The Fizz! Blog

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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Tax at Christmas (COVID edition)

Around this time of year, we usually publish a reminder about the tax rules around Christmas parties and gifts.  Of course, there's a big change this year, which is that it's rather unlikely that many employers are going to be holding Christmas parties in person.  However:

• If you decide to defer your Christmas party until some time in 2021 when (hopefully) you'll be able to hold it in a safe and legal way, you'll still be able to benefit from these allowances - an annual event is an annual event, even if it happens late.
• HMRC have confirmed that if you decide to hold some kind of event online - so, perhaps you provide everyone with their food and drink at home and all meet up on Zoom - then that event is covered by those allowances too.  To be honest, it's perfectly obvious that such an event will be covered, and we're not quite sure who would have asked for confirmation from HMRC, but there it is for avoidance of doubt!

So, having said that, the framework remains the same as ever.  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 now 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 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 a bottle of whisky then that's still completely fine, and may well make great business sense!  It's just that for every £100 you spend on gifts like that, it costs your business the full £100 - you can't reclaim any VAT or reduce your corporation tax or income tax bill at all.

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Thinking of investing a lot of money in your business in the coming months? Get your skates on!

Unlike general overheads, there are special rules for how and when a business can claim tax relief for long-term "plant and machinery" like computers, furniture, vans and so on.  Few businesses have to worry about the details of those rules though, because they save tax right away on the first £1m of such purchases each year - it's called the Annual Investment Allowance (AIA).  Historically, that £1m is unusually high, and from 1 January it's due to revert to £200,000.  Around 30,000 businesses each year spend more than £200,000 on plant and machinery, so they're going to find the pace with which they can save tax on those costs slowing.

If a business does not have a 31 December year-end, the rules are complex, and there are traps it's easy to fall into.

31 March is a very common year-end.  A company with a 31 March 2021 year-end is going to have a total AIA of £800,000 - that's 9/12ths of 2020's £1m (which is £750,000), plus 3/12ths of 2021's £200,000 (which is another £50,000).  However, when the spending happens is important too, and the company's year is split into two for these purposes.  If the company spends £600,000, and it all happens in the calendar year 2020, that's fine - it's covered by the £750,000 allowance for the first nine months.  However, if they spend it in January, February and March 2021 it's not fine.  Only £50,000 of AIA is available for those last three months, and any unused allowance from the first nine months is lost.  The balance of £550,000 must be carried forward, and relief claimed at a very slow rate through the years.  You could potentially mitigate things a bit by changing the year-end, but whilst that would give you a bit more upfront relief the bulk of the problem would remain.

So, if someone is, say, going to be fitting out a restaurant in the next six months, they might be wise to think about trying to get it done in 2020, not in the New Year.  There's a Budget before the end of the year, and there's always the possibility that the £1m AIA will be extended into 2021, but you can't bank on it.

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Reimbursing employees for home-working costs

Lately, a lot of people have found themselves working from home for the first time.  There are some rules around employers reimbursing employees for extra domestic costs in those circumstances.  Usually they're a bit niche, but suddenly they've become more mainstream!

 

If an employee has to work from home, then an employer can reimburse them for the extra costs that the employee is likely to incur on heat and light and so on.  For some time, the maximum that could be paid tax-free without any evidence was £4 a week.  Handily, from 6 April that allowance went up to £6 a week.  Technically, it's got to be a requirement of the employee's employment contract that they're obliged to work from home, and with the recent rush to decamp from offices it's unlikely that most employers formally amended contracts in that way, but even so it's unimaginable that HMRC would push that point under current circumstances.  The change is probably implied in the combination of government and employer instructions to stay home anyway.

 

You can pay more than £6 a week without the recipient paying tax if the extra costs they've incurred justify it - you'll need to keep some evidence backing the calculation up, though.

 

If an employee has to work from home as part of their contract, but their employer doesn't pay them an allowance for it, then they can claim tax relief on the £6 a week themselves, which isn't as good as the £6 itself, but it's something.  There's more at https://www.gov.uk/tax-relief-for-employees/working-at-home

 

In real life, these allowances probably aren't being made as often as you'd think.  In large part, that may be because employers and employees alike probably recognise that so much time and money is being saved on travel that many employees are clearly better off anyway!  Plus nobody's needed to have the heating on until this week.  But it still might be a nice way to say "Thanks!" to staff who've pulled together and helped keep your business going in trying times.

 

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Is a Coronavirus Job Retention Scheme or Business Rates grant taxable?

This is a question that's understandably coming up fairly frequently.  The answer is that the support payments going to businesses at present are indeed taxable, but that it's probably the wrong perspective to look at it from.

 

In the case of furloughed staff, the reimbursement from HMRC simply covers salary/NI/pension that you've paid out in respect of your employees.  The money you receive is taxable, but the payments you've made are tax-deductible (as your salary payments to staff always are), and so they just cancel each other out. There's no net income there to be taxed in the end.  You're really just the vessel that passes the money on to your employees and keeps them in their jobs.

 

In the case of a grant for Business Rates, the principle is the same, it's just the link between income and expenditure isn't so clear.  The money isn't reimbursement of a specific cost - but it is intended to help cover business outgoings over these difficult months.  So, in so far as you spend it on business overheads, again there's no net income to be taxed.  Of course, if your business doesn't need the money, so some or all of it ends up simply as profit in your hands, it'll be taxable income for you, just like any other excess of revenue over costs.  But that's fair, enough, right?

 

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