Repaying the value of benefits

You may have borrowed assets or money from your company with the intention of repaying or making good the cost to the company in the future. If you make this repayment by 6 July following the end of the tax year in which you received use of the asset or money, no benefit-in-kind tax charge will apply for that tax year.

The taxable benefits which can be effectively cancelled by this repayment mechanism are: non-cash vouchers, cars, vans, fuel for cars or vans, accommodation, credit tokens, and all benefits treated as earnings. It doesn’t apply to interest payable on loans.

Where these benefits are ‘payrolled’ monthly, to avoid a benefit charge, the reimbursement must be made by 5 April, or 1 June in the case of reimbursement for private fuel.

Where a loan is advanced to an employee or director, there is no tax charge for the individual (but there may be for the company) if the amount outstanding at any point in the tax year doesn’t exceed £10,000. If a greater amount is borrowed, the tax charge can be avoided if the employee is required to pay interest on the loan at a rate equal to or greater than the official rate (currently 2.5%).

This interest must actually be paid to the company, not just accrued in the accounts. It makes sense to pay any interest due on loans before 6 July 2018, so an accurate form P11D can be completed and submitted by that date.


Advisory fuel rates

These are mileage rates which employers can use to work out how much to reimburse employees who use company cars for business journeys, but who have paid for the fuel used on those journeys out of their own pocket.

The advisory fuel rates are reviewed by HMRC every quarter, with the new rates taking effect from the first of June, September, December and March. In view of the recent increases in the price of road fuel you would expect all the advisory fuel rates to rise, but they haven’t. The pence per mile rates for the current quarter are:

Engine size Petrol LPG
1400cc or less 11p 7p
1401cc to 2000cc 14p 9p
Over 2000cc 22p 14p
Engine size Diesel
1600cc or less 10p
1601cc to 2000cc 11p
Over 2000cc 13p

HMRC can’t require you to use these advisory rates. If the fuel costs in your area are much higher than the UK average, or your company vehicles have low fuel efficiency, your business can use its own mileage rates based on the actual fuel costs of your company vehicles.

When an employee uses their own vehicle for a business journey, you can reimburse them tax free using mileage rates of 45p per mile for any size of car for the first 10,000 business miles driven in a year, and 25p per mile for subsequent journeys. These mileage rates for personally owned cars haven’t changed since 2011.


Repercussions of tax schemes

Convoluted tax avoidance methods are known as ‘tax schemes’. Back in 2000, a popular tax scheme was to receive pay from your job as a ‘loan’, on which there was no tax, and no National Insurance. The individuals who took part in these schemes were told they were 100% legal and the loan would be written-off on their death, so they would never have to pay tax on the loan. In reality, the money provided wasn’t a loan if it was never going to be repaid; it was a disguised form of remuneration.

In December 2009 HMRC made it clear that disguised remuneration schemes would not be tolerated. Anyone who took part in such a scheme after that point was taking a huge risk, but the promotors of such schemes often didn’t warn their customers.

Now HMRC has got tough and a stiff penalty is due. If you received a disguised remuneration loan at any point in the past, and it is still outstanding on 5 April 2019, it will be deemed to be your taxable earnings received on that date. This special loan charge will apply on top of the tax and NIC actually due on the loan, so in effect a double hit of tax.

There is a partial solution, but only if you act fast. If you engage with HMRC before 30 September 2018 you can avoid the special loan charge in 2019, but you will have to pay tax according to the rates in force when you received the loan. However, we can help you negotiate a repayment schedule so the payment can be spread over time.


Trading and property allowances

Since 6 April 2017 you haven’t had to report income from trading or rents (property income) if the total amount received in each category is less than £1,000 per tax year, but there are conditions.

The property income allowance can’t apply to rent from letting a room in your own home to a lodger. This source of rent falls under a different allowance called rent-a-room relief, which covers up to £7,500 of rent per year. The property income allowance is designed to cover letting of non-residential areas, such as your driveway.

If your property or trading income is more than £1,000 you can elect to be taxed on the excess above £1,000, ignoring any expenses. Alternatively, you may elect for the allowance not to apply and deduct all allowable expenses, so you are taxed on the net profit or loss. This is the better option if you have lots of expenses and have made a loss.

Neither allowance can be set against income from a private company in which you or your close family holds shares, or from a partnership in which you are a partner or are connected with one of the partners.

Preparing for digital VAT

Tax is going digital, just as sure as Brexit is happening. The first business transactions to be affected by this Making Tax Digital (MTD) revolution will be those relating to VAT.

If your business is VAT registered, and your turnover is £85,000 or more per year, you will be required to submit your VAT returns using MTD-compliant software for quarters that start on and after 1 April 2019. You will also be required to keep the records from which the VAT return is derived in a digital form. This means recording digitally the date, the VAT rate, the VAT paid, and the value of each transaction. It won’t be necessary to keep a digital copy of each sale or purchase invoice.

MTD-compliant software must be capable of transferring data to and from HMRC via an application program interface (API). A spreadsheet on its own can’t qualify as MTD-compliant, but if it is used with an API add-on (aka ‘bridging software’), it may qualify as MTD-compliant.

Your first step in preparing for digital VAT should be to contact your accounting software provider and ask when they will issue an upgrade which is MTD-compliant. HMRC won’t provide free software for businesses to comply with the MTD regime.

If you currently keep all your VAT records on spreadsheets and/or paper, we need to talk about how you can digitise your recording systems over the next nine months. We can continue to submit your VAT return on your behalf, but we will need to receive the VAT information from you in a digital fashion, such as transferred on a memory stick, or downloaded from a cloud-based accounting package.

If you are VAT registered but your turnover is below £85,000, you will be able to carry on submitting VAT returns as you do now, either using your accounting software or by typing the sales and purchase figures into the online VAT return form.

It will be possible to claim an exemption from the new digital rules for VAT based on the business owner’s disability, the business having no access to the internet, or on certain religious grounds.


VAT on rewards for crowdfunding directors

It is always tough to raise funds to develop new inventions into viable products, but crowdfunding websites can help. The prospective investors are asked to commit to a set level of funding, and in return each is promised a package of rewards, tailored according to the value of their pledge.

When you use such a crowdfunding arrangement, you need to be clear about the VAT implications of those reward packages, to ensure that VAT is accounted for at the right time and on the right amount.

HMRC treat the promise of rewards as a voucher for VAT purposes, or sometimes as a pre-payment for goods or services. If the reward comprises just one product, the VAT treatment is simple; the VAT is due when the investor hands over his money.

Complications arise when the reward package includes a number of items or services which carry different VAT rates. The package is treated as a multipurpose voucher and the VAT is due when the investor receives his rewards.

The difference in the VAT point (i.e. the date on which the transaction takes place for VAT purposes) between a single product voucher and a multipurpose voucher can be a considerable time period. If your business has not already registered for VAT when it starts to receive money through crowdfunding, the package of rewards can determine when you must register for VAT.

Our VAT experts are happy to advise on all the tax aspects of crowdfunding, so don’t leave tax as an afterthought.


Avoid VAT penalties

As a VAT registered business, there are just two things you need to do to avoid a VAT penalty: pay your VAT on time and submit your VAT return on time. If you fail on either task twice within 12 months, you are put on the VAT equivalent of the naughty step.

Businesses with a turnover of £150,000 or more do not get that one-time free pass, as they are put on to the VAT naughty step (aka: VAT surcharge period) after just one late payment, or late filing of a return.

The surcharge period is a serious one-way trap, as once you are in you can’t get out until you demonstrate a full 12 months of good behaviour. Any late payment or late filing within those 12 months means the surcharge period is extended for another 12 months.

What’s more, the penalties start racking up. The first missed deadline within the surcharge period generates a penalty of 2% of the late VAT, the second missed deadline is a 5% penalty, then 10%, and finally 15% of the late paid VAT (ouch!).

Remember that even one day beyond the deadline means you are late. It’s easy to overlook a small penalty charge if your annual turnover is under £150,000, as you won’t receive a penalty bill for less than £400. But, the surcharge period will be extended and the penalties will continue to ratchet up should you default again.

The key thing to remember is: pay your VAT on time, every time.


Work place pension contributions

If your business has a workplace pension which complies with the auto-enrolment rules, that scheme must receive a minimum level of contributions on behalf of each employee who is enrolled in the scheme. This level of contributions is expressed as a percentage of the employee’s pensionable pay.

The rules of the particular scheme will define what pensionable pay is for each employee, as this can vary from scheme to scheme. For example, pensionable may be the amount paid between the NIC lower earnings and upper earnings limits: £6,032 to £46,350 for 2018/19.

The minimum total pension contribution from employees and employers for 2017/18 and earlier years was 2% of pensionable pay, with the employer contributing at least 1%. The total minimum contribution for 2018/19 jumps to 5%, and the employer must contribute at least 2%, with the remainder contributed by the employee.

There is no minimum contribution level set for employees, as many workplace pension schemes operate through salary sacrifice arrangements, so the employee’s pay is reduced to compensate for the pension contributions made by the employer. From 6 April 2018, where the employer pays the minimum amount, the employee’s contribution will triple from 1% to 3% of pensionable pay.

Such an increase in pension contributions will, in many cases, cancel out the tax savings from the rise in the individual’s personal allowance and NIC lower earnings threshold.

You may wish to review the amount your business is contributing to staff pensions, to ensure that your employees are not worse off in 2018/19. Remember, as an employer you are not permitted to encourage an employee to opt out of the workplace pension scheme. You must be very careful how you communicate the changes in pension contributions to your employees.


National minimum wage and directors

The National Minimum Wage (NMW) rates increased for pay periods beginning on and after 1 April 2018. The rate for those aged 25 and over (also called the living wage) rose from £7.50 to £7.83 per hour, an increase of 4.4%.

The three other NMW rates vary from £4.20 to £7.38 per hour, according to the employee’s age. Individuals who are enrolled on an approved apprenticeship may be paid a reduced rate of £3.70 per hour for the first year of their apprenticeship, or while they are under the age of 19. Interns generally must be paid the NMW, but what about directors?

If the director does not have a contract of employment with the company and is effectively only paid for his role as an office-holder, the NMW does not apply. However, where the director does have an employment contract with the company, he will be treated as an employee for NMW purposes, and the NMW should be paid for all the hours he works.

Where the company has a number of employees, good employment practice is to require all employees and directors to sign a declaration to say they understand their rights and responsibilities as set out in the company’s employment handbook. Such a declaration will amount to an employment contract where the handbook sets out all the employment conditions. Thus, directors who sign the declaration will have signed an employment contract with the company.

If the company comes under scrutiny for NMW issues, HMRC will want to examine the pay calculations for everyone on the payroll, including the directors.

The penalty for failing to pay the correct amount of NMW can be up to £20,000 per employee. If the company is fined for NMW violations, and the total underpayment is £100 for the whole payroll, it will also be included on the ‘named and shamed’ list of employers.


Loans and interest

Directors and employees sometimes borrow from their company, intending to pay the money back, but the actual repayment gets delayed. This can lead to a benefit in kind tax charge on the individual, and a class 1A NIC charge for the company.

These charges can be avoided if the amount borrowed at any point in the tax year doesn’t exceed £10,000. If a greater amount is borrowed, there will be no tax charge if the individual has agreed to pay interest on the loan at a rate equal to or greater than the Official Rate (2.5%).

This interest must actually be paid to the company, not just accrued. Although there is no deadline for paying the interest, it’s best to pay before 6 July following the end of the tax year, as that is when the form P11D must report any interest-free loans.

Directors and their family members can trigger an additional tax charge for the company if they don’t repay their loans promptly. That tax charge is calculated as 32.5% of the loan balance which is outstanding more than nine months after the end of the accounting year in which the loan was advanced. There is no minimum threshold for this tax charge.