Today’s business accountant wears two hats – ‘bean counter’ and ‘business advisor’. The new breed of accountant can deliver good all-round advice on a wide range of business issues Business start-ups without an accountant in the team from the word go are courting disaster. While there may be few beans to count in those early […]
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While most employee perks or “benefits in kind” are taxable, there are still a few which enjoy favoured status, to the advantage of employers and employees. This article sets out some of the key benefits and reimbursements which are... beneficial!
There is a well-established regime for taxing non-monetary “perks” for employees, such as company cars. They are generally reported on a Form P11D for each employee, so that he or she will pay income tax on its deemed value. These “benefits in kind” also cost the employer, who is normally obliged to pay Class 1A National Insurance contributions (NICs) at 13.8%. But note that in most cases, the employee escapes employee NICs.
Why sacrifice your salary?
While it could be argued that there is little point in an employee giving up his or her salary in return for ordinary taxable benefits in kind, there are one or two benefits which enjoy favoured status – so are not taxable. In these cases, replacing taxable income with a valuable benefit means less tax for the employee (so effectively more net pay), and an NIC saving for the employer.
1 Childcare vouchers
One of the most popular benefits co-ordinated with salary sacrifice, the employer can provide a basic rate taxpayer with up to £243 a month (or £55 a week) in childcare vouchers which are free of tax and NI for the employee – so the full amount can be applied directly for approved childcare. £243 a month equates to £2,916 a year, so a basic rate taxpayer can take home £2,916 in vouchers, instead of just £1,982 in cash. The employer stands to save roughly £400 in NIC as well. Both parents are eligible for the vouchers, potentially saving them over £1,800 a year.
There are conditions for a voucher scheme, and higher rate taxpayers can no longer benefit as much as their basic rate counterparts. Employer-supported childcare in the form of workplace crèches or directly contracted provision also stands to benefit, although vouchers are far more common for small businesses.
2 Employer pension contributions
Here, the employer offers to contribute to a pension scheme on behalf of the employee, instead of salary. The contribution is again free of tax, and NIC. This could be to replace existing salary, or it could be an alternative way to pay a bonus. The employer can put some or all of the NIC it saves towards the pension contribution, making it even larger than the cash alternative.
Of course, the employee cannot normally access the pension fund directly but this is less of a concern as retirement age approaches.
Care is needed when drawing up salary sacrifice agreements, in order for them to be deemed effective for tax purposes, as they are frequently scrutinised by HMRC. A key point is that the sacrifice must be agreed before the employee becomes entitled to be paid the salary or bonus payment. HMRC’s own guidance in its Employment Income manual starting at EIM42750 (www.hmrc.gov.uk/manuals/eimanual/EIM42750.htm) is genuinely helpful on this issue.
For lower-earning employees such as those who are entitled to benefits, salary sacrifices may also have adverse effects.
A mobile phone for an employee is not a taxable benefit in kind, nor does it attract NIC. Only one phone per employee enjoys this favourable treatment.
A common mistake, particularly with mobile phones, is for the contract to be between the phone company and the employee. Where an employer steps in to pay an employee’s contractual liability, there may be a tax charge and an NIC charge – on both employer and employee.
Computers and office equipment at home
HMRC permits the use of office furniture, stationery, computers, etc., away from the office without incurring a tax charge provided the motivation is for business purposes and private use is not ‘significant’.
Based on the relevant guidance, HMRC appears to have a quite relaxed attitude towards what is regarded as ‘significant’ private use in this context – fairly generous examples can be found at EIM21613 (www.hmrc.gov.uk/manuals/eimanual/EIM21613.htm).
Anyone who has previously tried to claim that there is no significant private use of a company car will be amazed at the difference in HMRC’s approach.
There is a potential trap for self-employed people when it comes to training: simply put, the costs of training for updating/maintaining existing skills are allowable, while acquiring a brand new skill is not.
This distinction is irrelevant for employees (and directors) – provided the training is intended to assist the employee in his or her employment, then the cost is not a taxable benefit for the employee.
Professional fees, subscriptions, etc.
An employer can pay for an employee’s membership of professional bodies, annual subscriptions, licence fees and trade union membership, relevant to the employee’s occupation. There are lists of approved professionals and bodies, which can be found in HMRC’s manuals at EIM32880 onwards (www.hmrc.gov.uk/manuals/eimanual/EIM32880.htm).
Scale rate expenses for travel/subsistence
Many readers will be familiar with the quite stringent rules for claiming deductions for ‘travelling and subsistence’. But HMRC is prepared to agree reasonable flat rate amounts that can be paid to employees working away from home/the business. (In fact scale rates can be agreed for expenses other than travelling and subsistence, although this is relatively uncommon).
Employers can use either the ‘advisory rates’ for meals published by HMRC at EIM05231 (www.hmrc.gov.uk/manuals/eimanual/EIM05231.htm), or agree specific rates with HMRC. This can be done for the business individually, usually by taking a sample of ‘real expenses’ and agreeing an average, or sometimes when the business is affiliated with a representative body which has agreed a national rate on behalf of its members – classic examples are those for the construction industry, and for long-distance lorry drivers.
Where the employer’s business involves employees spending long periods ‘on site’, this can be a real administrative saving. However, a scale rate payment can be made only if an employee confirms he or she has actually incurred some subsistence expense.
Personal incidental expenses
While HMRC doesn’t like to admit it, there is a long-standing allowance for employees who spend nights away from home. The allowance is intended to cover miscellaneous private expenses incurred, such as laundry or the cost of calling home. The amount is £5 per night away in the UK, and £10 per night outside the UK.
• It is a round sum that may be paid free of tax and NIC.
• No receipts are required, nor does any expense actually have to be incurred – it is explicitly for private expenditure, what the employee does with the allowance is irrelevant.
Whether you employ people, or are a director or employee yourself, the items above should offer plenty of opportunities for saving tax. I am particularly a fan of personal incidental expenses, as I enjoy telling tax inspectors that there are in fact some “round sum payments” which aren’t taxable!
None of these benefits has to be arranged as part of a salary sacrifice agreement – but it does help to sweeten the deal for the employer by reducing employers’ NICs. And where a director’s or employee’s income level is such that he is at risk of having child benefit clawed back, or of losing his personal allowance, then salary sacrifice can prove particularly useful.
There was a time when a limited company was considered the best way to hold rented properties; then the times (and the tax rates) changed and holding investment properties in a company became less attractive.
With rates of corporation tax plummeting over the last few years, and set to reach 20% for all companies in a couple of years, it may be the time to reconsider the use of a property company.
In particular, if part of your strategy involves selling properties to realise the capital gains they have made (and property prices seem at last to be rising again!), bear in mind that the company will pay only 20% on its capital gains, whereas you (if you are a higher rate taxpayer) will pay 28%.
When considering whether to use a company to hold your properties, much depends on the size of your planned portfolio, and how much cash you want to extract from it. If the plan is to reinvest the rental profits and acquire more properties, then the company will only pay 20% tax on its profits, whereas you could be paying 40% or even 45%.
If you want to draw out the profits for your own use, however, a company will not save you significant sums in tax, because when you draw out the profits as dividends (the most tax-efficient way to do this) the effective rate of tax for a 40% taxpayer is 25% on the dividend paid, and when you bear in mind that dividends are not tax deductible for the company, it works like this:
Example – The cost of drawing company profits
Derek is a 40% taxpayer. His property company makes a profit of £30,000, and he wants to pay this out as a dividend. He can only pay a maximum of £24,000, because the other £6,000 is needed to pay corporation tax. On his £24,000, he will pay income tax of £6,000, so the total tax paid by him and the company is £12,000, or 40% of the profits – exactly the same tax he would have paid if he owned the properties directly.
If Derek leaves the profits in the company to invest in more properties, however, he will have £6,000 more to invest than he would have if he owned the properties directly.
A company can decide when to pay dividends, so to some extent this enables you to control the rate of tax you pay on your dividends. If you own properties directly, you are taxed on the profit as it arises and apart from the timing of expenses like repairs, there is little you can do to change this.
Things a company cannot do
It is also worth bearing in mind that there are certain strategies that only work in the case of properties you own personally rather than through a company:
• Equity release – as a property owner, you can remortgage a property and use the cash for your own purposes, provided the mortgage is no greater than the market value of the property when it was first let. A company can, of course, remortgage its properties in the same way, but to extract the cash you will need to receive a (taxable) dividend.
• Main Residence – the exemption from CGT on your “only or main residence” does not apply if the property is owned by a company – indeed, there is likely to be a tax charge on you for the benefit of being allowed to occupy the property!
Here's a Practical Tip from Cloud Accounting NI :
Whether a company will be the best way to own your property portfolio depends very much on what your business strategy is. As with most tax matters, there is no “one size fits all” answer to the question, but it is a question every property investor should be asking themselves.
FROM beer to cheeses, smart - watches to video games, crowdfunding has snowballed over the last few years. But despite the buzz, crowdfunding has yet to hit the mainstream in Northern Ireland.
Certainly there is precedent for technology using crowdfunding to develop products from virtual-reality headsets to a low-cost robotic hand.
While crowdfunding clearly works for some consumer technologies, it remains to be seen whether crowdfunding is right for all electronics, software or med-tech enterprises.
By going to the crowd, entrepreneurs are forced to go to market early and get immediate feedback. It builds a loyal customer base of “early adopters” and creates noise around a launch. It is also far quicker than traditional investment routes, which can take months.
But, investment is not all about the money. Traditional investors – Angels and VCs – come with a wealth of experience, contacts, skills and business acumen. The crowd won’t necessarily get involved in a company, and pitfalls around sweat equity, dilution of shares and tax implications are as yet untested.
Crowdfunding is a unique route to verify demand and to open the door to other forms of business funding. It can be used to validate the product, service or market, and it can help to reassure funders that there is a potential demand for the product or service into which they are putting their money.
As start-up costs decrease and funders want to see start-ups commercialise early, crowdfunding fills an obvious gap. Most start-ups go to friends and family for seed funding. Effectively, the crowd acts as an extension of “friends” and “family”, offering enthusiasm, confidence and belief in the concept.
So, in conclusion, while the global crowd can help a Northern Irish company get off the ground, crucially, it does not offer business advice – and this is where solid network of connections to accountants such as Cloud Accounting NI who are familiar with the sector, specialist legal advisors, Patent Law specialists, Social & Visual Media experts, as well as business mentors who have ‘seen it all before’ are essential to the success of your Startup.
Please feel free to get in touch with Richard at Cloud Accounting NI if you would like to discuss more about this article. You can contact us at 07868 663 538
As the festive season approaches, ICAEW reminds employers that staff Christmas parties can be tax-free. Every year HMRC’s seasonal gift allows businesses to spend an annual tax-free amount of up to £150 per member of staff.
Done well, a Christmas party can serve as a great way for businesses to show appreciation for their employees' contributions and hard work, and encourages their commitment and ongoing efforts.
The rules apply to any annual party or similar function, which must be open to staff generally or to workers at a particular location. The tax-free limit applies for a tax year, so if the employer puts on a summer party and a Christmas dinner together costing less than £150 a head, both will be tax-free for employees. This generosity from the taxman is available to businesses of all sizes.
The range of items that can be claimed under the £150 limit goes beyond food and drink, it could also include accommodation and transport home if the employer pays for these. Furthermore, employees can even bring along their spouse or partner as long as the cost per head stays under the limit. On top of this, the employer will also get tax relief on the total costs.
However businesses should be aware that one penny over this limit and the full amount spent will become liable to income tax and National Insurance for both staff and employer alike, the amount being taxed as a benefit.
However, those bosses who are truly entering the festive spirit should remember that gifts to employees are taxable. Cash presents, such as Christmas bonuses or vouchers redeemable for cash, also have to have tax and National Insurance contributions paid through the PAYE system.
That said, those bosses who prefer to give staff a present, such as a high street gift voucher, can pick up the tax bill on behalf of their employees by setting up a PAYE Settlement Agreement with their tax office.
So enjoy the festive season and don’t let it be taxing!