PAYE Inspection Tips
Q: I am a director in a small limited company and it has been agreed that one of the directors is to receive a company car and fuel which will be made available for private use. At present, we have two other directors who use their own vehicle and make a claim under the HM Revenue & Customs authorized mileage rates of 40p/25p per mile for any business miles they travel. I note that HM Revenue & Customs are looking into this area of small business. Do you have any advice on what records the company should be keeping?
A: The company is now more likely than ever to be subject to a full review of their compliance systems and procedures by HM Revenue & Customs. You should keep full mileage logs for every vehicle, whether owned privately or by the company as they are likely to challenge all doubtful claims on the business mileage limit. If you were to receive an inspection they would ask for evidence of business mileage. Also ensure you keep separate figures for each car where there is a change during the year, or where more than one vehicle is available to a director/employee.
With regard to the company car and fuel provided to the new director, there is a benefit in kind due on provision of these. The fuel benefit is an 'all or nothing' benefit, so if the business pays for any private fuel and is not fully reimbursed by the director, the director must accept the corresponding private fuel benefit and you must report it on a P11D. It may be worth looking at the tax implications of this, and other ways of the director owning the vehicle, as it may not be that tax efficient to provide this.
Set up of PAYE schemes
Q: I am employed but have recently set up a small limited company to deal with a sideline venture. As I am already employed and paying tax a basic rate my accountant suggested that it is more beneficial for me to take dividends rather than salary from this company. As I am not paying any wages do I still need to set a up payroll scheme for the company, as the accountant wants to charge me for this?
Your accountant is quite correct. As a basic rate taxpayer if you were to take salary from the company you will need to make the necessary PAYE Tax and NIC deductions on the salary you are paid. If you take a dividend, and ensure this does not make you a higher rate taxpayer you will not pay any further income tax on this. It is therefore more tax efficient for you to take a dividend.
The HMRC will normally set up a PAYE scheme once it receives the new company notification form (CT41G). This is because they assume that all companies will have at least one director and normally (though not inevitably) that director will receive salary which is should be subject to PAYE deductions. If no remuneration is likely to be paid, the HMRC suggest that a covering letter is submitted with the form (or on receipt of the end of year form (P35)) which highlights this and they will update their records to show no PAYE scheme is required, and save you paying the accountant for a service that isn’t required.
State Pension Credit For Low Paid Employment
Q: I have recently left full time employment and taken a part time job as I am nearing state pension age. I have worked out that I will actually earn slightly less than the personal allowance of £4895 for the tax year and consequently are paying no National Insurance Contributions through may wages. Will this affect my entitlement to State Pension?
A: If you earn more than the Lower Earnings Limit (For 2005/06 Tax Year this is £4264), then you will get a notional credit towards your secondary state pension even though you have not made any National Insurance contributions. For this to be effective your employer must report your earnings at the end of the tax year on the Employers end of year return form P35. You should ensure that you get a P60 from your employer showing your earnings at the end of the year, as this will prove that your earnings have been declared to the HMRC, and mean that you receive a notional credit for state pension purposes.
Interest on late payments
Q: One of my clients is late in paying their bills and I have had to pay my supplier for the goods, which my client has already received. Can I charge interest on the outstanding debt?
A: All businesses have a legal right to claim interest from late-paying customers. The statutory right to interest applies to all contracts agreed after 7 August 2002 and gives you the right to charge interest at the Bank of England base rate plus eight per cent. For example, the base rate is for the current period to 31 December 2005 is 4.75%, so you could charge interest at 12.75% per cent.
The statutory right to charge late-paying business customers interest applies to contracts which do not already include their own arrangements for 'substantial' interest. If there is no agreed credit period, the law sets a default period of 30 days. You can charge interest 30 days after you delivered the goods or provided the service, or 30 days after you notified the purchaser of the amount of the debt - whichever is the later. Ideally, to notify the purchaser of the amount of the debt, you should send an invoice, but any other form of notification would do, including a phone call - though that might be difficult to prove if there is a dispute.
All organisations also have a right to claim reasonable debt-recovery costs. Creditors can claim an extra £40 for debts of up to £1,000, £70 for debts from £1,000 up to £10,000 and £100 for debts of £10,000 or more.
Holiday entitlement for part time workers
Q:I run a small café and I would like to employ a couple of part-time workers for between 10 and 20 hours per week to help me during busy periods. They both have pre-booked holidays during the Christmas season for which I have agreed to honour. How do I calculate their total holiday entitlement for the year?
A: Every worker – whether part-time or full-time – covered by the working time regulations 1998 is entitled to four weeks’ paid annual leave, and for part-time workers this is calculated on a pro-rata basis. For example, an employee who works three days a week is entitled to twelve days paid holiday - their normal working week multiplied by four. This is because a week’s leave should allow workers to be away from work for a week. It should be the same amount of time as the working week.
With regard to Christmas Day and Boxing Day public holidays, these can be counted as part of the statutory four weeks holiday entitlement. There is no statutory right to take bank holidays off, so unless the employees contract of employment states there is a right to paid time off for bank holidays, you are not obliged to pay your staff for these unless they take them as part of their annual leave entitlement.
Tax Treatment of Website Costs
Q: I have recently engaged a company to develop a website for my business so I can begin to sell some of my products online to a wider market. They are going to charge me £2,000 to set up and design the website and another £200 per annum to maintain the site for me. Is this expense deductible in full against my business profits for the year?
A: The HMRC actually advise that the initial cost of “bringing into existence an asset or advantage of enduring benefit to the trade” is treated as capital expenditure, and is not deductible in full.
Instead you will need to include this as an assets in your accounts, and claim capital allowances on the expenditure relating to the creation of the website. This is current rate for this is 40% for the first year and 25% per annum on a reducing balance for years after that. They actually compare the cost of a web site to that of a shop window. The cost of constructing the window is capital but the cost of changing the display from time to time is revenue.
You will therefore be able to claim the cost of maintaining the website as revenue expenditure against your business profits each year.
Choosing a new company car
Q: My company car is due to be replaced early next year and I am keen to keep my taxable benefit down (as well, of course, as doing my bit for the environment). I believe that a sensible diesel car will meet both aims. Can you please advise me on this?
A: You’re right in that diesel cars generally have lower CO 2 emissions than petrol models. They do emit particulates into the atmosphere – so the overall effect on the environment is in the balance, but taxable benefit carries a three per cent premium compared with petrol equivalents due to this lower emission rating.
What may be interesting to you, is that this three per cent premium does not apply to diesel cars that meet Euro IV criteria (these are basically very clean diesel engines) – so when choosing your next car, it would be worth looking at those that meet these criteria, and you could enjoy a relatively modest tax bill (assuming that the list price is reasonable). To find a list of cars which meet the Euro IV visit www.comcar.co.ukor contact the manufacturer.
You may also like to consider bringing the purchase of your new car forward, as it has been announced that the waiver of the three per cent premium for Euro IV compliant cars will be removed at the end of 2005. If it is viable for you to accelerate the replacement of your company car so that the purchase falls in 2005, you will then enjoy the waiver of the three per cent premium for the entire period that you have the car. This will save you a considerable sum in tax compared with taking delivery in 2006.
Claiming tax on work clothing
Q: I am a self-employed freelance journalist, and while I do work at home, there are frequent occasions when it is necessary for me to visit clients in their workplaces in appropriate business dress. I need to buy a couple of new suits for such meetings – is this considered an allowable expense for tax purposes?
A: This is one of a variety of expenses which the Courts have held to have an intrinsic duality of purpose – which means they are not deductible for tax purposes.
The suits are actually classed as “ordinary clothing worn by a trader during the course of their trade”, and is not deductible expenditure for tax purposes. This is the case regardless of whether particular standards of dress are required, for example to comply with the rules of a professional body, or simply for the trader to keep up appearances on meeting clients – because these items are regarded as ‘everyday' wardrobe.
Conversely, the cost of clothing that is not part of an ‘everyday' wardrobe, such as protective clothing and uniforms, is deductible for tax purposes.
Working Families Tax Credit
Q: I am a single parent living in Llandudno with my three young children, and have recently been given the opportunity to run my own business – but this will mean moving my family to London. I recently received some information about Working Families Tax Credit (WFTC), which explained that the ceiling on earnings to still qualify for WFTC is £20,000 per annum – and wondered if this varies according to where you live, as I will have to pay childcare fees for all of my children. As a business owner, can I also still claim help with my council tax?
A: The rate of Working Families Tax Credit (WFTC) is fully dependent on your level of earnings, which means you wouldn’t receive an increase (or decrease) dependent on location.
However if you do incur additional childcare expenses, this may increase the credit payable to you, which could result in a greater payment of WFTC to meet the childcare costs for your three children.
Regarding your claim for Council Tax Benefit, you need to check with your new Council when you move, whether you meet certain criteria, to establish what your entitlement in your new circumstances will be. The Department of Work and Pensions produces a leaflet - GL17 - which explains this in more detail.
State Pensions
Q I have heard the state pension age for women is increasing. Is this correct and how do I qualify for a full basic State Pension at present.
A: In 2005/06, a person needs to have earned at least £4,264 (on which standard rate National Insurance contributions are paid, treated as having been paid or are credited) for that year to be a qualifying year.
The tax years during which you build up entitlement to the basic State Pension are called ‘qualifying years’. The amount of State Pension you ultimately receive will depend on how many qualifying years you have built up before reaching State Pension age.
If you are a man, you normally need to have 44 qualifying years to be entitled to the full (100 per cent) basic State Pension. In 2004/05, the full pension was £79.60 a week for a single person. If you are a woman who will reach 60 before 2010, you normally need 39 qualifying years to receive the full basic State Pension. However, when the State Pension age becomes 65 for women as well as men in 2020, a woman will then also need 44 qualifying years to get the full basic State Pension. Years when a woman chooses to pay the married woman’s reduced rate of National Insurance do not count towards her qualifying years.
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By TaxAssist Direct Ltd. Both answers and advice are offered strictly on the basis that no legal liability is created thereby. Personal circumstances may vary and TaxAssist Direct Ltd advises that individuals seek personal professional advice in all situations.
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