Tag Archives: SME

How to Reclaim VAT on Cars

How to Reclaim VAT on Cars

Reclaiming VAT on cars has always been difficult. HMRC always argued that if a car was not “wholly and exclusively” for the business, VAT could not be reclaimed. In essence, if a company car was used to travel 1 non-business mile, a reclaim of VAT was not possible. Proving that a vehicle had not ever been used privately was difficult. HMRC has, understandably, never documented what evidence it would require in to allow such a reclaim. Whilst this still remains the case, a number of recent cases have set the roadmap to allow for VAT reclaims.

One issue these cases addressed was around the intent to use a company vehicle for personal journeys. It’s next to impossible to prove personal use didn’t/won’t happen. However, if the company takes the appropriate steps, it can show that it’s intent is that the car will only be used for business purposes. If it can do that, a reclaim of input VAT should be allowed. With £5,000 of VAT to reclaim on a £30,000 car, it’s easy to see why taxpayers are keen to reclaim and HMRC are intent on blocking them. So, what do you need to do to reclaim?

1.  Insure the car for business use only

If you only insure a vehicle for business use this is a pretty strong indicator that you only intend to use it for business. Private use would leave the company directly liable for any claim arising from a private journey. As such, it can be inferred the car is intended for business use only.

2. Instruct all potential users of the car that it is to be used for business purposes only

By informing all staff that the vehicle is for business use only it goes further to back up the intent of its use. Get employees to counter sign a declaration that they agree to the restriction of use of the vehicle.

3. Insert a stipulation in employment contracts

Further enforce point two by including a clause in the contract of employment that employees agree not to use company cars for private use. They should also agree to return pool cars to the business premises at night. In 2016, the first tier tribunal, in the case of Jane Barton, sided with the taxpayer in reclaiming VAT even though her business premises was at her home address. So even though the car was kept at her home, this also doubled as her business address an was deemed acceptable.

4. Get the paperwork right

As well as employee declarations and amendments to employment contract, a detailed mileage log is invaluable to a successful reclaim of VAT. Again, a clause could be inserted in the employment contract that employees agree to log all journeys in a mileage log. Also consider having the directors pass a board resolution restricting the use of the vehicle to business use only.

Summary

If the above points are followed, a reclaim of VAT should be allowed. It’s worth noting however, some taxpayers have won their case in the First Tier Tribunal without hitting all the above points. In 2016, Zone Contractors Ltd were allowed their reclaim of VAT even though there were no restriction to the insurance policy. There were also concerns over the credibility of the mileage logs. However, the legal and physical restrictions (stipulation in the employment contracts and requiring the vehicle to be stored at business premises overnight) were enough to side with the taxpayer.

Each case is very much decided on its own merits. However, if all the above steps are taken, there should be little or no room for HMRC to argue that the car is not intended for business purposes.

Changes to taxation of savings income can benefit owner-managed businesses

From the 6th April 2015, individuals deriving their income from interest on savings will notice a marked reduction in the amount of tax they are likely to suffer on this income. The Chancellor announced in his Budget 2014 speech back in March that the starting rate of tax for savings would be reduced to 0% for the first £5,000 of savings income over and above the personal allowance (PA).

As has always been the case with the starting rate for savings, if there is other income falling above the PA the reduced rate of tax is ignored and the income is taxed at the basic rate (20%).

When the 0% rate kicks in from 2015-16, the standard personal allowance will be at £10,500. Add to this the savings rate threshold of £5,000 and an individual earning £15,500 from savings (and notably nothing else) will have no tax bill. A husband and wife with joint savings will be able to earn £31k of interest without a penny going to the taxman.

Anyone whose main source of income is in fact savings and are having tax deducted at source by the bank can apply to receive the interest gross if the changes mentioned above are likely to mean you won’t have any tax to pay. To do this you will need to fill out form R85.

However, given typical savings rates are currently around 2-3%, to earn £15k in interest per annum, you need £500,000 – £750,000 sitting on deposit. So it’s not necessarily going to affect most people while interest rates remain low.

However, there is a distinct opportunity here for owner managed businesses to save tax on both their own earnings and the income of their owners.

Charging Interest on Directors Loan Credit Balances

If the company owners invested personal funds into the company for which they are still to be reimbursed, they are entitled to charge interest on this balance. The interest is deductible for the company and is taxed at 0% if no other income is earned in the hands of the business owners.

Previously, directors would have taken a salary equal to the personal allowance and then declared dividends to keep their income within the basic rate band of tax and therefore avoided any further charge to tax. Whilst this is still the most efficient manner of getting circa £40k a year from the company, it is certainly worth considering looking at charging interest on directors loan credit balances; especially in years of poor earnings or perhaps when accounting losses deplete reserves to the point where dividends are not an option.

The Tax Savings

The advantage here is for, say, a husband and wife who own and run their own company. They can pull an extra £10k from the company in the year, pay no income tax and save an extra £2,000 in Corporation Tax, not to mention the Employers NIC saving.

If we compare a salary of £15,500 to an interest charge of £15,500, the effect is the company is better off by £814 and the owner by £1,885. So overall almost £2,700 more stays with the company and its owners for each individual who is charging interest.

The trade-off then is the restriction of earnings. If you choose to take dividends as well you lose the 0% bracket but still get the CT deduction and NIC saving.

The key to this though is having sufficient funds owed by the company to its owners and being consistent and reasonable in the rate of interest you charge. Scenarios I’ve seen in the past that lead to this mechanism being utilised are typically when business owners secure funds personally to buy premises or high value assets for the company. In this instance, further savings can be made by claiming Qualifying Loan Interest relief on the interest charged to the owner. This effectively recharges the interest to the company (assuming similar interest rates) but this will counteract the utlisation of the savings rate band.

Summary

So while the above mechanism may have limited uses, it can still provide significant savings when the conditions are right. The relief for Qualifying Loan Interest, whilst it can counteract the usability of the savings rate band, can also help. The relief is given regardless of the type of income so if owners do wish to take dividends for their tax efficiency, the relief on the interest being suffered can help increase the amount of dividend that can be taken before hitting the higher rate threshold.

Engineering the above scenario simply to get the tax deduction would be inefficient. However, if the circumstances are in place, or the owners are considering transactions that might put them in place such as providing finance for the purchase of premises, then this interest income offers some flexibility to owners wishing to extract funds from their company in a tax efficient manner.

How do grants affect a company’s R&D Tax Credits claim?

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Since the introduction of the R&D Tax Credits in to the UK Corporation Tax regime, there have been two strands to it – the Small and Medium-sized Enterprise (SME) scheme and the Large Company scheme. Since August 2008, the definition of SME has been a company with less than 500 employees and, either less than €100m or a balance sheet with less than €86m.

In the context of Northern Ireland, the vast majority of companies will fall into the SME category and will be able to claim under the SME scheme. Which, from a tax perspective, is a good thing! The tax man will allow you to claim an additional 125% on top of the cost of R&D activities. So if you spend £10,000 on qualifying Research and Development, you are treated as having spent £22,500 and your taxable profits are reduced (or your tax relievable loss is increased).

Under the Large Company scheme, the additional relief given on top of the actual spend is just 30% – still a worthwhile relief, but pretty much miles behind the SME scheme.

However, although the vast majority of companies who are claiming R&D tax credits in Northern Ireland meet the criterion of an SME, there is a situation when they will not be able to claim under this scheme: whenever they claim grants which are State Aid Notified.

Being a member of the EU, the UK must comply with the laws surrounding State Aid – that is, the government using tax-payers money to give assistance to one or more organisations that give them an advantage over others. The laws are generally concerned with distorting competition across the EU and aim to stem any such distortion by monitoring and measuring the money Member State governments dish out to these organisations.

There is a de minimus level of state aid – a threshold of state aid a company can receive without causing any issue. This level currently sits at €250,000 in any 2 year period.

The R&D Tax Credits are a form of State Aid. More often than not, the scheme doesn’t result in cash being given to a company (although this can happen) but the enhanced tax saving available is deemed to be financial assistance.

So, in order to try to ensure that the de minimus level of State Aid is not breached by any company claiming under the SME scheme, the government has had to exclude from the scheme any SME that was in receipt of a government grant that was State Aid Notified.

In Northern Ireland at the minute this causes a problem. Some of the most common grants available are either awarded by Invest NI or a third-party on behalf of Invest NI. And, you guessed it – they are almost all State Aid Notified.

This is unfortunate. Not least because the companies carrying out this expensive and essential R&D are exactly the ones most likely to seek and claim grant funding.

However, there are a few things you can do in order to maximise your claim to R&D Tax Credits and, if the circumstances allow for it, claim a few pound back from HMRC in cash.

1. Ask Invest NI to award your grant under the “de minimus” rules.

Up until recently, Invest NI wasn’t able to do this. All grants were dished out as State Aid notified and no-one really complained. That was until the accountants told these companies that they were losing out on the uplift in their R&D expense and potential cash payments.

So, after a bit of pressure being put on, Invest NI have found a work around and are now able to offer de minimus grants where grant funding is £100k or less.. While there seems to be an awareness of this now with Invest NI staff, make sure you ask that the grant be awarded in this way. You should still make sure that the combined grant, plus all other grants in the past two years and the tax relief don’t push you over the de minimus limits.

2. Can your R&D spend be broken down into separate projects?

It is actually possible to claim under both the SME scheme and the Large Company scheme. If a company is carrying out a number of R&D projects, any that receive grants are relieved under the Large Company scheme whilst those that do not receive government assistance are able to remain under the remit of the SME scheme.

Say for example your business is researching a new medical vaccine and it receives a proof of concept grant in relation to a piece of new equipment that is being designed to administer the vaccine. This piece of equipment is separately identifiable from the vaccine and, has its own research activities and development activities. The grant was also given specifically in relation to this equipment. So it would be treated as a separate project for R&D tax credits and, due to being in receipt of the grant would receive tax relief under the Large Company scheme. This divisibility also protects the rest of the R&D project and ensures that it can still receive the 225% relief on its spend.

3. Reject the grant. Seriously.

This seems somewhat counter intuitive but, depending on your total R&D spend, it may be better for you to reject or not seek grant funding. This comes down to the differential in the SME and Large Company scheme uplift rates (125% – 30% = 95%) multiplied by the rate of Corporation Tax (usually 20%). So, if your total R&D spend times 19% (95% x 20%) is greater than the grant amount – you’re worse off I’m afraid.

Now, this is a purely mathematical and pragmatic view of things. Naturally there are other factors to consider with grant funding. The main one being, R&D is expensive and suppliers do not accept magic buttons or well wishes in lieu of payment so if you need the cash – take the grant! Remember also that tax relief will only actually materialise if you, one day, make a profit. Grants funding can also be more valuable than potential tax relief from the point of view that it may come with some professional advice, a chance at further grant funding or an introduction to potential equity investors.

Conclusion

So, whilst the R&D scheme is a pretty generous tax relief, SME needs to be careful not to fall in to the trap of excluding themselves from claiming the the maximum relief possible under the SME scheme. Remember also that grants are a taxable income stream themselves. So not only might they reduced you R&D uplift, but the may in fact cancel out the uplift that you do qualify for.

As with everything in business, consider the wider context when deciding on issues of tax planning and fundraising. Never undertake a transaction solely to gain a tax benefit. Weight up all the factors, including tax, and then see what’s best for you and your business.