Tax matters to consider over the festive season

With three weeks until Christmas, now seems like a good time to provide an update on tax rules you could encounter during the season. Hopefully this will give you some ideas on how to treat your customers and staff whilst staying on the right side of the taxman.

Christmas Parties

The cost of a staff party for employees is an allowable tax deduction for businesses. As long as the function meets the following criteria, there will be no chargeable taxable benefit for the employee:

  • It must be open to all employees, or to all at a particular location.
  • The cost per head must not exceed £150. (If more than one annual function is provided the aggregate cost per head must not exceed £150).
  • Partners/spouses of employees are included when calculating the cost per head of attendees.

If the £150 limit is exceeded staff will be taxable in full on total cost per head for them and their partner/spouse also attending

Cost is calculated as the total cost of the party or function including any transport or accommodation provided and VAT.

VAT is recoverable on staff entertaining expenditure, but this does not extend to staff partners/spouses so input VAT will need to be apportioned.

Client Entertaining

Client entertaining (i.e. hospitality of any kind) is never an allowable deduction for business tax purposes and input VAT cannot be recovered on it.

Business Gifts

Gifts to customers are allowable as a tax deduction if all three of the following criteria are met:

  • The total cost of gifts to any one individual per annum does not exceed £50
  • The gift bears a visible advert for the business
  • The gift is not food, drink, tobacco or exchangeable vouchers.

However, samples of a trader’s product are allowable even if they are food, drink or tobacco.

Gifts to Staff

HMRC have approved that an employer may provide an employee with a seasonal gift such as a turkey, an ordinary bottle of wine or a box of chocolates and this will be considered an exempt benefit.

Some employers give staff vouchers at Christmas; these are subject to tax and NI on the individual.

Christmas Bonus for staff

This will count as ordinary earnings and be subject to PAYE and NI as if it were additional salary. If you would like more information on this topic, please contact 01524 62801.

The December 2019 General Election: A tax take on the manifestos

A striking feature of the 2019 General Election is the big difference in the tax proposals of the three main parties. Our tax experts have reviewed the manifestos and summarised their thoughts on what the proposed policies could mean for you and your business.

Both the Conservatives and Labour have stated that they will make changes to entrepreneurs’ relief as it has not been effective in encouraging entrepreneurship as intended and is seen as too generous.  In view of this, thought should be given to the following:

  • If you are in the middle of a transaction where entrepreneurs’ relief is applicable it makes sense to complete this under the existing rules.
  • If there is a possibility of a sale, management buy-out, retirement or reorganisation in the near future speak to a tax advisor as more immediate tax planning advice may be beneficial.

So, what tax changes are proposed by the three main parties?

The Conservatives – business as usual, unless you are selling

From a tax perspective this is a fairly low-key manifesto with no major tax changes announced. One take-away message is the potential reform of entrepreneurs’ relief on the sale of business assets, as the Conservatives believe this is not working in its current format.

Read more

All change for the Labour Party

The Labour manifesto proposes some radical changes to the taxation of both individuals and companies.

Labour are proposing wholesale changes to capital gains tax which could transform the taxation landscape for business owners looking to exit their business.

Read more

Liberal Democrats seek reform

The Liberal Democrats’ main focus is on tackling climate change through a number of tax measures, including changes to stamp duty land tax, VAT and air passenger duty

Read more

December 2019 General Election: Our tax review of the Liberal Democrat manifesto

Liberal Democrats proposing reforms

As with Labour, the Liberal Democrats are proposing significant reforms to business taxation and to the taxation of capital gains and income through a single allowance.

The party’s main focus is on tackling climate change through a number of tax measures, including changes to stamp duty land tax, VAT and air passenger duty.

Individual Taxation

  • 1% increase to all income tax rates
  • Scrap the Marriage allowance

Capital Gains Tax

  • Align income and capital gains through a single allowance. This sees the abolition of the capital gains annual exemption and the taxation of gains at the same rates of income tax. 

Business Tax

  • Increase corporation tax to 20%.
  • Replace business rates in England with a Commercial Landowner Levy based solely on the land value of commercial sites. Payable by the landowner rather than the tenant.
  • Extend R&D tax credits against the cost of purchasing datasets and cloud computing.
  • A new ‘start-up allowance’ to help those starting a new business with their living costs in the crucial first weeks of their business

Indirect taxes

  • Reduction in the VAT rate from 20% to 5% on electric vehicles. We do not know whether this affect sales of both new and used vehicles?

Other Measures

  • End retrospective tax changes like the loan charge.
  • Review of proposed changes to IR35.
  • Allow local authorities to increase council tax by up to 500% on second homes.
  • A stamp duty land tax surcharge on overseas residents purchasing second homes in the UK.
  • Encourage employers to promote employee ownership by giving staff in listed companies with more than 250 employees a right to request shares, to be held in trust for the benefit of employees.

Click through to read our tax review of the Conservative and Labour manifestos.

December 2019 General Election: Our tax review of the Labour manifesto

A striking feature of the 2019 General Election is the big difference in the tax proposals of the main three parties.

Our tax experts have reviewed their manifestos and summarised the parties’ thoughts on how their proposed policies could affect you and your business.

Labour: All change

The Labour manifesto proposes some radical changes to the taxation of both individuals and companies. While the increase in the rates of income tax for higher earners and corporation tax have attracted significant publicity, Labour are also proposing wholesale changes to the taxation of capital gains which could transform the taxation landscape for business owners looking to exit their business.

Individual Taxation

  • Increase income tax for those earning more than £80,000 to 45% and for those earning more than £125,000 to 50%.
  • Freeze the rates of national insurance and income tax for all others,
  • Scrap Married Persons Allowance,
  • Scrap the dividend allowance. Dividend and investment income to be taxed at the same rate as other income i.e. 20%, 40%, 45% or 50% depending on income levels. It is not expected that national insurance will be payable on dividends but watch this space

Capital Gains Tax

  • Scrap entrepreneur’s relief and consult on a different option
  • Scrap the separate capital gains tax annual exemption. Have a single personal allowance to set against income and gains. Any gain on the sale of a capital asset would then be taxed as the top portion of income and taxed at 20%, 40%, 45% or 50% depending on income levels.
  • There will be a de minimis of £1,000 for gains.
  • Introduce a ‘rate of return’ allowance against gains. This is likely to be some form of indexation to take account of inflation.

Business Tax

  • Implement a staged increase in the main rate of corporation tax from 19% to 26%.
  • For companies with profits below £300,000 there will be a small profits rate of 21%.
  • Review of all corporate tax reliefs within six months.
  • Abolish Patent box relief.
  • Abolish R&D Tax credits for large companies.
  • Review the option of a land value tax on commercial landlords as an alternative to business rates.

Inheritance Tax

Labour have stated the they will reverse George Osborne’s Inheritance Tax cut. It is not clear what this refers to but it could see the removal of the residential nil rate band and the transferable nil rate band between married couples. This would reinstate an individual’s IHT nil rate band at £325,000 with no access to other nil rate bands upon death.

Indirect Taxes

  • The imposition of VAT on private school fees
  • A promise not to raise the VAT burden for the ‘lowest paid 95%’. If we leave the EU, the UK Treasury would be free to reintroduce higher rates of indirect tax above 20% on luxury items, which were last seen before VAT was introduced in 1973.

Other Measures

  • An annual levy on second homes that are used as a holiday home equivalent to 200% of the current council tax band.
  • Require large companies with more than 250 employees to establish inclusive ownership funds to hold 10% of their share capital, with dividend payments distributed equally among all employees, capped at £500 a year.
  • Tackle tax evasion.
  • End to retrospective tax changes like the loan charge.

Click through to read our tax review of the Conservative and Liberal Democrat manifestos.

December 2019 General Election: Our tax review of the Conservative manifesto

A striking feature of the 2019 General Election is the big difference in the tax proposals of the main three parties.

Our tax experts have reviewed their manifestos and summarised the parties’ thoughts on how their proposed policies could affect you and your business.

Conservatives: Business as usual, unless you are selling

From a tax perspective this is a fairly low-key manifesto with no major tax changes announced. The take away message is the potential reform of capital gains tax entrepreneurs’ relief on the sale of business assets as it is recognised this is not working in its current format.

While there is no announcement as to what the reforms may be, some potential changes could be:

  • Increasing the qualifying period of ownership to greater than two years;
  • Decreasing the current lifetime allowance from £10 million per individual;
  • Increasing the 5% ownership threshold for shares;
  • Restricting the assets which qualify for the relief.

Individual Taxation

  • No increase in income tax or national insurance rates
  • National Insurance threshold raised to £9,500 with effect from 6 April 2020 with an ambition to raise it to £12,500.

Thought –Will the personal allowance be frozen to allow the national insurance threshold to catch up?

Business Taxation

  • Reduction of business rates. The first step being to reduce business rates for retail businesses, grassroots music venues, small cinemas and pubs.
  • Increase the Employment Allowance from £3,000 to £4,000 in 2020/21.
  • Increase the R&D Tax credit to 13% from 12% (large companies only). The SME R&D scheme appears to remain untouched.
  • Review the definition of R&D to include cloud computing and data.
  • Extend SEIS and EIS into the next parliament.
  • Corporation tax flat rate of 19% to stay.  The scheduled reduction to 17% from 1 April 2020 scrapped.
  • Increase the rate of capital allowances on structural buildings from 2% to 3%

Indirect taxes

  • No increase to VAT rates in the lifetime of the parliament. This is not as reassuring as it first appears and still provides flexibility in the event of a shock to the economy post Brexit. In addition to the standard rate of VAT, there is a reduced rate of 5% and zero-rates on specific items. The Treasury has a long held desire to ‘modernise’ VAT and leaving the EU provides the freedom to achieve that aim.
  • Plastic packaging tax where the recycled content is below 30%
  • A headline grabber, the much-anticipated removal of VAT on sanitary products.

Other Measures

  • Tackle tax evasion,
  • Digital Services Tax to ensure major international companies pay their fair share.
  • Increased stamp duty surcharge on non-UK resident buyers.

Click through to read our tax review of the Labour and Liberal Democrat manifestos.

The tax impact of greener motoring

As motorists, our growing demand for reduced costs and greater efficiency coupled with increased choice and performance, has resulted in a massive increase of plug in and hybrid car sales.

There has been a huge surge in demand for ultra-low emission vehicles in the UK, with sales of electric and hybrid cars increasing.  BEVS (Pure Battery powered Electric Vehicles) have risen by 158% in the year to July 2019 and by the end of the year at least 25 different electric cars will be on sale.  There have also been driverless car trials and it is thought that if driverless cars do become an everyday reality, benefits would include improved road safety, reduced congestion, less emissions, as well as saving motorists up to 6 working weeks a year in driving time.

Going electric – the tax breaks

The government does of course encourage the use of electric and hybrid cars through the use of tax breaks. Regrettably, the value of grants has declined and plug-in hybrids have not received any financial support since 2018.

One area where the government could make a significant contribution to more environmentally friendly cars is through VAT, particularly when the UK is able to set its own rates post-Brexit. Reducing the rate of VAT on ULEVs from 20% to 5% would help but in the real world it is highly unlikely that the Treasury will agree to such a reduction.  But what concessions are actually allowed and what are some of the common misconceptions?

Common misconceptions

There are some commonly held misconceptions about the VAT breaks for businesses buying electric and hybrid cars. There have been numerous cases of car dealers telling customers that businesses can recover the VAT on the purchase of an electric car.

The reality

The first point is that HMRC has no special VAT breaks for electric cars and hybrids. The VAT can only be recovered on the purchase of the car if there’s no private use at all, and that includes home-to-work journeys. So you can only reclaim the VAT on the purchase of the car if it’s for 100% business use only.  An example of this would be a taxi.  If your business leases the car, then you can recover 50% of the VAT on the hire charges and all the VAT on any additional charges such as maintenance or roadside assistance.

Scale charges

The main tax break is on the motoring scale charge. The rules are exactly the same for electric and hybrid cars as for those powered by fossil fuels, however the savings come from the fact that the scale charge is based on CO2 emissions and as electric cars produce no CO2 they don’t pay the scale charge, although the VAT you can reclaim on electricity used to charge the cars will be minimal. On the plus side hybrids will pay a scale charge, but because of the reduced CO2 emissions the charge will be lower than for conventional cars.

HMRC gives no special VAT breaks to electric or hybrid cars but due to their low emissions there are savings on the scale charge excise duty and other direct taxes.

The cleaner the car, the bigger the savings.

For more information on this subject please contact Jonathan Main

HMRC update on digital links

HMRC had announced that businesses with complex or legacy IT systems can apply for additional time beyond the current one year soft landing period to put the required digital links in place, subject to meeting certain qualifying criteria.

For VAT periods starting on or after 1 April 2020 (or 1 October 2020 for deferred businesses) a business’ systems must use digital links for any transfer or exchange of data between software.

Businesses with complex or legacy IT systems may require a longer period to put digital links in place across their functional compatible software. These businesses can apply for additional time to put the required digital links in place (subject to qualifying criteria).

If you acquire another business it may take additional time to digitally link different software applications or packages to meet MTD legal obligations. HMRC will consider specific direction applications outside of the soft landing period(s) where more time is needed to comply with digital link requirements following the purchase of another business.

The cost alone is not sufficient reason to issue a specific direction. Business are expected to make every effort to comply with the digital links requirements by the end of the soft landing period.

For more information about this subject please contact Victoria Dadswell

Six good reasons to file your tax return early this year

Aside from avoiding the panic and stress of trying to find all your tax return information to send to your accountant just before the 31 January deadline there are several other good reasons to get your accounts organised earlier in the year.

1. Get a repayment sooner

If you have overpaid tax during the year you will be entitled to a refund from HMRC. If you know you have overpaid, it is advisable to complete your tax return as soon as possible, so that you can claim this refund. Refunds can be held on HMRC’s account as a credit but the interest received is minimal and it is likely that you will receive a better interest rate with your own bank.

2. Give yourself longer to plan your payments

Providing your accountant with your tax documents as soon as possible after the tax year end (5 April), allows them to calculate your tax liability and advise you of any tax payable in January. Balancing payments are due by 31 January following the end of the tax year, therefore the sooner your liability is calculated, the longer you have to save or plan for these payments. Those who leave their tax returns until January have little time to find the funds for their tax bills. Furthermore, late payments mean that penalties and interest payments may become due.

3. Working Tax Credits

For those who are in receipt of tax credit payments, claims need to be renewed annually by 31 July. Part of this process involves informing the Tax Credit office of your income for the previous tax year. By providing your tax return information early, your tax return can be completed in good time to show your income for the previous tax year, which will avoid the need to submit temporary estimates and the possibility of being over or underpaid.

4. Payments on account – reduce the chance of over or under payments

For those who are due to make payments on account towards the following tax year, by completing and submitting your tax return to HMRC before 31 July, your tax adviser will able to assess whether these payments still need to be made. If your income for the year is lower than expected, you may be able to make a claim to reduce these payments on account. This could avoid the potential overpayment of tax, as well as a waiting period for HMRC to issue this amount as a repayment to you.

5. Tax planning opportunities

An early calculation of your tax position gives you longer to take advantage of tax planning opportunities for the following year such as

  • Making gift aid or pension contributions to ensure you receive your full personal allowance
  • Changing ownership of shares or partnership profits
  • Transferring assets to a lower earning spouse
6. Tax code

If you get your information in early, it can also have an effect on the way the tax is collected. You can choose to pay your self-assessment bill through your PAYE tax code as long you meet certain criteria set by HMRC.  To take advantage the following must apply:

  • You owe less than £3,000 on your tax bill
  • You already pay tax through PAYE, for example you’re an employee or you get a company pension
  • You submitted your paper tax return by 31 October or your online tax return online by 30 December
Use a digital system to get organised

Do you struggle to keep a note of your self-employment and rental income and expenses each year for your tax return? QuickBooks is an accounting software which connects to your bank and allows you to enter your income and expenses as they are received or incurred. This keeps you organised throughout the year so you do not have the stress of collating the information in January.  Your accountant can have access to the information online too which speeds up the sharing of information.

Regardless of your choice in software the main thing is to keep records in an organised manner to ensure all allowable expenses are claimed. Remember for every £1 of expenses you can potentially save £0.29 or £0.42 depending on what rate of income tax and National Insurance you pay. 

Make a new ‘financial’ year resolution

In conclusion, the earlier your accountant receives your tax information the earlier you can have an up to date position regarding your tax affairs. It will give you time to plan, reduce or increase your savings for your tax liability and avoid the stress of a frantic search for information in January.

If you would like any more information on this subject please contact Lisa Pennington or call 01253 404404

Company Owned Electric Vehicles

The media has recently been awash with climate change activists, such as Greta Thunberg and the extinction rebellion group, trying to get the message across to the general public that the planet possibly only has a short time for substantial changes to be made to our everyday lives before there is irreversible climate change.  As part of the governments green initiatives, changes to encourage the use of electric vehicles have been set out in the draft legislation to provide a range of tax cuts that we will discuss in this blog.

Company Car Taxation

The draft finance bill 2020 sets out the changes to the way in which CO2 emissions will be based on for all new cars from April 2020.  The current system using the New European Driving Cycle (NEDC) will be replaced by the Worldwide Harmonised Light Vehicle Test Procedure (WLTP), where most appropriate percentages are reduced by 2 percentage points in 2020/2021 compared to the current appropriate percentages for cars.

The NDEC procedure will still apply for all cars registered on or after 1 October 1999 but before 6 April 2020.

Due to the 2-percentage points reduction, zero emission vehicles will see their appropriate percentage reduced from 2% to 0% for 2020/2021, then increasing by 1% in each of the following 2 years.

Therefore, from 6 April 2020 for 1 year, a zero-emission vehicle made available to an employee will be completely tax free.  At the time of writing this was in the draft finance bill 2020 legislation and had not passed into law.

Related Company Car benefits

HMRC do not consider electricity to be a fuel, therefore the petrol/diesel advisory fuel rates cannot be used to reimburse employees for business journeys, however HMRC introduced a new rate from 1 September 2018 of £0.04p per mile for fully electric company cars.

Other tax-free benefits of having an electric company car include:

  • The cost of charging an electric vehicle at work
  • The cost of installing a vehicle charging point at the employee’s home
  • Employer pays for charge card of £100 per year to allow individuals unlimited access to local authority vehicle charging point. 

Employer’s National Insurance

From 6 April 2020, as the benefit in kind charge on an electric vehicle will be 0%, the class 1A benefit in kind, which is the cost to the employer of providing benefits in kind to employees, will also be nil.

Capital Allowances

Most cars purchased by companies will be due tax relief on a writing down basis at either the main rate (18%) or the special rate (8%).  However, for new and unused cars with CO2 emissions of 50 g/km or less, there is a special enhanced capital allowance of 100% available.  With a main rate writing down allowance, after 8 years the company will still only have relieved 80% of the cost of the vehicle, but with the enhanced capital allowance regime available to low emission cars, the full cost can be relieved in year one.

For more information on this subject please contact Alex Gardner or a member of our tax team on 01772 821021

Permanent Establishment

Trading internationally can be a new and exciting venture for a company but embarking on overseas trading needs to be considered carefully to ensure the business does not fall foul of local company and tax requirements.

One area that creates the most issues is identifying whether a permanent establishment exists in the overseas country and what this means for a company’s compliance obligations.

If a permanent establishment exists in an overseas country, then the UK company becomes subject to local taxes and compliance requirements under that country’s legislation. Determining whether a permanent establishment does exist can be tricky.

Simply having customers overseas does not in itself create a permanent establishment, however, how these customers were acquired and how they are serviced may well do. In general, it is quite simple to recognise that a permanent establishment exists, specifically if a company operates from an office or has a warehouse in another country. However even if there is no tangible presence overseas a company may, inadvertently, create a permanent establishment by engaging an agent to negotiate contracts for a company or sending an employee to that country to act as a salesperson. Things become further complicated when a company trades in the virtual marketplace.

It would be easy to assume that a permanent establishment didn’t exist in relation to the provision of virtual services because the UK company has no actual physical presence overseas. This is not the case however, whether a virtual permanent establishment exists is largely dependent on the length of time a service is provided to a client in an overseas country.

So, once it has been concluded that an overseas permanent establishment does exist a company then needs to consider the following:

  1. The compliance regulations in the overseas country, this includes financial reporting as well as taxes.
  2. The need for foreign advisors to be engaged to ensure that the company is compliant. Clearly this creates an additional cost which will need to be factored into the company’s accounts.
  3. How the profits derived from overseas activities are going to accounted for and whether any UK costs are attributed to these profits. This creates the need to consider transfer pricing regulations which can add further compliance burdens.

A business should not shy away from trading internationally but should make sure the potential implications are given full consideration to ensure the transaction is a success.

If you require more information on this subject, speak to one of our tax team or call 01772 821021