At one point, that could apply to profits of up to £10m - in theory someone could save £3m tax if they qualified for the relief.

There were some conditions.  One was that the company had to be wholly or mainly a trading company; non-trading activities couldn’t be substantial.  One such activity is investment.  HMRC ended up issuing the guideline that they might consider 20% as a proxy for substantial.  But was that 20% of income?  20% of assets?  20% of management time being spent on investments?  They were non-committal.  There were various verdicts in tax tribunals over the years that clarified things a bit - generally suggesting that you were probably OK to have quite a lot of company funds invested as long as you weren’t very actively managing them - but if someone wanted complete certainty on the relief they’d generally tread pretty carefully if they were hoping for savings at the upper end of the scale.

Things are very different now.  The top rate of Capital Gains Tax on a company sale or liquidation isn’t 40%, it’s 20%.  And you can’t claim the relief on £10m of income, only £1m at most.  Back in the day you could theoretically save £3m.  Now the maximum benefit is £100,000.  The maximum benefit of the relief is only 3.33% of what it once was!  On top of that, the majority of company owners will probably not arrive at a point where the relief needs to be claimed anyway - and who knows if the relief will even exist at a future point when you come to sell or liquidate.

So, it’s true that for some company owners there was a strong incentive to err on the side of caution with investing funds, in case the effort to generate a bit more profit in the short term meant the loss of a massive tax benefit in the medium to long term.  But it seems to have morphed into a generally held belief that there’s an absolute cap on what a company *can* invest, which isn’t true at all.  Whether you *should* invest company funds is another matter!  But generally perceptions of some big tax disincentive are misplaced.

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It's party time! Tax at Christmas 2022

After a party-free 2020 and a party-light 2021 perhaps it's going to be a party hard 2022!  If you're hoping to get the party started, here's a reminder about the tax rules around work Christmas parties and gifts.

If an employer provides a Christmas party that's available to all of its staff (note that this really applies to PAYE employees, as opposed to, say, freelancers), where the cost is less than £150 per head, then it can reclaim all of the VAT and deduct the entire remaining cost from its profits before working out its tax bill - effectively, if a normal VAT-registered limited company holds its party at a normal VAT-registered venue, every £100 spent on the party ends up costing the company £67 in the long run, once they've got the VAT back and saved corporation tax on what's left.  Actually, those allowances apply to annual events, not specifically Christmas ones - so you could have, say, a summer barbecue *and* a Christmas party costing less than £150 a head in total and still reclaim all of the VAT and get tax relief on the balance.

If you want to give a Christmas gift to staff, then in practice HMRC consider a relatively small item like a turkey or a fairly normal bottle of wine to be trivial, and won't try to tax the employee on the value of the gift (as we've written before, sporadic gifts and benefits each valued at £50 or less are explicitly considered trivial by HMRC). Assuming there's VAT on the gift when you buy it, then once more the ultimate cost of £100 of staff gifts to a normal VAT-registered limited company employer will be £67. Anything more valuable the employees will have to pay tax on - and you'll have to pay National Insurance too.

If you give gifts to customers, then they'll only save you tax in full if:

• The total value of gifts in a year to the customer is less than £50,
• The gift has a clear advert for your business on it, and
• You can't eat, drink or smoke it!

If you want to give a customer, say, a bottle of whisky then that's still completely fine, and may well make great business sense! But a) you can only claim the VAT back on the gift if it costs less than £50 and b) you won't save corporation tax on it however much it costs. So a £49 bottle will cost a company £41 in the end (it can get the VAT back but can't save any corporation tax) and a £100 bottle will cost it £100 - it can't reclaim any VAT or reduce your corporation tax or income tax bill at all.

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Should my company buy stuff before 31 March 2023, or after?

At present, companies buying plant and machinery (computers, machinery, furniture, vans, that kind of thing - not cars, though) can claim the Super-deduction.  This means that for every £1 they spend, they save tax as if they’ve spent £1.30.  Since corporation tax is currently 19%, this means they effectively save tax at 24.7% on those purchases this year.

This was put in place because corporation tax is going up in April 2023, and if nothing was done then companies would have deferred those purchases until then.  The Super-deduction was designed to put companies in a broadly similar position whenever they bought stuff, so as not to discourage investment.

So, with corporation tax going up in April, and the Super-deduction being withdrawn, does that mean it’s not worth thinking about when you buy new assets?  Not necessarily!  There are actually going to be three corporation tax rates in place:

• Companies with profits under £50,000 will still pay tax at 19%.  If you know your company will have profits of less than £50,000 each year, you should invest before the end of March.  You’re effectively saving 24.7% this year, not 19% next year, a big saving.
• Companies with profits over £250,000 will pay tax at 25%. If you know your company will have profits of more than £250,000 each year, it doesn’t really matter when you invest.  A 24.7% tax deduction this year and a 25% tax deduction a year later are more or less the same.
• Profits in between £50,000 and £250,000 will effectively be taxed at 26.5% - a “catch up” rate to go from 19% to 25%.  If you know a purchase will reduce your profits from less than £250,000 to more than £50,000, arguably you might want to wait until next year to invest, as saving 26.5% is better than saving 24.7%.  But it’s only a bit better, so you might as well just buy whatever it is as soon as it’ll be useful to you!

(Things are a bit more nuanced for companies that don't have a 31 March year-end, who won't get the full 130% deduction - but they'll still get more than 100%).

Of course, you should never buy anything solely to save tax!  You buy things to ultimately pay MORE tax, not less.  But if you’re going to buy something, the good news is that you’re not going to go far wrong by just getting it as soon as your company needs it.

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What can you claim for charging your electric company car at home?

Thanks to the incredibly generous tax rules that apply to them, the vast majority of new company cars now are electric.  Most of them are probably charged at home.  If you’re charging your electric company car at home, how much can you claim back from your employer to cover the cost?

HMRC’s guidance from the outset has been that you can claim back the cost of electricity relating to business miles but not private miles.  You could do that by trying to figure out the actual cost, but most normal people are going to use the shortcut of HMRC’s approved rate; 5p a mile (a recent increase from 4p a mile).  Using that kind of basis with an approved HMRC rate has always been the way it’s been done with traditional fuels.

However, a cat has recently been put amongst the pigeons.  The ICAEW has pointed out that, per the legislation, electricity *isn’t* fuel, so treating it as such is wrong.  It’s just one of the general costs of running the car.  That being the case, it’s legitimate for the employer to pay for *all* the electricity that goes into the car, not just the business part (just as it can pay for all the servicing, all the insurance and so on).  And at this moment, there seems to be general agreement that HMRC’s guidance on this is wrong.

There are a few things to say about this:

• We’re only talking about fairly modest amounts here!  A driver who was going to claim back 5p a mile for her 2,000 business miles but not her 8,000 private ones can now be reimbursed £500 by her employer, not just £100.  Nice, but not life-changing.
• Employers may not actually pay an employee the whole lot; in fact, they probably won’t on the whole.  Just because an employer *could* reimburse an employee for the cost of her private motoring doesn’t mean they will.  They’ll probably quite reasonably think that the employee can pay for their own life themselves.  Who is going to be reimbursed?  Company owners themselves, that’s who.  They’ll definitely claim as much as they can tax-free!
• It’s possible HMRC might be bloody minded and try to cling on to their guidance!  In any case, it’s pretty likely the government will legislate to close what’s perilously close to being a loophole - let’s be honest, electricity really is analogous to fuel in every way.

For now, though, the advice for directors with an electric company car is going to be - claim 5p a mile for all mileage from your company until HMRC slam the door again!

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Can my limited company pay for my counselling or therapy sessions?

As ever with these questions, the "can" is a red herring that tempts a literal but unhelpful answer.  Your company can pay for anything, the real question is whether there will be knock-on tax consequences that make it a bad idea.

In this case, perhaps surprisingly, there probably aren't any adverse consequences.  The rules, HMRC's guidance about them and HMRC's internal manuals are clear - an employer can pay for counselling for employees with no tax consequences for the employee, and though HMRC say the exemption is tightly drawn it actually covers a lot of areas.

Now, this exemption is plainly not intended for owner-managed businesses.  For a big employer, claiming that they're only providing the therapy because of their needs as an employer, and that long-term personal benefit to the employee may well be created as well but it's not the reason for their footing the bill, is a reasonable assertion.  If it's your own business, then that dividing line between employer and employee is not so clear.  But HMRC are pretty unambiguous about it, so if you’re comfortable that the counselling you’re contemplating falls within HMRC's guidance as tax-free, then you should feel confident going ahead.  Your company must provide the therapy, so should contract with the therapist itself - it's no good arranging it yourself and claiming the costs back if you want the setup to be robust.

If you're a sole trader or a partner in a partnership, then this doesn't apply; these are employment tax rules.  A sole trader or partner will probably find it difficult to impossible to sustain the argument that the cost is tax-deductible - it's have to be incurred wholly and exclusively for the purpose of their trade.

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