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The hidden tax on car benefits for employers

Businesses that provide employees with taxable benefits: company cars, health insurance and so on, will be aware that a benefit in kind charge is added to the employee’s income and subjected to an income tax charge the same as their salary.
 
Employers will also be aware that the cumulative sum of all the taxable benefits of their employees are subjected to an employers’ National Insurance charge – at present, this Class 1A charge amounts to 13.8% of all taxable benefits provided.
 
Which means the true cash cost of providing £10,000 of taxable benefits is £11,380.
 
Unfortunately, some benefits are not based on an identifiable cost, but on a scale rate applied by HMRC. Of particular concern are car and car fuel benefits for the use of company cars.
 
Consider Thrifty Ltd, who provide a second hand Toyota to Jane, a salesperson. The annual cost to the company is calculated as:
 
·         Fuel £200 per month, of which £25 covers private fuel.
·         A further £100 per month to cover insurance, repairs, and road tax, and
·         The car was purchased for £12,000 second hand – and is expected to be worth £4,000 after 4 years – and so the expected annual depreciation amounts to £2,000. The cost of the car when new was £19,000.
 
The company consider the overall, annual cost of £5,600, including depreciation, to be acceptable.
 
The CO2 rating of the car is 122 g/km, and Jane’s annual benefit in kind charge for 2016-17 is (£19,000 x 21%) £3,990. The 21% is the scale rate applied by HMRC to cars with a CO2 rating between 120 – 124 g/km). Not bad, Jane is only being taxed on £3,990 when the underlying cost of the car for 2016-17 was £5,600.
 
Unfortunately, this is not the complete story. The company pays for all of Jane’s fuel, including fuel for private use. This means the car fuel benefit charge applies and this is based on the formula - £22,200 x 21% - £4,662.
 
Therefore, Jane’s total car and car fuel benefits amount to £8,652 (£3,990 + £4,662), when the underlying cost to her employer is just £5,600, and Thrifty Ltd will have to stump up £1,194 in Class 1A NIC, increasing the annual cost of providing the car to £6,794. The true rate of NIC payable is therefore 21.3% (£1,194/£5,600*100).
 
In this particular case, Jane would be advised to pay Thrifty Ltd the £25 a month to cover her private fuel. At a stroke this would mean the car fuel benefit would no longer apply, and reduce her taxable benefits for the use of the car from £8,652 to £3,990. As a bonus, the company Class 1A NIC would also reduce, from £1,194 to £551. As the true cost of the car is still £5,600, this reduces the effective NIC charge to 9.8% (£551/£5,600*100).
 
We are happy to discuss this conundrum with readers who feel they could benefit from advice in this area.
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Are you missing out on a tax rebate?

Apparently, over 4 million tax payers are eligible to claim the new marriage allowance, but only 2 million have done so. If our math is correct, this add up to £1.3bn in unclaimed tax refunds.
 
The allowance has been available since 6 April 2015 and is worth £212 for 2015-16, £220 for 2016-17 and £230 for 2017-18; a cumulative tax rebate of £662. The allowance is only available to the following couples:
 
  •          Couples must be married or in a formal civil partnership, living together does not qualify.
  •          One spouse/partner needs to be a non-tax payer. i.e. their income must be below the personal tax allowance. (£10,600 for 2015-16, £11,000 for 2016-17, and £11,500 for 2017-18).
  •          The other spouse/partner needs to be a basic rate (20%) taxpayer. Higher rate taxpayers cannot receive any benefit from the Marriage Allowance.
 
The spouse/partner that has the spare personal allowance needs to make the claim, and once made, the relief should automatically be given in subsequent years. You will need to advise HMRC if your circumstances change.
 
The allowance is simple to claim, just visit the Gov.uk website at https://www.gov.uk/apply-marriage-allownce. And don’t forget, it is the spouse partner who pays no tax (with an unused, or partially unused, personal allowance) that needs to make the claim.
 
Before making the application you will need to have you and your partner’s National Insurance numbers. You will also need a way to prove your identity. This can be one of the following:
  • the last 4 digits of the account that your child benefit, tax credits or pension is paid into
  • the last 4 digits of an account that pays you interest
  • details from your P60
  • details from any of your 3 most recent payslips
  • your passport number and expiry date

You’ll get an email from HMRC confirming your application.

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Possible bonus when you register for VAT

Businesses are required to register for VAT purposes when their annual taxable turnover exceeds £85,000 (this limit applies from 1 April 2017). You will not have to account for VAT on your taxable sales up to the date you are required to register, but interestingly, you may be able to claim back VAT you have paid out on purchases of goods, services and equipment, prior to the VAT registration date.
 
Accordingly, if you started a new business and were not required to register for VAT straight away, the first thing you should do when you do register is to explore the possibility that you can recover VAT you have paid on past purchases.
There’s a time limit for backdating claims for VAT paid before registration. From your date of registration, the time limit is:
  • 4 years for goods you still have, or that were used to make other goods you still have
  • 6 months for services
You can only reclaim VAT on purchases for the business now registered for VAT. They must relate to your ‘business purpose’. This means they must relate to VAT taxable goods or services that you supply.
Complications can arise if you have acquired assets prior to registration. There is an argument that any attempt to recover VAT on the purchase of equipment, vans etc. prior to VAT registration, should be restricted for any contribution the assets will have made to sales prior to registration, but it is not impossible to recover a proportion of the VAT charged.
You should make a claim on your first VAT Return (add them to your Box 4 figure) and keep records including:
  • invoices and receipts
  • a description and purchase dates
  • information about how they relate to your business now
If your pre-registration purchases and other costs are significant, this facility can produce a reasonable cash flow benefit. Please call if you would like our help to assess any possible claim you could make, in particular, the recovery of VAT paid on the purchase of pre-registration equipment. We can also advise how to make the correct entries in your accounts software, if you use this to file your VAT return.
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Do you use your car for business purposes?

Many employees use their own cars to undertake journeys for their employers. In most cases, employers will pay for this. Generally, they will pay a rate per mile.
HMRC consider this type of mileage payment as tax exempt as long as the rate per mile paid does not exceed a certain amount. Currently, the tax-free rates for cars are:
 

  •          45p per mile for the first 10,000 business miles in a tax year, and

  •          25p per mile for any additional miles in excess of 10,000.

 
The same rates per mile apply if you use your own van for business travel.
 
It is also possible to claim up to 24p per mile for the use of a motorbike and 20p per mile for the use of a bicycle. In both these cases there is no break point at 10,000 miles – you can claim these rates however many business miles you undertake.
 
Complications arise if you are paid more or less than these agreed rates per mile.
 
Are you paid more than the approved rates?
 
If you are paid more, any excess will be treated as a benefit and you will have to pay tax on the difference. Generally, this will be adjusted on the tax code that your employer uses to work out your weekly/monthly tax deduction from salary/wages.
 
Are you paid less than the approved rates?
 
If you are paid less than the approved rates per mile, you can claim the difference as a deduction from your taxable income. It’s called Mileage Allowance Relief (MAR).
 
Consider Jane, who undertook 2,000 business miles for her employer, but was only paid 35p per mile. She can claim 2,000 times 10p (45p – 35p) or £200 against her taxable income.
 
You will need to advise HMRC of any claim in order to get your tax reduced. If you pay no tax (if your income is below the current personal allowance - £11,000 for 2016-17) there is no tax to recover so a claim is inappropriate.
 
Your employer can also pay you up to 5p per mile if you carry a passenger as part of your business trip. Again, any payment in excess of this rate will be taxable, but payments of less than 5p per mile cannot be claimed as tax relief.

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