The Fizz! Blog

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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Trivial benefits revisited

Some years ago now, HMRC surprised everyone by quantifying the level at which they considered a non-cash benefit given to an employee to be trivial and disregarded for tax purposes.  £50 was much higher than everyone had imagined up to that point.

It doesn't represent carte blanche to give people an onslaught of things worth £50 in lieu of taxable pay!  If the provision of benefits becomes regular enough that it's effectively become just part of the deal with the employee and therefore contractual, it'd just be taxable as normal.  So a £50 John Lewis voucher every Friday or every month isn't going to work.  But sporadic £50 vouchers are fine.

The rules are tighter for directors - there's also a tax year cap of £300.  But that's still six £50 vouchers!  Or, if you're particularly prone to getting the wrong card out of your wallet and accidentally using the company one from time to time, the trivial benefits allowance can be used as a backstop so that you don't have to repay the company when that happens.

A small win perhaps, but small wins at the expense of HMRC can be disproportionately satisfying!

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Should I put my Buy To Let property into a company?

Owners of rental properties pay tax on the profits, and often the biggest cost associated with the property is mortgage interest. Over the last few years, the tax relief on that interest has gradually been tapered down for those with higher income, and people who might once have saved tax at 40% (or more) on that interest now save tax at a maximum of 20%.

As a result, the idea of putting a Buy To Let property into a limited company is often floated as a possibility. Is it a good idea? For most people, on balance it’s unlikely to be. Here are a few significant factors:

• If it’s a property that you already own, then transferring it to a limited company will be taxed as if you’d sold it at market value. If it’s gone up materially in value since you bought it, you’ll probably pay some Capital Gains Tax.
• There’ll also be Stamp Duty to pay on such a transfer; Stamp Duty on the transfer of a property from an individual to a company is calculated on the basis of market value, not the amount paid.
• Although the tax-efficiency of the rental income in the company might be a bit better, it’s quite likely that the tax position when you come to sell the property might be worse. An individual has a tax-free allowance for capital gains and only has to pay tax on profits above that Annual Exemption. A company pays tax on every penny. And then, as the owner, you’re likely to want to get the profits out of the company - and you’re likely to pay tax then as well. That kind of double taxation is always an issue when appreciating assets are held within a company.
• The professional fees you’ll incur in having a company’s accounts and taxes properly looked after are greater than those for an individual, so a bit of the year-on-year tax efficiency is absorbed by that anyway.
• It’s often the case that it’s more expensive for limited companies to borrow than it is for individuals.
• Fundamentally, it’s a big punt on the tax regime remaining stable for a long time, and such punts are pretty risky. It’s easy to imagine the rules changing to eat away at tax efficiency for the company ownership route - and you’ll still have paid the switching costs if you used to own the property personally, and you’ll still be stuck with double taxation on exit!

A limited company is more likely to be indicated where there are multiple properties and where there’s a really long term vision for the business. If it’s intended that a rental business will have multiple properties and it might be contemplated that it might even last generations, a limited company could well be indicated. But in 90% of situations, our view is that personal ownership is still more appropriate.

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Can I pay for private medical insurance through my limited company?

Yes you can.  It’s unlikely to make much of a difference to you financially though, so don’t get too excited!

If a company pays for private medical insurance on behalf of an employee (including a director) then it’ll save corporation tax on the cost – currently at 19%, though it could be at as much as 26.5% if corporation tax goes up as planned in 2023.

Great!  But, although there’s that tax saving, it creates two further liabilities.

1. The company has to tell HMRC the amount paid for the director’s cover (and, if applicable, their family’s) each tax year – the Benefit in Kind - on a form called a P11D.  The company has to pay Class 1A National Insurance on the cost at 13.8%.  It’s going to save corporation tax on that payment, but it’s already wiped out more than half of the tax saved. 
2. Then the director has to pay income tax on that Benefit in Kind too.  The rate depends upon how the person’s income is made up, but though it’s just about possible that it could fit into their 0% tax band without shifting anything else up into a higher rate of tax, it’s far more likely that it’s going to effectively be taxed at 7.5%, 20%, 25%, or maybe some other rate.

 So it’s actually pretty unlikely that the arrangement is going to save any tax overall (and it’s also likely to involve paying your accountant to do the paperwork, or be implied in whatever overall fee you’re paying them).  If you can get a much better deal if the company pays, fine.  Otherwise it’s not going to make much difference to you whether you pay personally or through your company.  In practice, it’s really quite rare to see an owner-managed company paying for medical cover for its directors – most people keep it simple and pay for themselves.

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Electric company cars - some traps to look out for!

Electric company cars have become extremely tax-efficient, and therefore extremely popular. But if you’re thinking of getting one, then there are some traps that you need to be careful to avoid:

• It’s only fully electric cars with zero emissions that are going to give you the really generous tax-efficiency. A hybrid won’t.
• The car has to be provided by the company, either via the company owning it or leasing it. It’s no good for it to be a personal lease or purchase with the company paying.
• There’s no superdeduction available on the allowance, unlike most plant and machinery bought by companies.
• The car has to be new! A second-hand car, even if fully electric, doesn’t attract full tax relief in year one. However, that could be a bit of a red herring, because…
• If you’re buying that new electric car outright, you shouldn’t be drawn in too much by the “100% tax relief in the year of purchase” aspect in any case. In the future year when you sell it or trade it in, you’ll effectively have to pay some of the tax back on whatever you sell it for (maybe at a higher rate, if you buy now when the corporation tax rate is 19% and sell in a couple of years’ time when it’s 25%!). Any asset is only going to save tax in the long run on the effective cost over its life with your company - what it buys it for minus what it sells it for. Which year or years the tax is saved may vary, but it’s just timing, you wind up saving tax on the same real cost in the end, and that's what you should focus on. That 100% relief in year one really just represents a little cashflow benefit, nothing else.

We know at some point we’re going to come across someone who - say - has taken out a Personal Contract Purchase plan in their own name, and set the direct debit up from their company bank account, thinking it’s a company car when it’s not. And we’re going to come across someone who is pleased for their company to save £15,200 when buying an £80,000 car, but is discombobulated when they trade it in for £50,000 and have to pay back £12,500 of the tax that was saved. Don’t let that be you!

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What’s the super-deduction?

If you’re in business, you’ll be used to the idea that generally you get to save tax on the whole cost of new equipment (except cars) in the year you buy it – the “Annual Investment Allowance”, which gives you a 100% deduction from profits for the cost of a laptop, van, loom or whatever. As of 1st April, companies will be able to claim a 130% deduction instead (aka the super-deduction).  

If you think about it, the government had to do it, because they've announced that the corporation tax rate will rise from 19% to 25% in April 2023.  Knowing that, companies would have delayed big investments in equipment until then, trying not to buy anything significant for a couple of years.  That’s not conducive to economic recovery.   How do you eliminate that factor from the decision-making process?  You give a 130% deduction for the next couple of years.  19% x 130% comes to 24.75%, meaning that a company that’s going to be paying tax on its profits at the new 25% rate will save more or less the same amount of corporation tax if they make the purchase between 1 April 2021 and 31 March 2023 as they will if they wait until April 2023.  The super-deduction just removes any tax incentive to delay investments.

As you’d expect, though, there are some wrinkles and things to be aware of!  Here are a few.

• The super-deduction only applies to companies, not to sole traders, partnerships or LLPs. That’s completely reasonable – that known approaching increase in the tax rate doesn’t apply to them, it only applies to limited companies.  Other businesses continue to save tax at the marginal rate of the sole trader or partner – most likely 29% or 42%.  There’s no reason for them to delay purchases, so no special incentive is needed.
• Not all companies will pay tax at a pure rate of 25% from 2023.  In fact, most won't - it's only companies with profits over £250,000 that will pay at that rate.  Companies with profits under £50,000 will still pay at 19%, so for them the super-deduction actually is a genuine boost for a couple of years.  Companies with profits between £50,000 and £250,000 will pay tax at 19% on the first £50,000 and then 26.5% on the next £200,000, so they'd still technically benefit by waiting to invest, but not by much; saving at 26.5% rather than 24.75% isn't going to make much of a difference unless the investment involved is pretty big.
• The super-deduction doesn’t apply to cars. This one is a bit more surprising.  The government is using the tax system to strongly incentivise companies to provide electric vehicles to employees.  There’s now a competing disincentive to delay purchase and provision of them until 2023.  Perhaps the government thinks that the incentives are so big that they outweigh that disincentive, or that people need to drive around and can’t just sit at home until 2023 so cars are going to be bought anyway.
• It also doesn’t apply to some other, more niche, classes of assets, like integral features in buildings, so any company looking at big levels of investment in anything other than mainstream plant and machinery should be careful (or at least be open to the possibility that it won’t all get the super-deduction).
• It doesn’t apply if you’re going to be leasing the asset out to customers (although, for companies letting out commercial property, a subsequent change of heart by HMRC means that the super-deduction is now available on certain qualifying assets of those businesses, after they were excluded in the first draft of the legislation).
• Although you save tax on 130% of the cost on the way in, if you sell the thing again before the tax rate goes up, you have to pay tax at 130% of the proceeds on the way out too. So you can’t claim 130% tax relief on something you buy and then sell it on in short order to try and craftily create a tax windfall.
• You can’t claim the super-deduction on second-hand goods – there could be quite a lot of second-hand equipment around at the moment as businesses have failed or shrunk, but those things will only save tax at the normal rate.

So, great headlines, but when you scratch the surface things aren’t quite as generous or simple as they seem!  It’s really an incentive to behave in exactly the same way as you would have done if you didn’t know corporation tax is due to rise in 2023.

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IR35 isn’t being introduced in April

IR35 was introduced in 2000, so it's going to be 21 this year.  In a nutshell, IR35 says that, insofar as your limited company’s revenue comes from you really being a pseudo-employee of an end-client, you can’t use the tax and National Insurance efficiencies of dividends – the company’s got to pay more or less all of that revenue out to you under PAYE.

Simple in theory, a complete failure in practice.  A company’s director had to make the call on whether IR35 applied and whether far more tax and NI should be paid, so there was a big financial incentive to argue they were outside it, and HMRC lacked the resources to police the rules in any meaningful way at all.  And, in any case, the question of what represents an employee-esque relationship is often impossible to answer with certainty.  In the modern world, countless people sit in that grey area somewhere between employment and self-employment.

So, IR35 was to all intents and purposes a failure.  In 2017, the government changed it a little.  If your customer was a public body – an NHS Trust, for example – then the decision was taken out of your hands, and the public body would decide if IR35 applied.  If they decided it did, they’d effectively take your company’s invoice, work out and deduct full employment taxes, and pay whatever remained, to put you more or less on a par with a PAYE employee.  This was effective in one sense – a lot of public bodies did apply the rules in that way – but had the unintended consequence that many of the better contractors just decided to move into the private sector and work there instead.

As a result, the government had a second idea.  From April 2020, those same rules would apply to big private sector companies too – they’d have to make the IR35 call themselves, at their own risk, and if they paid pseudo-employees via a limited company gross then the risk of employment taxes not being paid would be their own risk, not that of the contractor.  This was actually quite effective, and a bunch of big companies stopped using contractors entirely, either putting the workers on to PAYE or just outsourcing that PAYE processing to an umbrella company (technically they could go down that previously described route of deducting employment taxes from your company’s invoice, but there’s no real point, PAYE is an easier way of achieving the same result).

Then COVID happened, and the April 2020 introduction was postponed by a year.  The big companies who’d played ball and got ready for the new world found they could have got away with another 12 months of using contractors.  The big companies who buried their heads in the sand did get away with it.

But the change is still due to come in this April instead, so hopefully those latter companies have removed their heads from the sand and are getting ready to engage with it.  There’s a chance it could be postponed again, of course (the government have form over the last couple of years of very short-notice postponements of changes that businesses have spent a lot of time and money preparing for, even prior to COVID), but it seems unlikely, and it’s clear that it’s being talked about more this time round.  However, what that means is that you do hear a lot of things being said about it that aren’t accurate at all, such as:

• “IR35 is being introduced in April”.  No it’s not.  IR35 has been around for more than two decades.  All that’s happening is the responsibility of non-compliance is being shifted from the contractor’s company to its customer, if the customer is big.
• “You can’t take on a contract if it’s under IR35”.  IR35 has never had anything to say about whether a contractor’s company can accept an engagement or not.  It’s legislation about how a contractor must get paid by their own company.
• Crucially – “It’s more risky to be a contractor from April”.  There might be fewer contracts around, that’s true, with more of those gigs being offered on a PAYE basis instead.  But if you’re a contractor working for a big company, and they’re content to continue paying your company’s invoices in full, there’s *less* risk than before, as the customer now bears the burden of non-compliance.  There may well be some ultra-cautious contractors who decide to declare under IR35 anyway, even if their customer is happy to pay gross, but HMRC are going to be going after the end user in the first instance, not the contractor.  Anyone in that situation will clearly be at less risk than they were before, not more.
• End users of contractors telling contractors “there are some changes coming in April, you should look into them.”  Er, no, *you* should look into them.  This is a transfer of risk *from* contractors *to* end users.  The end users are the ones who need to understand what’s happening.

What is certainly true is that some contractors are going to find themselves taking PAYE jobs instead.  And what’s also true is that many of those people will find themselves earning less money than they used to.  Some of them will be able to ask for, and get, a bigger daily rate in order to make up for it, if they have particular bargaining power for some reason, but many won’t, as their fundamental value to their client/employer hasn’t changed.

There are two ways of looking at it, really.  Some contractors will be phlegmatic about it, considering they’ve done well for a while, and that now finding themselves with a tax burden on a par with that of an employee isn’t the end of the world.  And some contractors will not be phlegmatic about it at all, especially if their life involves overheads more or less equal to their present net income.  But it is what it is, and even if the change is postponed for a second time, it will come.  The tax system isn’t fit for 2021 in many respects, and the vast number of contractors using limited companies simply wasn’t contemplated when the fundamental levers of corporation tax, income tax and National Insurance were first created. 

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