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VAT implications of paying for staff gym memberships and subsidised healthy meals

Q. My client is a new social media enterprise company and the directors are keen to encourage a healthy lifestyle amongst staff.

To capitalise on all the good intentions and resolutions of January they are to pay for a corporate membership to a local gym and are offering subsidised healthy meals and snacks in their office café. Please could you advise of the VAT implications of these initiatives.

A. Employee rewards and perks are dealt with in HMRC’s manual VAT Input Tax (VIT43700). Here it explains that services provided to staff can be a legitimate business expense, if they are provided mainly to reward or motivate staff.

If so, the VAT incurred is all input tax. No apportionment under s.24(5) of the VAT Act 1994 (VATA1994) is necessary. In some cases, a charge to output tax for private use may have to be made under the Supply of Services Order.

However, HMRC said: ‘Where facilities are provided to all employees strictly for the purposes of the business it is generally not our policy to apply such a charge.

‘But perks provided to specific individuals within a business should generally be subject to an output tax charge to reflect private use.’

Specific guidance on recreational facilities can be found at VIT43950 and here it is confirmed that where sports and recreational facilities are available to all employees, the VAT incurred on the cost of providing the facilities is input tax.

Again it is not HMRC’s policy to apply the Supply of Services Order. If any charge were to be made, then output VAT would be due on that amount.

With regard to staff meals, HMRC’s manual VAT Food (VFOOD5060); paragraph 10 of Schedule 6 of the VAT Act 1994 specifically refers to the provision of food and drink in the course of catering by an employer to an employee.

Where such supplies are made, the value of the supply is the monetary consideration alone, if any, paid by the employee. So where an employee pays for a meal, snack or drink, the supply is standard-rated and the value of the supply is the amount paid.

Where an employee is not required to pay for a meal, snack or drink the value of the supply is nil and no VAT is due.

Additionally, for completeness, following the judgment of the Court of Justice of the European Union (CJEU) in Astra Zeneca (Case C-40/09), where employees pay for benefits under a salary sacrifice arrangement, employers must account for VAT on the value of the supplies unless they are exempt or zero-rated.

Subject to the normal rules, the employer can continue to recover the VAT incurred on related purchases. Equally where deductions are made from salary for the benefits, the value of the supply is the amount deducted.

BUYING PROPERTY THROUGH A LIMITED COMPANY: THE PROS AND CONS

It's become quite a trend (and for very good reason). But is it right for you?

The biggest trend that's taken place during my time in property is the huge and sudden shift to people buying properties within companies.

Up until 2015, it was very much a minority choice: there was no compelling need for many people, and mortgages for companies were much less competitive.

But then the changes to the treatment of mortgage interested introduced in the summer 2015 budget happened – which made the company route far more appealing. According to brokers, up to 80% of new mortgage applications are now for limited companies.

It still won't be for everyone, but it's now something that every investor should consider. Getting the ownership structure right could make a huge different to the amount of tax you pay over your lifetime (and beyond) – so let's take a look at the pros and cons…

ARE YOU A TRADER OR AN INVESTOR?

The first important distinction to draw when making this decision is whether you’re a property trader or investor.

If you buy a property to make value-adding improvements and sell on for a profit, you’re a trader. In this case you’re likely to be best off buying as a limited company.

Why? Because when trading properties as a limited company you will pay corporation tax on your profits – you can find the current rate here. If you’d bought a property to “flip” as an individual, your gains would be taxed as income – which, if you're taxed at the higher rate, will be a whole lot more (current rates here).

(As an individual you might be able to get the profit treated as a capital gain rather than income if you could prove that you intended to rent the property out, and maybe did for a short time before selling it, but let’s park that one for now.)

If you buy a property to collect the rent and watch its value creep up over the years, you’re an investor. This is where we get into “it depends” territory: most investors have historically operated as sole traders, but many will now benefit from using a limited company.

WHY MIGHT INVESTORS WANT TO USE A LIMITED COMPANY?

From a purely financial perspective, there are three obvious reasons why you might want to hold property as a company rather than yourself.

1. TAX TREATMENT OF PROFITS

If you own a property in your own name, the profits you make from renting it out will be added to your other earnings (such as from your job) and taxed as income tax. But if instead you hold it within a company, the profits will be liable for Corporation Tax instead.

The rate of Corporation Tax tends to be around half of the higher rate of income tax – which is an enormous saving.

You will still be taxed on the dividends if you take profits out of the company (which we'll come to later), but there’s flexibility: you can time your dividend payouts for maximum tax-efficiency, or distribute them to family members who are only basic rate taxpayers – or just leave the profits rolling up within the company to buy the next property.

2. TAX TREATMENT OF MORTGAGE INTEREST

As of April 2020, mortgage interest will no longer be an allowable expense for individual property investors (they'll claim a basic rate allowance instead) – but it will continue to be allowable for companies that hold property.

(The change is being phased in from April 2017.)

The post I've linked to goes into how it all works, but the upshot is that if you pay tax at the higher rate and you use mortgages to buy property, your tax bill will be higher if you own property in your own name rather than in a company.

3. OPPORTUNITIES TO MITIGATE INHERITANCE TAX

Property held within a company gives more options when it comes to planning for Inheritance Tax. It's all far beyond my pay grade (and you should take advice from a specialist tax advisor if passing properties on forms an important part of your plans), but you can make use of trust structures, different types of shares, and all kinds of clever methods that you wouldn't otherwise have access to.

So if there’s an income tax advantage, a mortgage treatment advantage and potentially an Inheritance Tax advantage, why wouldn’t you invest through a limited company?

Because of course, there are downsides too…

WHY NOT INVEST THROUGH A LIMITED COMPANY?

1. MORTGAGE AVAILABILITY

This used to be a major drawback: mortgages for companies were limited, expensive and had lower borrowing limits.

The number of products on offer for limited companies is still much lower than for individuals, but it's changing rapidly: as ever more investors are moving in this direction, lenders are following in order to win their business.

You will still need to give a personal guarantee and your own finances will be scrutinised, so in many ways it's a personal mortgage in all but name: think of the company as being a “tax wrapper”. So while you won't find quite as many options and the rates and fees are likely to be higher, it's less of a dealbreaker than it once was.

2. DIVIDEND TAXATION WHEN YOU TAKE THE MONEY OUT

If you're leaving your rental profits in the company, no issue: you pay corporation tax, then leave the post-tax income to roll up – maybe to buy more properties.

But if you're taking the money out (to spend on your own living costs, for example), you'll be taxed on the dividends you take. That means you'll be paying corporation tax first, then paying a hefty whack in dividend tax on what's left (current rates here) in order to take it out.

So if you want to live off your property income rather than leaving it to accumulate, it'll be a bit of a toss-up. You'll save tax in some ways, but incur extra tax in others. You'll have to run the numbers to work out which will work out best in your situation.

3. EXTRA COST AND HASSLE

Not a biggie, but there are higher accountancy costs associated with filing annual company accounts – so that's an expense to factor in, and your life will be full of more paperwork than it would otherwise have been.

HOW TO DECIDE IF USING A LIMITED COMPANY IS RIGHT FOR YOU

Which side of the fence you come down on when it comes to buying through a limited company is going to largely depend on three factors:

HOW MUCH INCOME DO YOU HAVE?

If you’re paying the higher rate of income tax, and you don’t have a lower-earning spouse whose name the property income could be put into, the lure of paying the much lower rate of Corporation Tax is going to be strong.

However, do bear in mind that if you’re actively acquiring properties your portfolio could be generating a paper tax loss rather than a profit – so with planning, taxable gains could be delayed until you retire and your income falls.

DO YOU WANT THE PROPERTY INCOME TO LIVE OFF?

Leaving it rolling up in the company (for future purchases, or just until your non-property income falls) will leave you better off than if you need to take it out to spend.

DO YOU USE MORTGAGES?

The ability to claim the entirety of your mortgage interest as operating expenses (once the new rules take hold) will be a major argument for using a company for higher-rate taxpayers.

WHO ARE YOU BUYING PROPERTIES FOR?

Initially of course it’s yourself, but what’s your exit strategy – do you plan to sell them off to finance your expensive cruise habit in your later years, or is it important that you pass your portfolio on to your children or grandchildren?

If passing your properties on is important to you, holding them within a company (if structured correctly) could result in huge Inheritance Tax savings.

SO THE ANSWER IS, OF COURSE…”IT DEPENDS”

Phew…1,300 words in and we’ve still really only scratched the surface of this whole debate.

If there's one thin we've learnt, it's that there are a lot of different factors in play – so you need to realise that compromise is inevitable, and weigh up all the pros and cons before deciding which side of the fence to come down on.

Before doing so, you should absolutely speak to us at Cloud Accounting LLP rather than this post being the end of your research, just use it as a way of getting up to speed with the facts so you can have a productive conversation with an expert.

How does tax work in UK

How Income Tax, National Insurance and the Personal Allowance works

Unsure about Income Tax and National Insurance? Don’t know what the National Insurance threshold is? Unsure how the Personal Allowance applies to you? We explain how the tax system works and what to do if you think you’re overpaying.

  • Should I pay any Income Tax?
  • The Personal Allowance if you earn over £100,000
  • What is Income Tax used for?
  • How much Income Tax will I pay?
  • National Insurance
  • What do you pay National Insurance on?
  • Voluntary ‘Class 3’ National Insurance rates
  • Voluntary ‘Class 2’ National Insurance rates

Should I pay any Income Tax?

Income Tax is charged on most types of income, such as wages and salary from jobs, your profits if you run a business, pensions, rents you receive if you’re a landlord, and interest and dividends from savings and investments.?

Got a question?

Our advisers will point you in the right direction.

Start a webchat online or call us on 07868 663538.

You don’t usually pay Income Tax on all of your taxable income. This is because most people qualify for one or more allowances. An allowance is an amount of otherwise taxable income that you can have tax-free each tax year.


Reduced by £1 for every £2 above income threshold until it reaches £0.

20% of this allowance is given as a reduction in your tax bill (unlike the Personal Allowance and Age Allowance which are deducted from your taxable income before tax is worked out).

£1,000 for basic-rate taxpayers; £500 for higher-rate taxpayers; £0 for additional-rate taxpayers.

Most allowances are increased each year and increases apply from the start of the tax year, 6 April.

Jump down to ‘How much Income Tax will I pay?’ to find out what you’re liable for.

What is a Personal Allowance?

Everyone, including students, has something called a Personal Allowance – the amount of money you’re allowed to earn each tax year before you pay Income Tax. Your Personal Allowance may be bigger if you claim Marriage Allowance or Blind Person’s Allowance, or smaller depending on your income or if you owe tax from a previous tax year.

The tax year runs from 6 April to 5 April, and for the 2019-20 tax year the standard Personal Allowance is £12,500. The Personal Allowance will also be set at £12,500 for 2020/21 tax year and then indexed with the Consumer Price Index (CPI) from then onwards.

If you earn less than this, you normally shouldn’t have to pay any Income Tax.

The amount of the Personal Allowance you receive is set by the government and can change from one tax year to the next.Check the most up-to-date Personal Allowance figures on GOV.UK.

The Personal Allowance if you earn over £100,000

For people earning over £100,000, the figure of £12,500 will be reduced by £1 for every £2 earnt. When someone earns £125,000 Income Tax is paid on everything earnt and there’s no tax-free allowance.

What is Income Tax used for?

Your Personal Allowance is taken off your earnings before you start paying Income Tax.

Income Tax is collected by HMRC on behalf of the government. It’s used to help provide funding for public services such as the NHS, education and the welfare system, as well as investment in public projects, such as roads, rail and housing.

How much Income Tax will I pay?

From April 2019, the standard Personal Allowance will increase to £12,500, with the higher rate tax threshold increasing to £50,000.

Income Tax is made up of different bands. This means that as your income increases so too does the amount of Income Tax you pay.

It’s an attempt to make paying Income Tax as fair as possible so that those who earn the most contribute more.

The table below shows the rates of Income Tax depending on how much you earn.

If you live in Wales, income tax rates are now set by the Welsh Government. These are currently the same as for England and Northern Ireland in the 2019/20 tax year. If you live in Scotland, the rates are different.

Calculate your income tax and national insurance contributions.

If you think you might have had Income Tax wrongly taken from your earnings, fill in the form from Her Majesty’s Revenue and Customs (HMRC) to have it paid back to you.Get the R38 form to reclaim tax on GOV.UK, or contact HMRC.

National Insurance

National Insurance contributions are a tax on earnings paid by employees and employers and help to build your entitlement to certain state benefits, such as the State Pension and Maternity Allowance.

Unlike Income Tax, National Insurance is not an annual tax. It applies to your pay each pay period (which might be monthly, weekly or some other period depending on your employer’s arrangements). This means if you earn extra in one month, you’ll pay extra National Insurance, but you won’t be able to claim the extra back even if your pay is lower during the other months of the tax year.

You begin paying National Insurance once you earn more than £166 a week (this is the figure for the 2019-20 tax year).

The National Insurance rate you pay depends on how much you earn:

  • 12% of your weekly earnings between £166 and £962
  • 2% of your weekly earnings above £962.

Your National Insurance contributions will be taken off along with Income Tax before your employer pays your wages.

Until April 1977, some older married women and widows who pay National Insurance contributions at the Married Women’s Reduced Rate could choose to pay a reduced rate of national insurance. You might still be paying the reduced rate if you opted for this before the scheme ended. The reduced rate is 5.85% of weekly earnings between £166 and £962 instead of the standard rate of National Insurance of 12% on earnings. As a result, your State Pension could be reduced and your ability to claim some contribution-based benefits could be negatively impacted.

Employee’s National Insurance contributions stop once you reach State Pension age.Find out more about your National Insurance contributions on GOV.UKopens in new window.

What do you pay National Insurance on?

Both you and your employer must pay National Insurance contributions on your earnings – including holiday pay, sick pay and maternity pay – and, in most cases, any reward you get that can be easily converted to cash. But there are exceptions – for example, if part of your pay is shares in your employer’s company using a tax-approved share scheme.

Part of your pay may be in the form of benefits in kind. As an employee, there is no National Insurance on benefits in kind. However, with some exceptions, employers do have to pay National Insurance on the value of any benefits in kind that they provide you with.

What do National Insurance payments pay for?

Your National Insurance payments go towards state benefits and services, including:

  • the NHS
  • the State Pension
  • unemployment benefits
  • sickness and disability allowances.

Voluntary ‘Class 3’ National Insurance rates

Class 3 voluntary National Insurance contributions are designed to fill in any gaps in your National Insurance record to get a higher State Pension.

To receive the full new State Pension, which is payable to people who have reached their State Pension age on or after 6 April 2016, you’ll need to have 35 qualifying years of National Insurance contributions.

Anyone with less than this will receive a reduced State Pension. To receive the new State Pension you need to have a minimum of 10 qualifying years.

If you don’t have 35 qualifying years, you may want to consider paying Class 3 voluntary contributions to boost your pension entitlement.

In 2019-20, Class 3 contributions are payable at a weekly rate of £15. This is the maximum you can pay each week.

You may not always be able to pay Class 3 contributions (or Class 2) for a tax-year. That’s why it’s important to find out whether you can make payments towards any gaps, how much you will need to pay, and what benefit (if any) you would get by making a voluntary payment before deciding whether to pay any voluntary National Insurance Contributions (NICs).For further information on paying voluntary Class 3 National Insurance contributions and to check your national insurance record visit the GOV.uk website.

Voluntary ‘Class 2’ National Insurance rates

If you’re self-employed or have been working abroad, you may be able to pay voluntary Class 2 contributions instead.

Class 2 NICs are currently flat-rate weekly contributions of £3.00 per week in 2019-20. You’ll need to pay them for every week or partial week of self-employment in a tax year if your profits for the entire tax year are £8,632 (the Small Profits Threshold) or more in 2019-20.

Payment of Class 2 contributions is voluntary for self-employed people with profits below the Small Profits Threshold. Paying Class 2 NICs even if your profits are lower can still help you build contributory entitlements to benefits.

This can be a specialist area and it’s best to take advice based on your individual personal circumstances.

Xero VS QuickBooks Online

Thinking of a cloud accounting system for your business finances but not sure which one — here’s the ultimate review!

With Making Tax Digital (MTD) approaching and with HMRC insisting that small business, many of whom currently use spreadsheets, to move to cloud accounting systems we thought we’d compare the 2 most popular…

Xero vs Quickbooks Online

Developed in 2004, QuickBooks Online beat Xero to the accounting scene by two years. With advanced accounting features, beautiful invoicing, 400+ integrations, it’s easy to see why the software is so renowned.

Xero is a robust accounting solution that rivals QuickBooks in terms of capability and popularity. It’s been around since 2006 and offers fully featured mobile apps, amazing customer service, access for unlimited users, and an impressive feature selection.

Summary Table

Accounting

Winner: Tie

Both Xero and QuickBooks Online offer strong accounting. Each uses double-entry accounting and supports cash-basis and accrual accounting. In addition, each software has strong accounting features including bank reconciliation, fixed asset management, a chart of accounts, and plenty of accounting reports.

Features

Winner: Xero

QuickBooks Online and Xero offer very similar features. In some areas, like invoicing, project management, QuickBooks Online far exceeds Xero (especially since Xero has no project management or lending). In other places, like contact management, Xero provides the better feature. So how do we decide who is better?

In the end, it all comes down to accessibility. QuickBooks Online offers many great features — project management, budgeting, inventory, etc. — but there’s a catch. These features are limited to the more expensive plans. Xero doesn’t limit features by plan, making it a more robust and realistic solution for many users, which is why we gave it the win for this section.

Pricing

Winner: Tie

For some businesses, QuickBooks Online is a much more affordable option. Xero’s smallest plan only gives customers 5 invoices and 20 transactions, which renders this plan useless to many small business owners.

For medium to large businesses, Xero is the better choice. Xero offers payroll at no additional cost and supports unlimited users for every plan. QuickBooks Online doesn’t even come close in this regard.

This category is a draw. The real winner will depend entirely on your business size and needs.

Hardware & Software Requirements

Winner: Xero

As cloud-based software, QuickBooks Online works with nearly any device so long as you have internet access and are using one of the following browsers:

  • Google Chrome
  • Mozilla Firefox
  • Internet Explorer 10+
  • Safari 6.1+

Xero is also cloud-based; it’s compatible with nearly any internet-enabled device so long as you are using one of these browsers:

  • Google Chrome
  • Internet Explorer 11
  • Microsoft Edge
  • Mozilla Firefox
  • Safari 8+

Both QuickBooks Online and Xero offer mobile apps for Android and iPhone.

The only reason Xero takes the cake in this category is that you can use Xero with Linux, a capability QuickBooks Online currently doesn’t offer.

Users & Permissions

Winner: Xero

Xero offers unlimited users for all five of its pricing plans. The company also provides some of the strongest user permissions in cloud accounting. QuickBooks Online only supports one, three, or five users depending on your pricing plan (you can add up to twenty-five users total, but the cost adds up fast).

In the end, how can you beat unlimited users?

Ease Of Use

Winner: Tie

QuickBooks Online used to be the clear winner here, but the company has recently made changes to the UI, leaving the software difficult to navigate (read more about this in our complete QuickBooks Online review).

That said, Xero is only easy to use once you get to know the software. There is a steep learning curve and setup can be quite intensive. Xero offers plenty of support tools to get over this learning curve (which is more than QuickBooks Online can say). Because of QuickBooks Online’s recent downgrade and Xero’s steep learning curve, the programs are tied in this category.

If you end up choosing Xero, check out our free How To Set Up Your Xero Account guide; it will help you get started and optimize your Xero account.

Mobile Apps

Winner: QuickBooks Online

While there are a few complaints about QuickBooks Online’s mobile apps, most users find the apps incredibly helpful and easy to use. The apps receive 4.2/5 stars on iTunes and 4.3/5 stars on Google Play Store.

One of the biggest complaints about Xero is that their mobile apps are lacking key features and are ridden with bugs and crashes. It’s easy to see the winner in this section.

Customer Service & Support

Winner: Xero

Xero has the best customer service by far. In my experience, Xero representatives are well-informed and quick to respond to customers. The company also offers ample online resources, including a comprehensive help center, an in-software help button, a community forum, and lots of business and accounting guides.

While QuickBooks Online has been attempting to remedy their issues with poor customer support, the company still has a long way to go. Response times are slow and representatives are often uninformed. On the plus side, QuickBooks Online does provide a contact phone number (Xero does not — a fact quite a few users have complained about), but the phone support is not enough to beat out Xero.

Negative Reviews & Complaints

Winner: QuickBooks Online

This is one category QuickBooks Online should not want to win, and yet here they are. QuickBooks Online has received many user complaints regarding poor customer service, bugs, limited mobile apps, and even unauthorized charges.

Xero, on the other hand, has received very few customer complaints (although, this could be because it has half as many users as QuickBooks Online and hasn’t been around as long). The software is well-loved by most of its users and receives higher ratings across popular customer reviews sites.

Positive Reviews & Testimonials

Winner: Xero

While QuickBooks Online gets more positive reviews in terms of numbers, Xero receives a higher percentage of positive to negative reviews, which is why we’ve given it the victory in this section. Xero has earned 4.4/5 stars on GetApp and 4.3/5 stars on G2crowd (on this same site, QuickBooks Online only receives 3.1/5 stars).

Integrations

Winner: Xero

Xero has over 500 integrations, while QuickBooks Online comes in with over 400 integrations. Xero outnumbers QuickBooks Online here, but let’s be honest: once a company hits the couple hundred integrations mark, what more could you ask for? Both of these companies are the top accounting software companies when it comes to integrations, so you can’t go wrong with either choice.

Security

Winner: Xero

Ordinarily, this section results in a tie, but Xero has set itself apart in terms of security.

Both QuickBooks Online and Xero use data encryption, redundancy, and physical security measures at their prospective data centers. However, Xero boasts an unheard-of 99.97% uptime and has one of the strongest security reputations in the cloud accounting world. Of course, QuickBooks has one of the other strongest reputations in the accounting world, so, again, you really can’t go wrong with either option in this regard.

And The Overall Winner Is…

QuickBooks Online put up a very good fight, but in the end, Xero edges out the competition in a few key areas. Xero offers accessible features, better customer service, and more positive reviews. In this comparison, the people truly have spoken, and Xero is the winner.

Xero the Best Accounting Software For Larger Businesses. If you are looking for strong accounting capabilities, Xero won’t let you down. It’s important to note that there is a steep learning curve with this software, so if you’re not up for the challenge, QuickBooks Online might be a better choice.

Although QuickBooks Online didn’t win this one, it is particularly ideal for small businesses. If your company relies on invoicing, QuickBooks Online’s invoicing capabilities are far beyond anything Xero can offer. And if you need a project management feature, QuickBooks Online is also the way to go. Who knows?

If you want a full guide in how to set Xero up- go to our of our new chatbot 🤖, Claire

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