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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.

Did You Know You Can Make Over £37k A Year Without Paying Tax

Did you know you can make over £37k a year without paying tax?

Up until 5th April when the Government abolished the 10% tax credit on dividends in favour of a new £5,000 allowance, it was easy to earn £37,000 a year without paying tax. However, you typically needed to own your own (profitable) company. The mechanism in this instance was to take a salary equivalent to you personal allowance and then gross dividends equal to the rest of your basic rate band and you could come away with £37-38k and only pay a small amount of National Insurance on the lot. Now however, dividends in excess of £5,000 are to be taxed at 7.5% for basic rate tax payers.

However, it is still possible to make around £37,000 a year without incurring any tax at all.

I should state that while it is possible, it may not be entirely practical. But I think it’s worth looking at the multitude of tax allowances that have become available in recent years as the Government have gradually restructured the tax system.

In short, the reliefs available to everyone are:

  • Personal Allowance – £11,000
  • CGT Annual Exemption – £11,100
  • Dividend Allowance – £5,000
  • Savings Allowance – £1,000
  • Rent-A-Room Relief – £7,500
  • Trading Micro-Enterprise – £1,000 (from April 2017)
  • Property Micro-Enterprise – £1,000 (from April 2017)

On top of these, you also have an exemption from any interest earned in ISA’s plus tax relief for pension contributions.

The Usual Suspects

The main allowance that people will be familiar with is the Personal Allowance. In the current tax year this allows you to earn £11,000 before you pay tax (around £917/month or £212/week).

On top of that, everyone has an annual exemption for Capital Gains Tax. This comes in to effect if you sell shares, land, property (except you main residence) or other valuable items such as paintings. At the minute this allowance is £11,100. So you can make £11,100 profit on the sale of these items without having to pay any tax.

The “Makeover” Reliefs

A number of existing tax reliefs have been spruced up in recent years. The main one of interest to any small business owners is the £5,000 dividend allowance. Whilst not as generous in tax terms as its predecessor – the 10% tax credit – it’s still a valuable allowance. If you and your spouse are the only shareholders in your small company, that’s an extra £10k in to the household every year with no further tax cost.

Another allowances that has been modernised is the Rent-a-Room relief. For years this relief stood at £4,250, meaning you could rent out a furnished bedroom of your house for up to £4,250 a year and pay no tax. Now however, this relief has been raised to £7,500. As soon as this was announced, my first thought went straight to Air BNB. This platform has really grown in popularity in recent years and some people were doing very well out of this. However, one of the fears that people had was how this income left them in terms of their tax compliance. This increase should mean that the vast majority of users will fall below the limit and, as such, not fall foul of the legislation.

The Newcomers

Aside from the above allowances, which have either always been around or have just had a face lift, 3 new allowances have come in to effect recently.

For basic rate tax payers, there is now a £1,000 savings allowance – so the first £1,000 of bank interest (excluding interest on ISA’s which is still exempt) will be tax free. Those paying tax at the higher 40% rate still get a £500 allowance.

The two most progressive allowances to come from the recent budget make me very happy as they really aim to take a lot of burden off those earning small amounts from “side-projects”. There are two £1,000 allowances for micro enterprises – one for trading income and one for property income. These two allowances are due to come in to effect in April 2017 so are still subject to change.

Those likely to benefit from this will be those selling small amounts of products/services online or renting out sheds, storage units or driveways. But in reality, any trade with receipts of less than £1k qualify for the relief so musicians, market traders and artists could all benefit. If your total income is less that £1,000 you have nothing to declare. Above this limit and you can either deduct your expenses before calculating the tax or just deduct £1,000.

It should be noted that the Rent-A-Room relief and the £1,000 micro enterprise allowance can’t be added together for the same purpose. But they can be used separately. So if you are getting the use of the Rent-A-Room relief, you will need to rent out your driveway or storage unit to use the £1,000 micro enterprise property relief.

Conclusion

As previously stated, whilst it is possible to use all these reliefs together, it may not be particularly practical. To do so you would need to have quite a lot wealth to begin with. For example to earn £1,000 of interest in a single year would require around £40-50k in savings. But be aware of all of the above – particularly the micro-enterprise reliefs – and cherry pick those that apply to your circumstances. Tax alone on £37,000 of income would normally be over £5,000 so some real savings are available by using the above.

As always, speak to your accountant about how best to maximise your tax savings as the advice given will greatly depend on your own circumstances.

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Minimum wage increase on 1st April will cost employers almost £1,200 extra per employee

From the 1st April, the National Minimum Wage for employees aged 25 or over increases from £6.70 per hour (the current rate for all employees aged 21 or over) to £7.20 per hour to fall in line with the Living Wage.

The government plans to increase this amount year on year to bring the minimum hourly rate for those over 25 to £9 per hour by 2020.

Whilst this is good news for low paid employees, the cost to smaller business will be significant – around £1,200 more per employee per year once National Insurance contributions and Auto-Enrolment pension contributions are added in. With what is effectively a new minimum wage bracket being introduced, the gap between the minimum wage for employees aged between 18 and 25 is now £1.90 per hour – almost £4,000 per year for a full time employee.

To this end, I wouldn’t be surprised to see a significant decrease in unemployment for people under 25, as employees try to manage their costs by hiring younger workers ahead of the more expensive, older ones.

To lessen the impact on employers, the government are increasing the Employment Allowance on 6th April from £2,000 to £3,000. So the first £3,000 of employers National Insurance incurred in the 2016/17 tax year doesn’t need to be paid over to HM Revenue & Customs. While this is welcome, it may mean very little to employers who have more than one employee going up to the new £7.20 rate.

It’s worth noting that none of the other National Minimum Wage rates are changing at this time. These are usually tinkered with on 1st October every year so don’t be surprised to hear more on this in Budget 2016 next Wednesday, 16th March.

Tax breaks for employees

.Over the past couple of years, you have no doubt seen companies advertising that they will reclaim tax for you if you had to pay for uniforms for work, or spent money travelling for work. There’s nothing wrong with what these companies are offering, however they do take a hefty enough chunk of any payment you are due back. For the most part, it’s simply a case of filling out a single form.

So what can you claim for and how do you go about it?

Uniforms/work clothes & tools

You are allowed to claim for the cost of cleaning, repairing or replacing uniforms or specialist work clothing or specialist tools you had to buy for your job. However, you are not able to claim for the initial cost.

You can either claim for the actual cost of these expenses or, HMRC has a table of flat rates for each occupation that you can use instead. You are fully entitled to claim the higher amount.

Mileage

Most people are aware that when you use your own car to travel for work purposes (not travelling to work from home, or vice-versa), your employer can pay you a mileage rate. This payment is tax free so long as it isn’t more than the approved HMRC rates (currently £0.45). But what if your boss pays you less than this rate (which he or she is perfectly entitled to do)?

Well, the HMRC rates are deemed to be the cost incurred per business mile – an average of total fuel costs, insurance, road tax, wear & tear, depreciation, tyres etc. So if you don’t get the full 45p per mile, in the taxman’s eyes you are out money. As such, you are allowed to claim tax relief on this difference.

If you do very few business miles, this isn’t going to be worth your while. However, as an example, if you do 5,000 miles a year at a mileage rate of 25p, you have incurred costs of 5,000 x 20p which is £1,000. For basic rate (20%) taxpayers, that equates to £200.


Professional Fees & Subscriptions

If you have to pay a subscriptions or membership fee to certain approved organisations either because it is a requirement of your job or is helpful in your job, you are entitled to claim tax relief on this. Your organisation must be on the list of approved professional bodies and you can’t claim any relief if your employer covered the cost.

How to claim

If the total of your expenses is less than £2,500 (and you don’t currently fill in a tax return) you need to submit form P87. If your claim is for more than this amount you must claim on your tax return, even if you don’t currently file one.

Now for the good news – you can go back up to four tax years to make a claim.

If you think you have incurred expenses for work and I haven’t mentioned it, have a look at the HMRC guidance on this. As a rule however you should be able to claim for any expenses which were incurred “wholly and exclusively” for work purposes.

Tax return submitted? Time to start planning for next year’s.

So another 31st January deadline has been and passed. Your tax return is filed and the whole subject of tax can be ignored for another year.

Well, not quite. There are quite a few changes to Income Tax being introduced from 6th April 2016. Leaving everything until then means that you’re at the mercy of these new rules. If you act now however, you should be able to do some pretty minimal tax planning that could save you quite a lot of money.

If you have income from dividends, rental property or interest then these rules will affect you.

Dividends

For basic rate taxpayers, dividends were always a tax efficient type of income as they didn’t attract any further income tax (the thinking being that, as dividends came from the profits of a company, they had already been taxed before being paid). However, from 6th April, this changes.

Rather than attracting a notional 10% tax credit, dividends will instead have a £5,000 nil rate band, so the first £5,000 will be tax free). The excess will then be taxed at 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for those in the additional rate band.

With just over two months to go until the new tax year, and the new rules, you are best to bring forward any dividends and utilise all of your basic rate band. Be careful though – there had been talk of the Chancellor introducing anti-avoidance legislation in anticipation of this. If you are considering bringing forward dividends, make sure you prepare all the necessary paperwork – minutes of the meeting, management accounts etc.

And don’t forget to look at dividends in the context of your total income. Dividends are always the last “slice” of income to be taxed so will attract the highest rate if there are other earning in the mix.

Rental Income

HMRC appear to have a particular grudge against landlords at the minute. A number of new changes to the rules around rental income mean one thing – more tax to pay!

Firstly, the 10% Wear & Tear allowance is to be abolished. This allowance allowed landlords to take 10% of their rental income off their profits as a deduction for the wear and tear of furnishings regardless of whether or not the actually incurred any expense in this respect (or even if they incurred more than the allowance).

From 6th April this will be replaced with 100% relief for the full replacement cost of furnishings. It is still the case that there is no relief for the first furnishing of a rental property.

So, it would follow that, if you are a landlord and are considering replacing any furnishings in your property, hold off until 6th April. You will still get the 10% W&T allowance in the current year and then get full tax relief on the full replacement cost in the 2016/17 tax year.

If you are a landlord who pays tax at the higher 40% rate, then there is more bad news for you. From 7th April 2017 your tax relief in respect of mortgage interest is going to be restricted to 20% tax relief whereas at the minute you will be getting 40% or possibly even 45% relief. This is being introduced on a phased basis between 2017/18 and 2020/21 tax years. Taken together with an expected increase in interest rates in 2017, landlords are certainly going to find themselves more out of pocket than before.

Rent A Room Relief

This tax relief has been around for ages and hasn’t changed in ages either. In fact, it has been 18 years since it has been increased. At present, you can rent a (furnished) bedroom in the house you live in for up to £4,250 per year and no income tax is payable. From 6th April 2016, this increases to £7,500. So income up to this level, whether from a lodger or via something like Airbnb is tax free.

Personal Savings Allowance

From 6th April you may notice that your bank will stop deducting tax from the interest it pays you on your savings. This is because of the introduction of a new £1,000 Personal Savings Allowance. This means that essentially the first £1,000 of interest you earn is tax free. The £1,000 allowance is available to everyone with income below £42,700. If you income is above this but below £150,000 you still get a £500 allowance.

This allowance may well go unused by the vast majority of us given that to earn £1,000 of interest at current rates you would need to have around £30-50k stashed away. However, if your income is mainly derived from interest this allowance coupled with the £15,000 ISA allowance and the 0% tax rate on savings income up to £5,000 you have plenty of options to spread your savings and not suffer any tax.

Additionally, with banks now not deducting interest, it makes the comparing the true interest rate of savings accounts with ISA’s much simpler as before you would have needed to factor in the tax deducted.

Conclusion

So, lots changing at the minute in tax and the outlook for the years ahead is the same. The governments online tax account project has begun rolling out. The planned result for this scheme is to do away with annual tax returns and, instead, update HMRC on your earnings as you go along and pay the tax as you go along. Developers are already working on integration with bookkeeping software to make it easy for you to send across your up to date profit and loss, VAT and PAYE details and square them up sooner rather than later.

So, whilst you may still have 12 months to sort out your 2015/16 tax return, you should be planning to out the next three months to make it as tax efficient as possible. On the bright side, you may not have many tax returns left to complete.

 

The above is general commentary on the changes is tax rules and should not be taken as advice. The application of the above rules will be determined by the specific circumstances of the individual. I accept no responsibility for any loss incurred by action or inaction based on the above article.

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.