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The Chancellor of the Exchequer Jeremy Hunt delivered his Spring Budget 2024 on Wednesday, March 6, 2024. He announced a series of tax cuts and spending plans that aim to boost the UK economy and ease the pressure on households and businesses. Here are some of the key points from the budget and how they may affect you.
The main rate of employees’ National Insurance contributions (NICs) will be reduced from 10% to 8% from April 2024, benefiting around 27 million workers with potential savings of up to £450 per year. The main rate of Class 4 NICs for the self-employed will also drop from 9% to 6% from April 2024, a further reduction after the abolition of Class 2 NICs. This means that the self-employed will pay the same rate of NICs as employees on their profits above the lower profits limit of £9,568.
The higher residential property Capital Gains Tax (CGT) rate will be reduced from 28% to 24% from April 2024. This will apply to gains from the sale of second homes and buy-to-let properties. The basic rate of CGT for residential property will remain at 18%. The annual exempt amount for CGT will also remain at £12,300 for individuals and £6,150 for trusts.
The stamp duty relief for buying multiple homes at once, known as Multiple Dwellings Relief (MDR), has been scrapped from June 1, 2024. This means that buyers of more than one property in a single transaction will have to pay higher rates of stamp duty on each property, regardless of whether they are residential or non-residential. The higher rates are 3% on top of the normal rates for properties up to £500,000, 8% for properties between £500,001 and £925,000, 13% for properties between £925,001 and £1.5 million, and 15% for properties above £1.5 million.
The furnished holiday lettings (FHL) regime will be abolished from April 2025. This means that FHLs will no longer be treated as a separate category of property income for tax purposes. Instead, they will be taxed as normal rental income, subject to the same rules and allowances as other landlords. This will affect the eligibility for certain reliefs and deductions, such as capital allowances, loss relief, and CGT rollover relief.
The non-dom tax status will be removed in April 2025. This means that foreign nationals residing in the UK but officially domiciled overseas will no longer be able to avoid paying UK tax on their foreign income or capital gains. Instead, they will be taxed on their worldwide income and gains, regardless of whether they remit them to the UK or not. A more ‘straightforward’ residency-based system will be implemented in 2025, with details to be announced later.
The high-income child benefit charge threshold will be raised from £50,000 to £60,000 and the taper – which applies when an individual’s income increases beyond the threshold of £60,000, meaning they will gradually lose eligibility for child benefit – will extend up to £80,000. No one earning under £60,000 will pay the charge, taking 170,000 families out of paying it altogether. And because of the higher taper and threshold, nearly half a million families with children will save an average of around £1,300 next year.
Businesses can expect full expensing to be extended to include leased assets in the future, with the Chancellor announcing he will publish draft legislation to cover this extension. This will allow businesses to deduct the full cost of leasing certain assets from their taxable profits, rather than spreading the deduction over the lease term. The types of assets that will qualify for full expensing are yet to be confirmed.
The VAT threshold for small businesses has been increased from £85,000 to £90,000 from April 2024. This means that approximately 28,000 small businesses will drop below the threshold for paying VAT. The registration and deregistration thresholds for VAT will be frozen until April 2027.
Fuel Duty has been frozen for an additional 12 months and the 5p cut to petrol taxes that was introduced in 2022 remains in place. This will benefit motorists and businesses that rely on road transport.
The Spring Budget 2024 has introduced a number of tax changes that will have a significant impact on individuals and businesses. Some of the main winners are employees, self-employed, and property sellers, who will benefit from lower NICs and CGT rates. Some of the main losers are property buyers, FHL owners, and non-doms, who will face higher stamp duty, income tax, and CGT liabilities. Businesses will also see some changes to their tax treatment, with some positive measures such as full expensing and higher VAT threshold, and some negative ones such as the removal of MDR and FHL regime.
If you have any questions about how the Spring Budget 2024 affects you or your business, please contact us for expert advice and guidance.
The director’s loan is one area that causes a great deal of confusion for limited companies. What is it and why is it so important?
Let’s start with what it isn’t. The director’s loan is not a real bank account. You don’t need to go and set one up.
It’s a “virtual” account that only exists on your company balance sheet. The director’s loan account is a way of recording all the interactions between you as the director and the company.
The director’s loan is needed because the company is a separate legal entity from you, as the company director and / or shareholder. The company’s money is not your money. This is different from a sole trader where the business money and other assets belong directly to the business owner.
There are some common types of transaction that might be recorded in your director’s loan account.
If you have salary being declared to HMRC via a payroll, but don’t actually pay yourself the money, it will show as money owed to you in the director’s loan.
If you pay for company expenses personally and don’t reimburse yourself, it will show as money owed to you in the director’s loan. This might be things like business use of home, mileage or cash travel expenses.
If you put your own money into the company bank account, for example if cashflow gets tight, then this shows as money owed to you in the director’s loan account.
When you’re a shareholder as well as a director, these transactions could also include dividends. If the company declares a dividend but you don’t actually pay yourself the money, it will show as owed to you in the director’s loan.
If you take money from the company that’s not payroll salary, expense reimbursement or dividends, then it will go to the director’s loan account.
This would also include paying for non-business items through the company bank account, whether accidentally or intentionally.
Ideally your money-in transactions will always outweigh your money-out transactions. At any point in time, your director’s loan should have a nil balance or a credit balance. A credit balance means the company owes money to the director. You have made a loan to the company.
If you lend money to your company, you can charge interest on the loan balance. However there are some tax and administrative implications in doing this.
The interest counts as part of your taxable income for self assessment. It’s paid to you with 20% tax deducted by the company.
The interest can count as a business expense for the company. The company will also needs to report and pay the 20% tax deducted to HMRC every quarter.
When the money-out transactions outweigh the money-in transactions, the director’s loan has a debit balance. It is considered to be overdrawn. This means the director owes money to the company.
If you do end up with an overdrawn balance then you are left with three choices.
This blog article gives you some more information about these options.
If the relevant payroll filing period has past and you don’t have personal funds to repay the balance, then dividends may be the only option. But dividends aren’t always possible.
Dividends are declared from profits after tax, so the amount of dividends is limited by the available profit. If your company can’t afford enough dividends to fully clear the balance, your director’s loan account is left overdrawn.
An overdrawn balance on the director’s loan account can result in extra tax for the company and for you personally as the director.
An overdrawn directors account (where the director is also a shareholder) is known as a close company loan to participators. A close company is one that is controlled by five or fewer participators (generally the shareholders) or one that is controlled by shareholders who are also directors.
If the company loans money to one of its participators, there is additional corporation tax to pay if the loan hasn’t been repaid within 9 months and 1 day of the company year end. The overdrawn loan balance (or any increase on the balance since last year) is currently taxed at 33.75%.
This also applies to loans made to associates of participators for example relatives such as your spouse, parents, siblings or children.
It’s not all bad news as it’s possible for you to get the extra corporation tax back. If you permanently repay the director’s loan during a future financial year, you can reclaim the extra tax.
However, the catch is that this can’t be done until 9 months and 1 day after the accounting period where the balance was cleared. So you get your extra tax back, but it’s not a quick process. Better to avoid having to pay it in the first place if you can.
You may be wondering, can’t I just repay the loan before year end, then take the money out again the next day?
Unfortunately if you’re repaying more than £5,000 this falls under the rules for what is known as Bed and Breakfasting. You can’t put money in and then take it out again within 30 days.
For example, you owe £6,000 to the company and decide to pay it back just before the company year end to avoid extra tax. A week into the new financial year, you withdraw the £6,000 again, creating a new loan. However under the Bed and Breakfast rules, the £6,000 repayment you made before the year end is allocated to the new loan. This is because it’s within 30 days. The old loan remains, leaving the director’s loan still overdrawn at year end.
These rules apply from 30 days before the year end to 9 months and 30 days after the year end date. So they cover the whole period you might need to repay an overdrawn director’s loan.
If your loan amount is more than £15,000, there are some additional rules that apply beyond the 30 days period.
Repaying your loan or withdrawing money through payroll salary or via dividends is fine. It’s not included as bed and breakfasting because both of these methods result in extra income tax. But you’re not allowed to put cash in and then take it back out again, without counting it as salary or dividends.
If I can’t bed and breakfast, can I just write off the overdrawn director’s loan as bad debt?
You can choose to write off a director’s loan but there are still tax consequences. The amount is treated as a deemed dividend for self-assessment and taxed accordingly. There would also be Class 1 national insurance to be paid by the company.
Having an overdrawn director’s loan can also result in additional personal tax. An interest-free (or reduced rate interest) loan over £10,000 is known as a beneficial loan. It’s taxable as a benefit in kind.
If the company charges tax on the loan using at least HMRC’s official interest rate, then it’s not classed as a benefit. The interest is counted as additional taxable income for the company.
Otherwise the average loan balance (end balance plus start balance, divided by 2) is used. The value of the benefit is the interest that would have been due on the average balance, using HMRC’s interest rates. If interest was partially paid or paid at a lower rate, then the benefit would be the difference between the two amounts.
Unfortunately there’s no way to reclaim any tax on benefits in kind once the loan is repaid.
The best way to avoid extra tax is to make sure that the director’s loan doesn’t get overdrawn.
This blog article goes into more details about how you can take money out of your limited company without ending up with director’s loan issues.
The most important thing is to plan up front about what you need and how you will take that money. You can only take what the company can afford. Nothing creates director’s loan issues faster than lots of random, unchecked cash withdrawals that add up much more quickly than you realise.
Speaking to your accountant and planning together is a great way to make sure that you are making the most tax efficient decisions for both you and your limited company.
On 1 April 2023 there were some important changes to corporation tax. The rate changed, increasing from 19% to 25% and marginal relief was introduced.
Now some companies will continue to pay 19%, some will pay 25% and others could pay anywhere in-between. What is marginal relief and how do you know what corporation tax rate to apply for your company?
For the 9 years from April 2015 to 31 March 2023 there was a single corporation tax rate for all companies. Most recently it was set at 19%. This rate was applied whether company profits were £100 or £100,000,000. Prior to that the rate of corporation tax depended on the size of the profits. Profits over a certain threshold were taxed at a different rate.
From 1 April 2023 we returned to this profit based approach, where not every company has the same corporation tax rate. Now there are effectively three corporation tax bands that your company could fall into.
If your profits are below £50,000 then you fall into the small profits rate and will continue to pay corporation tax at 19%
If your profits are above £250,000 then you fall into the main rate and will pay corporation tax at 25%.
If you are over the main rate limit then the whole amount of your profit will be taxed at 25%. It doesn’t work like personal tax where different slices of income get taxed at different rates.
If you fall between the two limits then things get a bit more complicated. You start at the main rate but get to apply marginal relief based on your profit level, so the actual percentage ends up below 25%.
Marginal relief is a way of gradually increasing the corporation tax rate for profits between £50k and £250k. The closer the profits are to £50k the more relief you receive and as profits increase, the relief amount decreases. It means profits close to £50k are taxed at a rate that is closer to 19% and as the profits increase, so does the rate, up to £250k and 25%.
This should be calculated automatically in your tax software when you prepare your corporation tax return. However you may also want to calculate corporation tax to help you with financial planning or saving for tax.
HMRC have a calculator that lets your check the marginal relief and effective corporation tax rate based on your profit (or predicted profit).
You can also calculate the corporation tax yourself using HMRC’s formula.
The calculation for marginal relief takes into account not just the profits that are usually chargeable to corporation tax, but also distributions from unrelated companies. These are items such as dividends or assets.
If your company has associated companies then this affects the limits and thresholds for marginal relief. Associated companies are where one company controls the other or where both are under control of the same person or persons.
The upper and lower limits get divided by the total number of associated companies. So a company had 3 associated companies (so 4 companies in total) then the upper and lower limit would be dividend by 4. This would give lower limit of £12,500 and an upper limit of £62,500.
Additionally the small profits rate and marginal relief doesn’t apply to non-UK resident companies or to close investment holding companies. These type of companies pay corporation tax at the main rate of 25%.
If part of your financial year falls before 1 April 23 and part after, then the two parts of the year will be treated separately.
Your profits will be pro-rated based on the portion of the year before or after 1 April. For example if your year runs Jan 23 to Dec 23 then you have 3 months before 1 April 23 and 9 months after. With profit for the year of £120,000, you would have £30,000 before 1 April and £90,000 after.
The portion falling before 1 April 23 will be taxed at 19%. The portion falling after will be taxed under the new rates with marginal relief applied if necessary. In the example, £30,000 would be taxed at 19% and £90,000 would be taxed using the marginal relief calculation.
For the portion of the year falling after 1 April 23, the upper and lower limits are adjusted proportionally. In this example the lower limit would be 9/12 * £50,000 = £37,500. The upper limit would be 9/12 * £250,000 = £187,500.
If you don’t have any associated companies or distributions to take into consideration and your whole financial year is after 1 April 23, you can use the following quick formula to calculate your corporation tax at the marginal rate.
Multiply your profits above £50k by 26.5% and then add £9,500 (£50k at 19%).
For profit of £120,000 it would be (£70,000 * 26.5%) + £9,500 = £28,050 corporation tax.
Mobile phone expenses are an area where personal and business often overlap to cause some potential tax pitfalls.
No one wants to be without their mobile, but few people want the hassle of carrying a separate business phone. So it’s usually one mobile phone doing it all, business and personal. How do you separate out what mobile expenses can be claimed through your business?
As ever, there are differences depending on whether you’re self employed or employed (including company directors).
The rules here are relatively simple. You can include your mobile phone costs as a business expense, but you can’t claim for any non-business use.
There’s no set method to work out your non-business use. But whatever you use has to have a logical basis and be appropriate for your business. You need to be able to justify your figures if they’re checked by HMRC. Keep your mobile phone statements / records and calculations to back up whatever method you use.
One method would be to look at a few months’ worth of phone statements and work out business use percentage. Then use this percentage to apply to the rest of the year. You should re-check the percentage on a regular basis, at least once per year, ideally every few months.
It may be easier to have a separate mobile or SIM that’s only used for business purposes. This would allow you to claim all of the costs.
If you buy your phone handset separately then you can claim some or all of that cost. Personal use would have to be taken into account here too. You could potentially use the same personal use percentage for the calls and apply it to the handset.
Remember, if you’re VAT registered you can only claim VAT on the business use element of any mobile costs.
This covers company directors as well as employees of all types of business.
As with other employment related expenses, we’re thinking about what mobile expenses the business can provide without being a classed as a benefit in kind. Benefits in kind incur additional personal tax which may be paid via payroll or through your personal tax return.
For mobile phone expenses it makes a big difference whether the contract is in the business name or your personal name. There are different reporting requirements, and more importantly some significant tax differences and tax traps for the unwary.
The business can provide each employee with one mobile phone or SIM card without any benefits in kind being incurred. The phone contract must be with the business (not the employee) and the business must pay the bill directly.
The most important thing, which is unusual, is that private use of the phone is allowed. This makes it a very good option for company directors and employees with a mixture of work and personal use. Particularly where they don’t want two separate handsets or SIM cards.
Additionally, if the business is VAT registered, it can claim VAT on all of these cost as long as there is some reasonable element of business use.
If there is more than one mobile (or SIM) provided, then the second one would be a benefit in kind unless it any personal use was not significant.
If the mobile contract is in your own name and you are reimbursed for the mobile phone expenses, you do have to worry about business use versus personal use. The business can only reimburse the actual cost of business calls. Anything beyond this will result in a benefit in kind.
It can be tricky to work out the business calls element. HMRC advise that you should “approach the matter in a reasonable way and give an appropriate deduction that reflects the actual cost to the employee of business calls”.
This “actual cost to the employee of business calls” is important. It means, if making the business calls doesn’t cause you to pay any more each month, there’s nothing you can claim. For example, if you’re on a tariff with unlimited minutes.
This is different to the sole trader who can split the whole bill based on percentage of business use and personal use. For an employee it’s only the extra cost of business calls that can be claimed and not any element of the line rental.
You need to be able to provide some sort of evidence to back up what you claim. This applies whether that’s based on actual calls or increase in costs. You don’t necessarily need to count every call, every month, but you do need to be able to justify your logic or calculation.
If your employer pays for the mobile phone itself, the fixed monthly charges or any element of personal use, then there will be a benefit in kind. That’s the case whether they reimburse you for the costs or pay the bill directly. There will be some income tax and Class 1 National Insurance to pay. This may be via payroll or through your self-assessment tax return.
Paying for the mobile phone handset or the fixed monthly charges incurs a benefit because the phone is available for personal use as well as business use.
HMRC’s guidance doesn’t mention anything specific about data costs. It’s only the business phone calls that are listed as being exempt from benefits in kind.
This is an area where you do need to proceed with caution and review regularly. As many mobile contracts now include very high or unlimited minutes, you could end up without any additional costs related to your business calls. Anything you reimburse in this situation would therefore include an element of personal use and could be a taxable benefit.
VAT can only be claimed on the business calls, not on anything else that may be paid for or reimbursed.
If you’re self-employed, it’s pretty straightforward. You just need to focus on the best way to work out your percentage of business use.
If you’re employed then the rules are surprisingly lenient if the business provides the phone, but very strict if the contract is in your own name.
If you’re claiming for your personal mobile expenses through your limited company, you need to be very careful to make sure you’re not accidentally incurring a taxable benefit in kind.
“Clothes make the man. Naked people have little or no influence on society.”
Mark Twain
I think most people would agree that clothes are pretty important. Clothing is a basic necessity of life, as HMRC describe it, “for warmth and decency”. This necessity is also why very few clothing expenses are allowable.
Business expenses have to be wholly and exclusively for business. It’s very hard to prove your clothes are wholly for business, when going without them wouldn’t be a practical option.
There are a few types of clothes that HMRC do recognise as potential business expenses. The three areas that are allowable are
HMRC defines a uniform as something that identifies the wearer as belonging to a particular profession. A person on the street should be able to recognise that someone is wearing a uniform rather than everyday clothes.
Think fancy dress for the most obvious examples. Police, nurse or firefighter uniforms are all favourites for fancy dress as they’re clearly identifiable. A waiter’s dinner jacket or evening dress would also be seen as a uniform for their profession. Similarly with a chef’s checked trousers and white hat.
The other aspect that can make something a uniform is if it carries branding or a logo for the business. If you get your company logo embroidered on a standard polo shirt, it can become an item of uniform as it clearly identifies you as working for that business.
Your clothing needs to have a permanent and conspicuous badge (or logo) if it’s going to be considered as a uniform. A removeable badge doesn’t count and you can’t claim for other – non branded items of clothing. Employees or staff all wearing similar design or colour clothes, is not enough to make that a uniform.
One type of protective clothing is something that goes over the top of your everyday clothes. This might include aprons, overall, lab coats etc. These are worn in addition to your everyday clothes and are protecting them.
If the main purpose of the protective clothing is to protect you from the elements, such as a coat, then it’s not allowed. It’s considered as something that you’d need to wear anyway.
Other types of protective clothing you can include are items that are necessary for safety or general protection. For example, heavy duty gloves, hardhats, steel toe-cap boots, hi-vis vest. You could also include trousers with reinforced knees if they were bought from a specialist workwear retailer. These type of items are designed as workwear and aren’t suitable for everyday wear.
The final category relates primarily to actors and entertainers. Clothing that you buy specifically to wear in a performance is considered as part of a costume and is allowed. This could apply to items that would normally be considered as everyday wear.
You can also include expenses that relate to the repair and upkeep of your uniform or protective equipment, where necessary. Upkeep can also include cleaning or a contribution towards laundry costs.
Repair or cleaning costs for your everyday clothes aren’t allowed, even if they were damaged through work or only worn for work.
Company directors, you need to make sure any clothing you are claiming as business expenses meets one of these criteria otherwise there could be some personal tax liability.
Any clothing that your employer provides or pays for, which doesn’t fall into one of these categories, could potentially be considered as a benefit in kind.
If the clothing doesn’t fall under one of those categories then it’s not allowable.
Everyday clothing is not allowed if you could wear it outside of your work environment. It is the COULD that’s important, regardless of whether you DO actually wear it outside work.
If you buy a suit to wear at work in order to look professional and conform to the general image of your workplace, it’s not allowable.
If you have clothes that you only wear at work, they are not allowable unless they are branded and become a uniform. This would apply across many professions where clothes might get dirty, or where a particular type of clothing is required e.g. gym wear.
If clothes aren’t uniform , protective or a costume and you could wear them outside of your work (even if you don’t) then they’re not allowable.
However you can turn everyday clothes into a uniform by adding a conspicuous badge or branding to the item.
All good things must come to an end and limited companies are no exception. Whether you’re switching to employment, retiring or starting something new, there may come a point when you want to shut down your business. What are the options to close your limited company and how does it affect your tax?
Here we’ll be looking at the process of shutting a solvent limited company. This won’t cover sole trader or partnerships businesses. It won’t discuss selling the company or dealing with an insolvent company that’s no longer able to pay its debts.
Whatever method you chose to close your limited company, there are some actions to take in preparation before shutting down your business.
If you work with an accountant, it’s beneficial to discuss your plans with them as far in advance as possible. They’ll help you make sure everything is done correctly and may be able to offer some tax saving advice.
You need to make sure that all company debts are settled. This may include any suppliers, bank or other loans, and tax owed to HMRC. Settling any director’s loan balance would also be advisable, particularly if it’s overdrawn.
If you have a payroll running, you’ll need to issue P45’s to all staff. You can notify HMRC that the payroll is ceasing through the RTI process.
Where you’re VAT registered you’ll need to de-register for VAT. If the business owns significant assets or how large amounts of stock, there may be VAT to pay on these items at deregistration.
If you’re a CIS contractor or subcontractor in the construction industry, you’ll need to notify the CIS helpline .
You’ll need a final corporation tax return, to the date you are closing the business.
If you claimed capital allowances on your business assets, you may end up owing part of them back on any assets that still have value when you cease the business. This applies whether you sell the assets or just kept them for your own personal use.
If you sell any assets that have increased in value since you bought them, there may also be corporation tax on the capital gains.
If you have a solvent limited company (can pay its bills) there are two main options for closing down. These are Strike Off or Members Voluntary Liquidation. The best option for you will largely depend how much retained profit is left in the business.
You can apply to have the company struck off the register at Companies House through an informal or voluntary strike off. It can be done if the company has not traded (or changed its name) for three months. The company director completes a DS-01 form which is submitted to Companies House.
Companies House publishes notice of the proposed striking off. During the next two months any interested parties can contact Companies House and object to the striking off. This most commonly happens were there are unpaid debts, in particular to banks or HMRC.
You don’t need to submit any final accounts to Companies House, but you will need to submit a final corporation tax return to HMRC. You must settle any corporation tax due before the company can be struck off.
Once the company has been dissolved, the bank account will no longer be accessible, so make sure all remaining funds are withdrawn before the DS-01 form is submitted.
Up to £25,000 of retained profits at closure can be treated as a capital distribution. This means it is taxed at the capital gains rates of 10% (basic rate) or 20% (higher rate). If the business qualifies for Business Asset Disposal Relief, the tax rate on the gains is 10%.
Retained profits above £25,000 are taxed as dividends. Dividends that fall outside the basic rate are currently taxed at 33.75% (higher rate) or 39.35% (additional rate).
If your company has retained profits below £25,000, the voluntary strike off process would usually be the most appropriate option.
Advantages of this option are that it’s a lot less expensive and doesn’t require a liquidator or even an accountant. It’s usually a quicker process providing all creditors have been settled.
The Members Voluntary Liquidation (MVL) process has to be carried out by a professional insolvency practitioner and can’t be done by your tax accountant. Most accountancy practices have insolvency practices that they work with regularly or can recommend, if you aren’t sure where to start.
The insolvency practice will deal with all aspects of the company closure, although they may work with your accountant to obtain any relevant information. They effectively take control of the company in order to deal with the liquidation process and will then distribute the remaining proceeds.
The main tax advantage of an MVL is that all the retained profits left in the company can be treated as a capital distribution, not just £25,000. Taxing all the retained profits as capital rather than dividends can make a significant tax saving on a larger amount.
If Business Asset Disposal Relief can be applied, the tax rate is 10% rather than 20% which can save even more tax.
If the company has significant financial assets, a Members Voluntary Liquidation (MVL) may be more tax efficient.
One disadvantage of this option is that you can’t have a significant interest in a similar company within 2 years. This applies to not only you, but connected parties such as your spouse, parent or child. This is part of the Targeted Anti Avoidance Rules (TAAR) which aim to stop phoenixing. It’s where companies wind up in order to avoid income tax and then immediately restart.
The MVL process is slower than the voluntary striking off, taking around 6 months. It is more expensive with insolvency firms charges of around £2,500 and upwards.
Business Asset Disposal Relief used to be known as Entrepreneur’s Relief until 2020. It allows a capital gains tax rate of 10% to be applied across the whole of the eligible gain.
It applies in a number of situations including when you sell shares in limited company or when capital distributions are made on the winding up of a company. This could include the £25,000 capital for a voluntary strike off, or the entire capital distribution in a Members Voluntary Liquidation.
There are a number of criteria that must be met in order for you to claim the relief. For the last 2 years it must have been a trading company and you must have held an office (such as director) or been an employee. You need to own at least 5% of the shares to be eligible for the relief.
The rules around Business Asset Disposal Relief are complex. It’s definitely worthwhile seeking further advice and support if you think it may apply to your business.
A third option is to become dormant rather than close your limited company completely.
Dormant has slightly different meanings from a Companies House and HMRC perspective, but the overall principle is the same. You would go through the same preparation process with your company as if you were closing down, but instead of taking the next step and striking off or liquidating the company, it remains open.
There will still be some accounting and administrative overhead each year. You would still need to submit an Annual Confirmation Statement and accounts to Companies House. If you’ve closed down your bank account and have no significant business transactions at all, then you can use the dormant accounts format with Companies House.
You should inform HMRC that the company is dormant for corporation tax and file a final return. After that there should be no further corporation tax returns required unless you start to trade again.
This route allows you to retain the company name. It gives the ability to restart the company again at a future date, rather than opening a new company.
It can be useful if you aren’t sure of your future plans. For example, you could start employment but keep the company open for a few years in case it doesn’t work out. It can also be useful if there is some brand or special significance to the company name.
If you withdraw your company’s retained earnings, these funds would be considered to be dividends and taxed at the current dividend rates.
Sometimes companies are kept as non-trading rather than dormant, with the bank account still open. The retained profits are taken as dividends over a number of years rather than in a single tax year.
If you’re considering whether to close your limited company and aren’t sure which option would be most appropriate, speaking to an accountant and a insolvency practice is a good starting point. They’ll be able to advise you from both perspectives and help you make the right decision for your particular situation.
The further in advance you can obtain advice, the better. There may actions you can take over the next few tax years that will help to reduce the tax due on closure.
The new tax year of 2023-24 is approaching rapidly.
With only one month to go now until the new tax year, it’s a good time for a round up of some of the changes in store for 2023-24 tax year for both individuals and companies. With so many updates that were announced, then reversed or altered at the end of last year, it’s been easy to lose track of the final outcomes.
There may be changes which affect the decisions you make in the final tax month of 2022-23. For example, around the timing of dividends, capital gains or company profits.
The personal tax thresholds and rates relate to England, Wales and Northern Ireland.
These changes for 2023-24 tax year could mean more or higher tax, especially for dividends, capital gains and corporation tax. You should potentially consider what’s going to fall in March and what will fall in April. A few days difference in timing could make a significant difference to tax.
My company, my money. Think again!
One common way to run into trouble with your limited company, is to take out more money than the company can afford. It’s easily done, particularly now with the impact of Covid on profits, combined with the increased cost of living. When household bills need to be paid and there’s money in the company bank account, it’s very tempting to just withdraw what you need to get by. Why is this so bad for both you and the company and what are the alternatives?
When you’re both a director and shareholder, it can seem natural to think of the company’s money as your own. Particularly if you’ve come from employment or running a sole trader business, it’s not always clear how a limited company is different.
If you’re a sole trader, then you and the business are classed as the same legal entity. That means, the assets and the profits of the business all belong directly to you as the owner.
A limited company is a separate legal entity to both its directors and its shareholders. The assets, the money in the bank and the profits all belong to the company itself. As a director or shareholder of a company, you can’t just take out money whenever you like. That money belongs to the company, not to you personally.
If you’re both a director and shareholder, there are two main ways to “pay” yourself from a limited company: salary, dividends or more commonly, a combination of both.
Salary can be paid to employees of the company. Being a company director means you’re classed as an employee and if there’s a payroll, you can pay yourself a salary.
Salary comes out of the company’s taxable profits. Taking a salary can be beneficial because both salary and employer national insurance contributions will reduce the company profits and so reduce the corporation tax. However, employment salary does attract personal income tax and employee national insurance.
For a director with no other employment income the salary amount is usually optimised at a level around the personal allowance (avoiding any personal tax on the salary) and avoiding significant amounts of national insurance.
Dividend are paid from the profits of the company after corporation tax. If the company has a negative balance sheet (it owes more money than it has in assets), then no dividends can be paid.
Dividends are paid to all shareholders in proportion to the number of shares that they own. So if there are 10 shares and you own 5 of them, that’s half the shares, so you get half of any dividends.
It’s possible to pay different dividend amounts to shareholders by using different classes of share. But this is more complex to set up and the majority of companies are formed initially with one class of share.
Dividends can be formally declared at any time, however it’s most common to see a single large dividend declared at the company financial year end. There might also be an interim dividend during the year, often to coincide with the personal tax year.
Most director / shareholders take the majority of their income as dividends to benefit from the lower dividend tax rate. This is a successful strategy when the company is profitable, but can cause issues if profits drop.
Taxed at a lower rate than salary (currently 8.75% , 33.75% and 39.35%).
Some dividends are not taxed. Currently the dividend allowance is £2,000. This is due to reduce to £1,000 from 6 April 2023 and £500 from 6 April 2024.
Have to be distributed in relation to the shareholding. Can’t easily be adjusted in relation to income if there are multiple shareholders (without creating additional dividend classes).
No profits = no dividends.
Can be hard to keep track and taking too much can cause an overdrawn director’s loan.
Having a lower salary and higher dividends can be a tax efficient strategy in theory, but in real life it can be tricky to organise. How do you know how much to take out of the company each month? What about if you pay for some company expenses such as travel or mileage?
This is where the director’s loan account comes in.
The director’s loan account often causes confusion because it doesn’t actually exist except in the balance sheet of your accounts. It’s not a real bank account, it’s a “virtual” account that’s a way to keep track of financial interactions between the company director and the limited company.
When you pay personal money into the company or takes money out for personal use, it’s recorded into the director’s loan account. But it’s not just bank transfers that are included.
Paying for personal expenses with the business bank account is treated as if you’re taking money out of the company. You are effectively borrowing that money from the company.
Not paying yourself salary or dividends that are owed to you is recorded as if you’re putting money into the company. You are effectively lending that money to the company. Paying for expenses personally, such as mileage, subsistence etc. and not reimbursing yourself is another way to lend money to the company.
So what happens if your director’s loan account ends up with more taken out then owed? This means that you’re left in a position of owing money to the company.
If you’re both a director and shareholder, the debt can be covered by declaring a dividend. This is generally done at company year end or at the tax year end. The idea is to bring the director’s loan back to a position with a zero balance or even a credit balance where the company owes you money.
It’s common for directors not to withdraw their payroll salary or reimburse expenses during the year. They assume that at year end, the money owed to them will more or less balance off against what they’ve taken out of the business.
However, this once-a-year strategy is can often backfire. When the numbers are added up at year end, the director can be in for a shock. The amount of dividends needed to balance the director’s loan ends up much higher than anticipated.
At best this means more personal tax than expected, but at worst this can mean an overdrawn director’s loan account.
If the company doesn’t have enough profit after tax (or retained profit) to cover the balance on your director’s loan account with dividends, it means you’re left owing money to the company at the year end. The director’s loan account is overdrawn and this is risky to both you and to the company.
If the company becomes insolvent, for example through a creditors liquidation, then your director’s loan debt is considered as part of the company assets. The liquidators will expect you to pay some or all of it back so that creditors can be repaid. By owing the company money, you lose one of the main advantages and protections of setting up a limited company, which is the separation between the company debt and your personal debt.
If the director’s loan is overdrawn at year end and it is not repaid within 9 months of the year end, this incurs additional corporation tax. It is known as a close company loan to participators. HMRC will charge 32.5% tax on the outstanding balance (or on any increase on the balance since the last tax year).
If you later repay the overdrawn balance, you can claim the extra tax back from HMRC, however it’s not an immediate process. The claim can’t be made until 9 months after the financial year end date which includes the clear director’s loan. If you cleared an overdrawn directors loan by year end 31 March 20×4, you would not be able to reclaim any additional tax paid until after 1 Jan x5.
Maybe you’re thinking that you could just settle the loan at 9 months, and then take the money out again straight afterwards? But unfortunately not, this is known as bed and breakfasting and is not allowed for significant amounts.
A director’s loan with a balance over £10,000 (at any point in the year) is considered a benefit for the director unless interest is being charged. This is because you are borrowing money at a beneficial rate that’s better than you’d be able to find if you borrowed that money commercially.
You can calculate the interest that would be due on the loan using HMRC’s offical rates and the average balance across the year. This interest can be added to the director’s loan balance and will also be considered as additional income for the company.
If the company doesn’t charge interest, or the interest is below the official rate, you must declare the beneficial loan as a benefit in kind. The value of the benefit is the amount of interest that you should have paid (based on HMRC’s official rates). Or, if you did pay some interest, the difference between what you should have paid and what you did pay.
If no provision is made then HMRC could decide to treat the loan as additional employment income and tax it accordingly, with implications for income tax and national insurance.
Here are some top tips to help you keep your director’s loan in check and prevent unwanted tax shocks.
You (hopefully) don’t pay your other employees as-and-when, so it’s good to apply that same principle to yourself as a director. Pay your salary as per the payslip amount each month. Reimburse any expenses that you’ve incurred on a monthly basis as well. Ideally at month end when you pay any other employees.
This means that any money taken out of the company over and above these payments is clearly dividends. It’s easy to see where you stand with your dividends at any point in the year, not just at year end.
Try to take a consistent single dividend payment from the company at the same time each month. Taking £50 here and a couple of hundred £’s there is the easiest way for the director’s loan to get out of control. It’s amazing how quickly small amounts can add up.
Start by sitting down and working out a personal budget so you know how much you money you need each month. Then you need to look at whether this is possible with your company profits.
Your accountant can help you with the process to determine what the company can afford. They can help structure the best split between salary and dividends and also give you an idea how much tax you would pay.
Information out is only as good as information in. If you keep your business accounts up to date on a weekly or monthly basis, it’s much easier to see how things stand with the business. This allows you to be proactive rather than reactive. You can spot if profits are dipping and maybe adjust your salary and dividends accordingly.
Treating yourself like an employee, staying organised throughout the year and planning up front with your accountant. This is the best way to maximise the tax benefits of the low salary, high dividends strategy, without getting into trouble from an overdrawn director’s loan account.
With Christmas on the way, I’m sure you’re firmly on Santa’s nice list and never submit any late VAT returns. For those unlucky businesses on HMRC’s VAT naughty list, the new year brings some important changes to the VAT penalties scheme.
The current VAT penalties scheme is based on surcharges. A late return or late payment is classed as a default. They are both penalised in the same way.
For a business with less than 150k turnover, one default triggers a warning letter. Two defaults starts the clock on a surcharge period. Every subsequent default within the next 12 months results in a penalty based on the amount of VAT due. For example, the 6th default within a 12 month period results in a surcharge of 15% of the VAT due or £30 (whichever is more).
Businesses with turnover over £150k go straight into the surcharge period on the first default.
If no return has been submitted, HMRC will estimate the VAT due in order to work out the surcharge.
The business needs a clear 12 month period with no defaults in order to reset the clock and leave the surcharge period.
There is no surcharge for a late return if you’ve paid the VAT on time, have a repayment due or there is no VAT to pay.
The new penalties will apply for VAT periods starting 1 Jan 2023. So if your 31 March 23 return is late, it will be the first one with penalties under the new scheme. 31 Jan 23 and 28 Feb 23 returns will still have penalties based on old scheme.
The new scheme splits up the penalties for late submission and late payment and deals with them in different ways.
All VAT returns will be affected, including nil or repayment VAT returns where no VAT is due.
There are no changes in relation to the penalties for inaccurate returns. They will remain the same.
Returns that are submitted late will accrue penalty points. Each late return results in one point.
There are penalty point thresholds which vary depending on whether you submit your VAT returns monthly, quarterly or annually.
If you cross the penalty points threshold there is an initial fine of £200. Any further late submissions result in further fines of £200 for each late return.
The submission penalties apply even if it’s a nil return or a repayment return. This is different to the old scheme where you could submit a late return without penalty, providing there was no VAT due.
Submitting all your return on time for the relevant compliance period will reset your points to zero. For example, if you submit quarterly you need 12 months (so 4 returns), all within the submission deadline to clear your slate with HMRC.
If you’re unable to pay your VAT on time then HMRC is giving you 15 days from the submission and payment deadline to either pay the VAT due or arrange a payment plan with them.
If you’ve not paid the VAT or agreed a payment plan by day 16 then there is an initial late payment penalty. This is calculated as 2% of the VAT due at day 15.
If it’s still overdue at day 31 then there is a further penalty added of 2% of the VAT due at day 30.
After that there is an additional penalty (on top of the previous ones). This is 4% per year for the period that the balance is outstanding, calculated on a daily rate. The total is determined once you pay the VAT.
In addition to the late payment penalties, HMRC will also charge interest on the overdue balance. This will be charged at the Bank of England base rate plus 2.5%, from the day that your VAT is overdue.
So although the late payment penalties don’t apply until day 16, there will still be interest to pay from day 1.
There will still be interest applied, even if you make a payment arrangement to avoid the late payment penalties.
The good news is that HMRC are giving businesses chance to get used to the changes. There will be no first late payment penalty charged until December 2023 providing you pay within 30 days of the payment due date. If you pay later than 30 days there will still be penalties charged.
There is no soft landing planned for the late submission penalties.
The main businesses that could be caught out by these changes are those that submit nil returns or get VAT repayments. You may have got into the habit of not worrying so much about being on time as previously there was no surcharge penalty if there was no VAT due. Under they new scheme there will be penalties and no soft landing period for this part of the changes.
So your new year’s resolution is to make sure that those VAT returns are submitted on time. Remember if you can’t afford the VAT, you can make a payment arrangement with HMRC to avoid late payment penalties.
You’re at work, you buy some food, it must be a travel and subsistence expense. Simple, surely? Think again!
Travel and subsistence expenses are one of the areas of business travel that causes the most confusion. So, what are your options for claiming these expenses and how do you get it right?
Put simply, travel and subsistence expenses are the costs for your journey, your accommodation and your food and drink during a business trip. Motor travel expenses have already been discussed in a separate post. This blog will focus on the other types of travel costs, and in particular, the subsistence side of things – meals, food and drink.
Being at work is not enough for a meal to be counted as a subsistence expense because, as HMRC argues, “everyone must eat to live”.
As with other types of travel expenses, we are looking at what is allowable as a business expense for sole traders or what can be reimbursed without being a benefit in kind for employees and company directors.
Generally, food and drink are allowable expenses on journeys that are away from the base of work and outside the usual pattern of work travel (for sole traders) or to a temporary workplace (for employees). So, that daily coffee you buy on the way to work, would sadly not count as a subsistence expense. But the latte at the train station on the way to a client meeting in another town, may be allowed.
Establishing whether a journey can be counted as a business trip, is always the first step because the other travel expenses follow from there. No business journey, no travel expenses. Business journeys are a complicated area and there is a whole blog post covering this topic.
But just because a meal is part of a business trip, doesn’t always mean that it’s subsistence. If you pay for other people, such as customers or suppliers the meal would be classed as entertaining rather than subsistence. Again, this is another complex area which has implications for corporation tax, income tax or VAT.
Alcohol on its own would be classed as entertaining, although limited alcoholic drinks can still be included as subsistence when drunk as part of a meal.
You can claim any actual costs incurred. These costs need to be evidenced e.g. with receipts, bills or other proof.
This applies to sole traders putting expenses through their business, to employees claiming travel expenses from their employer or directors claiming travel expenses from their limited company.
HMRC doesn’t care whether you travel first class or if you dine in MacDonalds; any reasonable expenses are allowed. The only limits HMRC sets are if the expense is lavish enough to be considered as some kind of employee reward rather than purely a travel expense, or if it doesn’t meet the criteria as a wholly business expense.
If you’re an employee making a journey that meets the criteria as business travel, but you aren’t reimbursed for the full cost by your employer, then you can claim the balance. This can be done directly to HMRC or via a self assessment tax return.
Employees (and company directors) have an alternative option for claiming some travel expenses. Instead of using the actual cost, you can claim meals at HMRC’s benchmark rate. These rates unfortunately don’t apply for sole traders or partnerships.
The rules around these benchmark rates changed from April 2016. Previously there were amounts set for specific meals. Now the rules are based on minimum journey time rather than meals.
The benchmark rates are the maximum that can be paid to an employee without incurring tax or NIC on the payment and without using the actual costs. Employers can pay less than these rates if they wish.
However, this doesn’t mean that you can just chuck all of those travel receipts in the bin. The employer has to have a checking system in place to make sure benchmark payments are being claimed legitimately. This could still mean hanging onto some receipts as evidence.
You can only claim one allowance per journey. If you had a 12 hour journey you could only claim £10, not £5 and £10.
A meal can only be reimbursed once. For example, if a hotel bill included an evening meal, you couldn’t claim the £25 allowance as well. But you could claim the £10 allowance for the other meals during that day.
There are no benchmark rates for overnight accommodation or for staying with friends and family. For these expenses, you use the actual cost.
There is however, £5 per night that can be paid for overnight stay incidentals (such as phone calls and newspapers).
Instead of using the standard rates, a business can also agree its own bespoke benchmark rates with HMRC. They can also apply to use an approved industry scale rate, if one exists.
Remember – these benchmark rates apply only to employees, not to sole traders or partners.
Start by establishing whether it’s a business journey. If the journey is not allowed, then the expenses won’t be allowed either.
Think about whether it might be classed as entertaining rather than travel and subsistence.
Sole traders and partners can only use actual cost.
Employees and company directors can use benchmark scale rates as an alternative method for meal costs.
When it comes to claiming business travel expenses, it really is all about the journey.
Once a trip is classed as a business journey, all the other travel expenses such as subsistence or motor costs can follow from there.
But this isn’t always straightforward. Whether something counts as a business journey depends on your particular circumstances and how you operate.
There are also some differences between sole traders / partnerships and limited companies. But before we get into the differences, let’s look at the key rules that are the same for all businesses.
The first important rule is that travel between home and work (your normal commute) is not allowed.
There are some differences as to how the workplace is defined, but the common factor remains that journeys between home and work are not classed as business travel. Therefore no associated expenses can be claimed.
The other important thing to remember is that for business expenses, the trade purpose must be the only purpose. This applies to all types of business.
So if there is a dual purpose to a journey (business and private), then the whole journey and all associated expenses could be disallowed. As ever are some exceptions and complexities, but as general advice it’s much better to avoid making dual purpose journeys if you can.
There are different sets of legislation and rules between sole traders / partnerships and limited companies which are similar, but not exactly the same.
The main reason for the difference is that directors of limited companies are considered employees of the company, so what they can claim for travel is covered by the rules around employee expenses along with any other employees.
A sole trader (or partner) is not an employee, so what they can claim is covered by a different set of rules. If the business has employees then the employees will be covered by the employee expense rules, but the sole traders or partners themselves won’t as they are not employees.
The main differences relate to how the workplace is defined.
The workplace for sole traders or partnerships is defined by the base of operations.
The workplace doesn’t have to be a building, office or shop that you own or rent. It can be anywhere that you regularly carry out your trade. So for a personal trainer, this could be the local gym.
Base of operations really depends on how you run your specific business. You need to think about your particular circumstances. Some areas to consider are:
Once you’ve established your base of operations then you should not claim any expenses for journeys made between home and that location. These journeys are classed as your normal commute.
This seems simple enough if you operate from a shop or an office, but what about other businesses that operate from home or don’t have a specific workplace?
Some traders are “itinerant”, meaning they don’t operate from a specific location. For example, a builder who travels to wherever the job is located and operates the business from their home. Admin such as bookkeeping and invoicing is done at home, tools are kept at home and the home address is used for the business correspondence. In this case the base of operations will be home and travel from home to the various jobs can be counted as a business journey.
Working from home sometimes doesn’t automatically make it your base of operations. If you sometimes or partly work elsewhere then this could well be counted as your base of operations rather than home. Particularly if it’s a regular location and / or the trips are predictable. This could include a location where equipment is stored or if you visit a depot to pick up items before starting work. The more regular and predictable the journey between home to a work location, the more likely it could be considered as part of your commute rather than business travel.
The base of operations doesn’t have to be a single building, in some circumstances it could be a larger geographical area, your general area of trade. If you live some distance from your area of trade, it gets more complicated. In this case, the journey from home to the area of trade could be counted as your commute. As the commute is not allowed, this part of the travel would be disallowed as a business journey.
Working out the base of operations can be tricky for certain businesses. If you aren’t sure, then this is something you can discuss with your accountant.
For a limited company, the director and other employees fall under the rules covering employee expenses. These rules look at which expenses can be reimbursed without being classed as a benefit in kind.
For an employee, the travel has to be necessary as part of the duties of their job. This could be because it is directly as part of the job itself or because they have to visit somewhere in the course of their job.
This is broadly the same as expenses having to be wholly business related for sole traders and partnerships. But the focus and detail is slightly different; you have to consider the person and the job role rather than the general business.
There is no concept of base of operations for employees, instead we look at whether it’s a permanent or temporary workplace.
A permanent workplace is a place at that you attend regularly for the performance of the duties of the employment
The employment contract usually states the permanent workplace and this is normally a good indication. However for tax purposes, it’s the pattern of work that dictates the permanent workplace and sometimes it may not agree entirely with the contract.
Here are some other common indicators of a permanent workplace, although these will vary depending on the specific job:
Travel to your permanent workplace is your normal commute, so you can’t claim expenses associated with that journey.
HMRC have some specific measurements to determine whether exactly how much time must be spent for somewhere to be classed as permanent rather than temporary.
As with the sole trader / partnership, a workplace doesn’t necessarily have to be an office, factory or shop.
Your permanent workplace can be home.
It’s possible to have more than one permanent workplace. If you travel between two or more permanent workplaces, the trips between can count as a business journey. You can claim the expenses for this. What you can’t claim is the journey to and from home at either end.
A depot or similar base can be a permanent workplace even if you don’t spent that much time there (Depot and Bases rule). It can be classed as permanent if it’s the base from which you work regularly or are routinely allocated tasks.
The permanent workplace doesn’t have to be a specific building, it can be a larger area. If the duties of employment are defined by a specific geographic area then that whole area is the permanent workplace (the Area rule). If you live outside the boundary of your work area, then the journey to and from the boundary is your normal commute. Journeys inside the boundary are business travel and allowable.
A temporary workplace is somewhere that you attend in the course of your job that doesn’t qualify as a permanent workplace. The two key aspects are:
You can only claim for necessary attendance. If you chose to work at a temporary workplace because it’s preferable or easier, then no expenses can be claimed.
Travel to a temporary workplace in the course of your business duties is classed as a business journey. You can therefore claim any expenses associated with that journey.
However, if you’re going to a temporary workplace that has a similar journey to your permanent workplace, then you can’t claim those expenses. For example, offices in the same travelcard zone in London, buildings located close to each other, journeys in the same direction and similar length.
How about if you have to drive by or close to your permanent workplace on the way to a temporary workplace? Do you lose the commute part of the journey? If you don’t stop then you are fine and the whole journey can be claimed. However, if you do stop at your workplace and perform some duties, then you have to split the trip into two parts, the normal commute part and the permanent to temporary workplace part.
A temporary workplace can become permanent even if you haven’t been there for more than 24 months.
In the 24 month rule, it is the “expect to” part that becomes important. It doesn’t matter if your role at a particularly location is in month 1 or month 24. As soon you expect to be there for more than 24 months for more than 40% of the time, it becomes a permanent location.
So if you’re 6 months into a 12 month placement and it gets extended for another 2 years, then it immediately becomes your permanent workplace. It doesn’t matter that you’ve only been there 6 months, it’s how long you expect to be there that counts.
The reason this is important is because, as soon as it becomes your permanent workplace, the home to work trip is no longer a business journey and you can’t claim for any associated expenses. It has become your normal commute.
In many ways the rules around business travel are similar across all business structures as the overall intention is the same. However the workplace definition for employees is more rigidly defined and complex than for sole traders. So if you’re moving from one business structure to another, this is something to watch out for.
The first step is to work out your base of operations or permanent workplace (depending on your type of business). This gives you the basis for whether you’re making a business journey or just carrying out your normal commute.
If you’ve firmly established that you’re making a business journey then you can claim the associated expenses such as motor costs, meal or accommodation costs. These type of expenses are broad topics in their own right and will be covered in the future.
If you’re in doubt about your base of operation, your permanent workplace or whether something counts as business travel, then this is something you can discuss with your accountant. If you would like to chat to us then just email to tax@cooperfaure.co.uk.
Business motor expenses can be complicated and with rising fuel costs you want to make sure you’re making the right choice for your business. So, let’s take a trip through your options.
How you put your motor expenses through your business can depend on whether you’re a sole trader or limited company, if you have employees, whether you’re VAT registered, the type of vehicle and the nature of your journeys.
Whatever method you choose, you always have to start with the journey. You can only claim motor expenses for business travel; not for personal travel or commuting.
There are two main routes to claiming motor expenses, mileage or full cost.
This method uses a fixed rate per business mile so relies on keeping accurate mileage records.
The mileage rate is supposed to cover not just fuel, but all the costs involved with running a vehicle. It’s also supposed to account for an element of wear and tear that would reduce the value of the vehicle. If you’re using mileage, then no other motor costs can be included as business expenses for that vehicle.
With this method, you can claim journeys in different vehicles, for example if you have two family cars. The most important thing is that it’s a business journey.
For employees and directors of limited companies, any personal mileage reimbursed by the company is classed as a benefit in kind and is taxable. Similarly, if the mileage is reimbursed at more than HMRC’s approved rate, the difference becomes a benefit in kind.
How about if an employee is using a vehicle owned by the business but paying for the fuel personally? They still need to track their business mileage so that they can be reimbursed for their fuel costs.
They can claim the business mileage at the HMRC advisory fuel rate, which covers the fuel costs only (and not any of the other motor costs covered in the approved mileage rates).
Conversely, if the business pays for the fuel and the employee doesn’t want to end up with a benefit in kind, they can reimburse the company for their personal mileage, again at the HMRC advisory fuel rate.
This uses the actual costs of fuel and running the vehicle based on the expense bills and receipts.
If the vehicle is owned by the business, then it’s more common to use the full cost method. However, if there is any element of personal use this has to be taken into account.
For sole traders this would mean discounting a portion of the motor costs in relation to the personal use. The most accurate way to work this out is to log business mileage so that you can see what portion of the overall mileage relates to business. This can then be applied to the motor costs. Or if it’s mainly business use, then log personal mileage.
For limited companies this would mean looking at Benefits in Kind for the employees who are using the vehicle. Any personal use whatsoever in a vehicle owned by a limited company can potentially cause a benefit in kind. There are particularly strict rules around company cars, but company vans can incur benefits in kind as well.
There are some extra considerations for motor expenses if your business is VAT registered.
If you’re using the mileage method, then you have an additional calculation to do for VAT. Also, don’t throw away those fuel receipts!
VAT can only be claimed on the fuel element of the mileage allowance. HMRC provides an advisory fuel rate to apply to your mileage allowance; this depends on your particular vehicle and is updated quarterly.
You also need to ensure that you have VAT receipts covering enough fuel for the amount of VAT that you are claiming on the fuel element of your mileage.
Whatever method you are using, you also have to make sure VAT is not being claimed on any element of personal use.
This is easy enough if you’re using mileage, as only business miles are being claimed. It’s a bit harder if you’re using the actual cost and there are two options.
HMRC have scale charges – these are fixed rates, based on the CO2 emissions, that show how much should be deducted from the VAT. The amounts are given for a month, quarter or year depending on the VAT period.
Alternatively, if you have accurate mileage records, you can work out the actual percentage of personal use mileage and then deduct that element, with the associated VAT from your fuel costs.
There are also some VAT differences in what can be claimed for the cost of the vehicle depending on whether it is a car or a van and whether it is new or second hand. For example, you can’t normally claim VAT on the purchase of a car. This will be covered in more detail in a future post.
You can switch from mileage method to full costs and vice versa, but only when you change your vehicle. Once you’ve decided on a scheme for a particular vehicle, you should stick with it until you replace the vehicle.
Despite the rising price of fuel, the mileage rate remains at 45p per mile. The advisory fuel rate is adjusted quarterly in line with fuel prices, but the approved mileage rate has remained at 45p since 2011. This means that as fuel prices go up, you’re effectively being compensated at a lower rate for the other motor cost elements.
It is definitely something to consider if you’re replacing your vehicle or bringing a new vehicle into the business.
If you have a new or low maintenance vehicle with good fuel consumption, this may not be an issue. However, if you have a vehicle with a high portion of business use (or wholly business use), that’s expensive to run in terms of fuel and other motor costs, then using the actual costs may be better value.
The method you choose will largely depend on whether you’re using your own vehicle and the proportion of business miles and personal use.
If you have any element of personal use then logging business mileage is important, even if you are using the full cost method, so that you can make sure all your expenses are business-only.
If you’re thinking about a new or replacement vehicle then it’s always good to discuss the possibilities with your accountant, particularly if you’re VAT registered. Every business is different, and you need to find the best option for your particular circumstances. If you’d like to chat to us about this, then just send an email to tax@cooperfaure.co.uk.
Don’t worry I’ll put it on expenses! A familiar comment on TV as the high-flying entrepreneur treats their friend to lunch in an expensive restaurant. What you don’t see, is what happens to that receipt later when it gets to their accountant. Many clients are disappointed to discover that the tax rules for entertaining are much less generous in real life.
Business entertainment is the provision of free or subsidised hospitality or entertainment. The person being entertained may be a customer, a potential customer or any other person.
Entertaining can involve eating, drinking, accommodation and other hospitality. It could include tickets for sporting or cultural events, entry to clubs or nightclubs, use of an asset such as a yacht. Entertaining includes subsidised events as well as free events. It can also involve gifts (such as Christmas presents to customers).
It’s fine to have expenses for business entertaining and include them in your accounts. Entertaining is a legitimate and important part of many types of business. It needs to be recognized as business expense in terms of the business profit.
Apart from a few exceptions, there is no tax benefit to be gained from entertaining. Most entertaining expenses are disallowed for VAT, corporation tax and income tax.
Similarly expenses related to the entertaining event are also disallowed. For example travel, meals and accommodation costs to attend an entertaining event.
However if providing hospitality and entertainment is your business trade (or part of your trade) e.g. hotel, restaurant, events company etc. then this is different and expenses are allowable.
Sometimes an element of entertaining is expected as a normal part of a service e.g. a tea or coffee at the hairdresser. That is fine as long as it’s not excessive. It’s assumed to be factored in as part of the cost of the service that’s being provided.
Both entertaining and travel & subsistence costs often involve eating, drinking and accommodation but travel is allowable for tax whereas entertaining is not. So how do you tell them apart?
The main difference is that entertaining involves paying for people who are not business employees such as customers, suppliers or new prospects.
Staff can claim travel and subsistence costs for a trip away from their normal place of work that is necessary for business. This expense is allowable for VAT and for income tax and corporation tax. But if you pay for a non-employee, even if it’s related to business, that cost becomes entertaining.
A hotel stay and overnight meal for an employee on the way to a customer meeting is travel and subsistence. Meeting the customer and paying for lunch is entertaining.
The other thing to think about is whether the costs are directly related to the trade of the business. Meals and accommodation costs for non-employees can sometimes be allowed if they are directly involved in the trade of the business and the cost is not excessive. For example a construction company could pay for the travel expenses for its subcontractors as well as its employees to work on a non-local building project.
There are a few specific situations when entertaining can be included as an expense for tax and these relate to entertaining of business staff and also gifts.
Staff entertaining is all allowable as an expense for tax providing it is wholly and exclusively for the purposes of the trade and is not incidental to entertaining being provided for customers. This is the case for income tax, corporation tax and VAT too.
This means that the main purpose of the expense has to be entertaining the business staff. Business staff means payroll staff and does not include subcontractors and volunteers. If an entertaining expense meets these criteria it’s allowable for tax.
However, businesses need to be careful as too much generosity to their staff can actually be a disadvantage. There’s a limit to how much entertaining staff members receive before it becomes a benefit in kind and is personally taxable for them.
There are also some VAT complications to be wary of.
Businesses can provide an annual party for payroll staff as long as it’s available to all employees (whether as one event or various events across sites) and does not cost more than £150 per head, including VAT.
There can be more than one function e.g. a Christmas party and a summer BBQ, providing the total costs don’t exceed the £150 limit across the year.
This limit includes VAT and covers all costs such as travel to the event and accommodation that may be provided. If staff members bring invited guests, such as family members, then they fall under the £150 limit of the relevant staff member. If the conditions are not met or the £150 limit is exceeded then staff will end up with a taxable benefit for the entertaining event.
Sadly if it’s only directors on the payroll and no other staff, then the exemption doesn’t apply.
Sole traders are not considered employees, so although they can claim for staff, their own costs would not be covered.
Another spanner in the works is that VAT can only be claimed on the employee costs. So if your employees bring guests, although the guest may be covered under the £150 per head limit, you can’t claim the VAT on their costs. This might mean dividing up costs in terms of number of employees and non-employees for your VAT return.
One very odd anomaly is that VAT can be claimed on entertaining overseas customers, as long as it’s a “reasonable” cost. However for corporation tax or income tax purposes the expense would still be disallowed.
Unfortunately not everything in life is neatly clear cut. Some events may be a mixture of business and entertaining. Other events might be entertaining but for a mixture of staff and clients. How should the business deal with these?
For mixed events it’s important to work out what is the main purposes of the event and what is incidental. Is it a work event with some incidental entertaining or a entertaining event with some incidental work?
If it’s primarily a work occasion and entertaining expenses are incidental and very minor, they can usually be included. A basic lunch provided at an office meeting to enable the meeting to carry on without interruption would be OK. Lunch with customers in a restaurant, particularly if alcohol was involved, would not. If entertaining expenses at a work event are significant or substantial, they should be separated out and disallowed.
Similarly, if it’s primarily an entertaining event with a minor work element, the direct work related expenses can be separated and included. This would not include expenses related to employees attending, it would be expenses like an advertising display stand, business leaflets etc.
If it’s an occasion with both employees and guests attending, then you can think about whether the business would still have paid for the event without the guests being there e.g. just for employees. If the event would not have been paid for without the guests then it should be considered to be business entertaining rather than staff entertaining and all expenses (guests and staff) would not be allowable.
This is a very grey area with lots of complexity. I think the general advice for mixed occasions would be to avoid them if possible. If that’s not possible, consider the main purpose of the event and if in doubt, separate out. Don’t forget, your accountant is there to help out and provide advice and guidance on these tricky areas where answers might require a bit more thought or research.
Generally gifts are considered entertaining and not allowed as a taxable expense, but there are a few exceptions.
Free samples of trade goods aren’t considered to be entertaining.
Small gifts of less than £50 (not food, drink, tobacco or a voucher or token) are allowed providing they contain a conspicuous advertisement for the donor. So giving a customer one of your branded golfing umbrellas or a mouse mat is fine and not considered to be entertaining.
Business can also give gifts to staff providing they are less than £50 in value and not cash or a cash voucher. These fall under the trivial benefits exemption and don’t have to be declared as benefits in kind. The gift must not be provided as part of a contractual obligation or in recognition for services or employment duties. The exemption is design to cover things like birthday celebrations, Christmas presents or wedding presents.
The VAT rules on gifts are similar with a £50 annual limit on business gifts whether to customers or employees. Any more than this and the gift has to be treated as if it was a sale for VAT purposes.
Although the rules on entertaining are covered by a number of different areas of legislation and various HMRC manuals, they are actually pretty consistent across VAT, corporation tax and income tax. There are some differences or clarifications in relation to particular taxes. However overall the outcome is usually the same.
Generally you should consider that if a particular expense is disallowed as entertaining for one tax, then it would also be disallowed for the others as this will most often be the case.
There are exceptions of course (nothing in tax is ever 100% straightforward) and this article can only give a brief overview. So if your business does have a particular situation where more complex tax treatment may apply or you need further advice or clarification, this is something that your accountant can help you with. If you’d like to chat to us about this then just send an email to tax@cooperfaure.co.uk.
Is it a bird, is it a plane, is it normal capital allowances? No it’s super deductions!
If you’re planning on investing in new plant and machinery assets for your business you could save tax if you buy them before 31 March 2023 and take advantage of capital allowance super deductions.
In the March 2021 budget the government introduced capital allowance super deductions as a way to encourage businesses to invest in plant and machinery assets. It was part of a number of measures to encourage business growth after the Covid-19 pandemic. Extra tax relief is available on qualifying assets purchased from 1 April 2021 to 31 March 2023.
Before we get to the super deductions, let’s look at how capital allowances usually work.
Normally when a business buys assets, such as tools, equipment, machinery or vehicles, the cost of the asset can be claimed in the tax return using capital allowances.
Assets live in pools and the portion of the asset value that can be claimed in the tax return each year depends on which pool. The majority of assets live in the main rate pool which allows 18% to be claimed each year. However some assets, like cars, have pools at a lower rate e.g. the Special Rate pool only allows 6% of the value to be claimed each year.
18% or 6% per year doesn’t sound that great, but the majority of businesses can actually claim the whole value of the asset in year one. This is done through the annual investment allowance (or first year allowances for certain assets). It applies to most new assets except cars, and gives 100% of the value in the year of purchase. If it’s not claimed in that first year (or not entirely claimed) the rest of the value reverts to the standard 18% or 6% per year.
Capital allowance rates and rules can be changed and are a way for the government to encourage particular activities e.g. favourable rates on electric cars, unfavourable rates on high emission cars. In the case of the super deductions, it’s an incentive to encourage investment and growth.
The super deductions give 130% first year capital allowances on most new main rate pool plant and machinery investments. You are able to claim more than the actual cost of the asset.
So instead of the usual 100% for annual investment allowance / first year allowance or 18% for standard writing down allowance, you can claim 130% of the value in the first year.
For special rate assets where only 6% of the value can normally be claimed each year, the super deductions allow 50% of the value to be claimed in the first year.
Sadly the super deductions don’t apply to types of business, only to limited companies.
Capital allowances can be claimed by sole traders, partnerships, furnished holiday lets and limited companies. However only limited companies can claim the super deductions.
These are typically moveable plant and machinery type assets including computer equipment, commercial vehicles such as tractors, lorries and vans, tools and machinery such as ladders, drills, cranes, office equipment such as desks and chairs.
Integral features in a building such as the heating and lighting systems may not qualify for the 130% but could qualify for the 50%. This also applies to long life assets (with a useful life of at least 25 years), thermal insulation added to buildings and solar panels.
There are a number of exclusions, but some of the main ones include:
Second hand assets – it must be a new, unused asset.
Assets given as a gift.
Cars (but commercial vehicles and vans are allowed).
Plant and machinery purchased for leasing, i.e. bought in order to lease out to other people. The exception to this is background plant and machinery within a building.
Buildings and structures
Additionally if you are ceasing your business, you can’t claim the super deductions in your final accounting period.
The super deductions are claimed in the same way as the standard capital allowances on the company corporation tax return.
Assets where super deductions have been claimed will need different treatment on sale or disposal.
If you’re disposing of the asset in an accounting period that ends before 1 April 2023 (so still during the super deductions period) then it’s more straightforward. You claimed 130% of the asset value, so you give back 130% of the disposal value (as a balancing charge).
If you’re disposing of an asset in an accounting period that begins after 1 April 2023 (so falls entirely outside the super deductions period) then the disposal value stays as it is, no adjustment required.
If you dispose of an asset that starts in the super deduction period but ends after, then it gets tricker as you end up with a hybrid approach. The disposal value is effectively pro-rated based on the amount of time inside and outside the super deduction period. The super deduction part of the value is at 130% and the rest at 100%.
There are more complexities if you only claimed super deductions on part of the asset value. There are also differences in how the disposal is dealt with in relation to the rest of your existing assets.
This may well be one for your accountant to grapple with. However, in terms of what you would need to know as a business owner, it saves tax to dispose of the super deduction assets outside of the super deduction period and particularly to wait until a business financial year that begins after 1 April 2023.
If you aren’t ready to buy new assets right now, but are worried about missing out on the super deductions savings, then don’t worry, all is not lost.
Corporation tax rates are increasing from April 23 to a rate between 19% and 25% (depending on profit levels) for businesses with profits over £50,000. Claiming normal capital allowances with a 25% tax rate gives similar tax savings to claiming 130% at a 19% tax rate.
If the asset cost £1,000 then under 130% super deductions you can claim £1,300 which saves tax of £247 at 19%.
If you claim capital allowances on an asset costing £1,000 with a tax rate of 25% then you save £250 tax. This might all be in year one if you can claim annual investment allowance, or more spread out if you have to claim writing down allowance.
So if you have profits over £250,000 and know that you’re going to be at the 25% tax rate, you don’t necessarily need to rush. Waiting until the corporation tax rate goes up will give you similar tax savings on your capital allowances.
However for those businesses with profits over £50,000 but under £250,000 who will end up on a hybrid rate between 19% and 25%, it may be more advantageous to go for the super deductions depending on your profit and therefore the tax rate applied.
Working in the construction industry and registered for VAT; are you clear on how the VAT Domestic Reverse Charge for Construction affects you?
The VAT Domestic Reverse Charge for Building and Construction Services came into force on 1 March 2021, but despite being around for more than a year now, there’s still a lot of confusion around this scheme.
HMRC recognize the scheme is complex and have given a “soft landing” for errors but eventually they will tighten up, so it’s important to get it right.
The reverse charge scheme was introduced as a method to combat Missing Trader VAT fraud in the construction industry. Specifically, where a business charges VAT to their customers, gets paid and then disappears before accounting for the VAT to HMRC.
There is a similar scheme already in place for mobile phones, computer chips and wholesale gas and electricity.
If you’re curious as to how this scheme actually helps HMRC – check out the extra section at the end.
Are you working in the building or construction industry and report through CIS (Construction Industry Scheme) as a contractor or subcontractor?
Are you VAT registered?
If both of these apply to you then you will need to deal with the VAT domestic reverse charge in certain circumstances.
If you are working for a VAT registered CIS contractor and issue a sales invoice that falls under CIS, then it also falls under the domestic reverse charge for VAT.
You will need to makes some changes to the way you prepare your sales invoice.
Include zero rate (0%) VAT on both labour and materials, instead of the usual 20% or 5%.
VAT still needs its own line but your invoice should also show wording stating that the domestic reverse charge for VAT has been applied. HMRC gives some guidance on the wording and invoice layout.
CIS is calculated and deducted from the net labour amount as normal and should still have its own line on the invoice.
But there might be times when the reverse charge does not apply and it’s back to the normal rules of 20% VAT (or the appropriate reduced rate). For example:
Domestic – If you invoice a domestic consumer then reverse charge doesn’t apply as this invoice wouldn’t fall under CIS and they are not VAT registered.
Non VAT registered – If you invoice a CIS contractor who isn’t VAT registered, then reverse charge doesn’t apply.
Services outside CIS – If you invoice a VAT registered CIS contractor for a service that that falls outside CIS, then reverse charge for VAT doesn’t apply either. Reverse charge for VAT follows along with CIS. Some examples include: installing certain elements of security systems, blinds and shutters. If you aren’t sure then the best starting point is the CIS guidance.
End User or Intermediary Supplier – If you invoice a VAT registered CIS contractor and they’ve informed you in writing that they are the “End User” or an “Intermediary supplier” then reverse charge for VAT doesn’t apply.
If you aren’t sure then HMRC has some handy flowcharts to help.
It’s important to be clear about when the reverse charge applies for your subcontractors so you know if you’ve been invoiced correctly. You may also be working as a subcontractor as well as a contractor, in which case may need to apply the reverse charge to your own sales invoices.
If you receive an invoice from a subcontractor that falls under domestic reverse charge, you should not be paying out VAT to the subcontractor. You also need to make sure the invoice is processed correctly for your VAT return.
In your VAT return you need to account for the VAT as if you are both the customer and the supplier so that reverse charge VAT amount appears in your sales VAT and your purchases VAT, but overall the net effect is zero. This is the reverse charge method.
If this sounds horribly complicated, don’t worry, as your digital bookkeeping software should hopefully deal with the domestic reverse charge VAT automatically. However, you may have some initial set up to make sure everything works correctly.
You’ll need to make sure that you or your accountant are familiar with the set up and updates to the invoice and VAT process. You may need to contact your software provider if the process isn’t clear.
By now most people have got to grips with the basics of the scheme but there are still a number of areas that frequently cause complications. This list is by no means comprehensive, as it’s a complex subject, but here some of the most common errors.
If the domestic reverse charge VAT of 0% applies, then it applies to the whole sales invoice, including both the labour and materials elements. This is a common source of confusion as the CIS deduction applies only to the labour element on the invoice and everything else about reverse charge follows along with CIS.
But……., if the labour element is 5% or less of the value of the whole invoice, then there is a 5% disregard and normal VAT rules would apply to the whole invoice.
Hire of equipment and machinery falls outside scope of CIS if it’s equipment only but inside CIS (and therefore subject to reverse charge) if there is an operator or some sort of labour element.
A digger hired with a driver would be under CIS and reverse charge, but a digger hired without a driver would not be under CIS or reverse charge. This can be confusing as bills from the same supplier could be inside or outside CIS and reverse charge depending on the circumstances.
One very common area of confusion is scaffolding. If the scaffolding is supplied, erected and dismantled then it does fall under CIS and reverse charge as there is a labour element involved even if it isn’t explicitly mentioned.
The reduced rate VAT of 5% is used for certain construction projects, such as conversions from non-residential to residential use.
The domestic reverse charge can apply to both standard VAT and reduced rate VAT sales.
The domestic reverse charge applies to UK goods and services. It is not to be confused with the reverse charge for cross border services which is used to account for VAT on non-UK services.
If you use services from outside the UK, for example software and apps, then you may receive some bills with 0% VAT showing the wording “reverse charge”. This reverse charge works in a very similar way, but is a different scheme. It’s likely both types of reverse charge will be set up in your bookkeeping software tax rates.
If you are doing your own bookkeeping, you need to make sure you pick the correct VAT rate in your software. If you accidentally select the wrong type of reverse charge, the transaction might not be processed properly and the relevant rules applied. Again, if in doubt here, speak to your accountant or software provider.
Many businesses use cash accounting for their VAT return. This means sales and purchases are included in the VAT return based on when the money is received or paid, rather than included based on the invoice or bill date (accruals basis VAT accounting).
Cash accounting for VAT can’t be used for sales invoices or bills that are subject to the domestic reverse charge.
But don’t worry. If you do use cash accounting, this doesn’t automatically mean you have to switch to the accruals basis. Many software providers are now able to cope with this rule and your VAT return may end up as a mixture of cash basis for your normal items and accruals for your domestic reverse charge transactions.
However it’s important to check this is the case for your particular digital bookkeeping software and whether there is anything you need to set up to make it function correctly.
Retention payments are common on large-scale construction projects. If you are making or subject to retention, you also need to ensure that these are being dealt with correctly in your VAT software.
The VAT on the retention element is allowed to be delayed until the retention is paid, even if they fall under the reverse charge. This might require changes to the way you manage your retention invoices depending on how your software is set up.
Another limitation of reverse charge invoices and bills is that they are outside the flat rate VAT scheme. They are included in the VAT return separately as if you were on the standard scheme.
Again, this is something that your digital bookkeeping software may be able to deal with automatically but it’s always worth knowing the rules and double checking.
It would also be valuable to work with your accountant to see whether using the Flat Rate scheme is still worthwhile for your business. This will depend on how many reverse charge invoices you are sending or receiving.
There’s no way to cover the full complexity of reverse charge VAT in one blog article, so if you are stuck and need accounting support with your construction VAT, then maybe we can help? Just send us an email to tax@cooperfaure.co.uk to arrange a chat.
Reverse charge is a bit of a strange one and it’s not really intuitive how these changes are actually helping HMRC.
Let’s imagine that Business C and Business S are both VAT registered construction businesses. Business S is working as a subcontractor for Business C, who is the contractor.
Business S charges VAT on their sales invoice to Business C. This shows up on their VAT return as Sales VAT (Output VAT) that they owe to HMRC.
Business C includes the Business S invoice on their VAT return as a Purchase and claims the VAT (Input VAT) from HMRC. Overall Business C has no net gain or loss from the VAT on the invoice, they pay it to Business S and claim it back from HMRC.
If Business S was a Missing Trader, they could collect the whole invoice value from Business C and then disappear without paying their sales VAT to HMRC. Meanwhile Business C has claimed that VAT and HMRC would be left out of pocket. Business S would have stolen the VAT amount from HMRC.
Both businesses have to do things differently under the domestic reverse charge. Business S charge 0% VAT on their sales invoice so only get paid for the net amount from Business C.
Business C applies the reverse charge which means that they include the VAT as both a sale and a purchase.
Before, the Sales VAT (Output VAT) was on the Business S return and the Purchase VAT (Input VAT) was on Business C return. Now Business C is now accounting for the both the Sales VAT and the Purchase VAT (Input and Output VAT) on their return and Business S is not accounting for any of the VAT.
If Business S was a Missing Trader, there is now no benefit for them. Business S doesn’t get paid the VAT because they are charging 0%, therefore there is no VAT for them to steal.
Business C still has no net gain or loss on the invoice from Business S. They didn’t pay any VAT to Business S and don’t claim any VAT back from HMRC.
So the Missing Trader issue is avoided and HMRC doesn’t lose money.