Tax Matters

1. Tax Matters

2. Tim Smith – Tax PartnerDeborah Parks-Green Employee Consulting Group

3. Tax Planning You or the tax man ?

4. “Every man is entitled to order his affairs so that the tax attaching under the appropriate Acts is less than it otherwise would be”

5. Tax Avoidance “Where the taxpayer obtains a tax advantage by reducing his income or incurring expenditure in circumstances in which the taxing statute affords a reduction in tax liability”

6. Tax Evasion “Where the taxpayer reduces his liability to tax without involving him in the loss or expenditure which entitles him to that reduction”

7. What’s the Difference? “The difference between tax avoidance and tax evasion is the thickness of a prison wall”

8. Seminar Outline • Employee tax • Other Income tax • Capital gains tax • Inheritance tax

9. Employee Tax Matters

10. Employment income Income tax is chargeable on employment income including: • Earnings – salary, wages, fees, bonuses and other emoluments • Amounts treated as earnings through the benefits code • E.g. Benefits in kind • Amounts which are not earnings but count as employment income • E.g. employee share schemes

11. BENEFITS

12. What is a benefit in kind? • Received by reason of employment • Not necessarily from employer • Benefits code

13. Who does the benefits code apply to? • Directors • Higher paid employees

14. Types of benefit • Cars and fuel • Vans • Cheap loans • Pecuniary liabilities • Gift of asset • Use of asset • Private health • Expense payments • Living accommodation

15. Company cars Annual charge = list price x CO2 emissions % List price: • Manufacturer’s list price not what is paid by employer • Increased to include cost of accessories • Reduced for capital contribution (up to max £5,000)

16. Company cars CO2 emissions %: • 140 g/km gives 15% • This increases by 1% for every 5 g/km (see next slide) • Diesel gives an increase of 3% • Greener cars reduce % (see further slide) • Maximum % is 35%

19. Company cars • Annual charge is pro-rated if car not available all year • £ for £ reduction on the charge for employee annual contributions • Benefit in kind arises on employee for a car provided by company to a family member

20. Capital contributions - company car • Employer provides new car for 4 years to 40% tax payer • List price £20,000; CO2% = 35% • Employee contributes £2,000 to cost i.e. 10% cost • Saving in tax £2,000 x 35% x 40% for 4 years = £1120 • Car sold £8,000 and employee gets 10% value = £800 • Employee pays £2,000 but gets back £1920 • Cont next slide

21. Capital contributions company car • Employer saves 12.8% = £360 over period • Employer also saves £1,200 (net) from employee • Overall saving to employer = £1,560 • If employer makes gross salary payment £1,363 • (Employer’s NICs added to this would be £1,560) • After tax and NICs, employee receive £816 • Overall better off by £736

22. Fuel benefit • Annual charge £14,400 x CO2 emission % • Benefit pro-rated if car/fuel not available for full year • All or nothing charge • No charge if employer reimbursed for all private fuel in which case accurate records must be kept

23. Company Cars - Advisory Fuel Rates for Company Cars from 1 February 2007

24. Example fuel benefit • Fuel benefit = £14,400 x 28% = £4032 • HMRC advisory fuel rates indicate – average fuel cost per mile for 1800cc to 2000cc petrol car is 11p • HMRC view of private miles - £4032/11p = 36,655 miles • Being taxed on 36,655 private miles pa • Pers cost - £4032 x 40% = £1613/11p =14,662 miles • Many drivers better off paying for own fuel for private journeys and negotiating a salary increase to reflect savings made by employer

25. Approved Mileage Rates – Private owned cars Passenger payments: • 5p per passenger per business mile for carrying fellow employees in a car

26. Cash or car Example • Employee taxable at 40% and drives 30,000 business miles • Choice of: • £4,000 per year gross, put through payroll • Co. car with 20% CO2 emissions; list price £15,000 • If driving co. car for business, paid approved mileage rate of 12ppm • If driving private car, paid business mileage payments of 40ppm • By taking cash option, employee will gain or lose:

27. Cash or car £ Extra salary (£4,000) less tax (£1,600) less NIC (£40) GAIN 2,360 Business mileage payments (30,000 miles @ 40ppm/25ppm) GAIN 9,000 Non-receipt approved mileage (30,000 miles @ 12ppm) LOSE (3600) Annual tax saving re co. car GAIN 1,200 Net overall gain 8,960 Employee can spend £8,960 per year to acquire and maintain a car without being worse off compared with having a company car

28. Company vans From 6 April 2005 • No benefit where van used mainly for business travel and any private use is insignificant i.e. • Home to work • Taking rubbish to tip once/twice a year • Calling at dentist on way home from work • Make slight detour to newsagent on way to work

29. Company vans • New rules from 6 April 2007 • Benefit increase from £500 to £3,000 • No reduction in charge if van over 4 years old • If fuel provided for private mileage, additional charge of £500 NB Vans can include a double cab pick-up provided it has a payload of 1 tonne (1,000kg) or more.

30. Cheap loans • Low interest rate and free loans chargeable • EXCEPT: • Interest free travel season ticket loan is exempt • Loans less than £5,000 exempt • Director’s overdrawn current account is treated as a loan • Charge to tax on difference between interest rate paid and official rate – currently 6.25%

31. Pecuniary liability • Personal liability of the employee met by the employer e.g. employer pays employee’s gym membership bill • Benefit is value of the liability • Entered on form P11D for tax purposes and included in gross pay for NIC purposes

32. Pecuniary liability Alternative: • Employer forms the contract with the provider • No-longer personal liability of the employee • Benefit is no longer put through the payroll • Entered on P11D • Class 1A NICs not class 1 NICs • Only employer pays class 1A NICs not employee

33. Assets made available • Gift of an asset by employer to employee is a taxable benefit • Benefit = market value at the time it is transferred

34. Assets made available • If company retains ownership of asset but it is made available to employee, the employee is taxed. • Benefit = 20% x market value at the time asset first provided • Unless charged under specific rule e.g. car • No charge on computers provided before 5 April 2006

35. Assets made available Computers • Pre 6 April 2006 £2,500 computer equipment loaned free of tax • Computers provided after 6 April 2006 may incur a tax charge but not always • No tax will arise when computer equipment is provided for business purposes where private use is not significant • Not significant: The employer’s policy about private use is clearly stated to employees (within contract or expense policy) and employer makes a commercial decision not to recover the costs of private use • Employers are not expected to keep detailed records of private use

36. Computers – significant private use? Example 1 • Sales manager provided with computer at home by employer • Spends 5 minutes each morning downloading workload for day • Used for 1 hour a day for private purpose • Sole purpose for provision of computer is business • Private use secondary even though more time spent • Exemption applies

37. Computers – significant private use? Example 2 • Employee of financial advisory firm chooses to work at home every Friday. • Employer provides laptop for use on that day • Business use on Friday is same time as private use rest of week • Laptop essential provision to working at home on Friday thus primary purpose is business and private use is secondary • Exemption applies even though choice to work from home

38. Non taxable benefits • Subsidised canteen – must be available to all employees • Mobile ‘phone • Long service awards up to £50 per year of service • Suggestion awards and encouragement award • Some childcare facilities and payments • Annual staff parties – up to £150 per person

39. Non taxable benefits • Trivial benefits – e.g. small seasonal gifts • Up to £2,500 of IT equipment at home, but provided prior to 6/4/06 • Re-training courses • Sports facilities – must be available to all employees • Home working allowance • Relocation • Welfare counselling

40. PAYE settlement agreement • Annual voluntary settlement by employer • Employer settles tax and NICs payable by employees on items covered by an agreement • Items will be minor, one off or difficult to divide between employees • No need to report on P11D or on employee’s tax return

41. Expenses

42. Expenses • Benefits code ensures expense payments made to employee by reason of employment charged as remuneration • Includes: • Payments related to specific expenses • Round sum allowances • Reimbursements of expenses incurred • Expenses paid by credit card in employer’s name

43. Expenses A tax deduction can be claimed against these expenses where: • You are obliged to incur and pay as holder of employment AND • Incurred wholly, exclusively and necessarily in the performance of the duties of the employment

44. Expenses A tax deduction can be claimed for: • Professional membership • Annual subscriptions • Business entertainment • Travel and subsistence • Use home telephone

45. Annual subscriptions Allowable where: • In HMRC’s list of approved professional bodies- • This list can be found on www.hmrc.gov.uk • Employee pays out of their own emoluments • The activities of the body are directly relevant to their employment

46. Business entertaining • Allowable where genuine business reason to entertain customers, suppliers or other business connections in course of duties • No restriction for the cost of employee’s own food and drink • Must keep record of who and why • Must be paid by employer specifically for business entertainment and not as part of general round sum allowance

47. Travel Allowable if: • Necessarily incurred travelling in the performance of the duties of employment • Not ordinary commuting • Not private travel

48. Travel Can claim: • Mileage allowance • Cost public transport • Vehicle hire • Toll charges • Car parking • Accommodation • Meals

49. Personal incidental expenses On business trip spend money on e.g. laundry, newspapers and telephone calls • No travel expenses in relation to these • Can claim relief for personal expenses incurred and reimbursed by employer • Maximum relief: • £5 every night away on business in UK • £10 every night away on business outside UK • These amounts can be averaged over period • E.g. In UK can pay £2 night 1 and £8 night 2

50. Homeworking expenses • Employers can provide necessary equipment to work at home free of tax and NICs • Includes computers, internet access and office furniture • Employer can also make tax exempt payments to cover additional household expenses • Where employer doesn’t pay, in limited circumstance, a tax deduction can be claimed to cover additional household expenses