Tax Matters. Tim Smith – Tax Partner Deborah Parks-Green Employee Consulting Group.

Tax Matters

Tim Smith – Tax PartnerDeborah Parks-Green Employee Consulting Group

Tax Planning

You or the tax man ?

“Every man is entitled to order his affairs so that the tax attaching under

the appropriate Acts is less than it otherwise would be”

Tax Avoidance

“Where the taxpayer obtains a tax advantage by reducing his income or incurring expenditure in circumstances in which the taxing statute affords a reduction in tax liability”

Tax Evasion

“Where the taxpayer reduces his liability to tax without involving him in the loss or expenditure which entitles him to that reduction”

What’s the Difference?

“The difference between tax avoidance and tax evasion is the thickness of a prison wall”

Seminar Outline

Employee tax

Other Income tax

Capital gains tax

Inheritance tax

Employee Tax Matters

Employment income

Income tax is chargeable on employment income including:

•Earnings – salary, wages, fees, bonuses and other emoluments

•Amounts treated as earnings through the benefits code•E.g. Benefits in kind

•Amounts which are not earnings but count as employment income

•E.g. employee share schemes

BENEFITS

What is a benefit in kind?

•Received by reason of employment

•Not necessarily from employer

•Benefits code

Who does the benefits code apply to?

•Directors

•Higher paid employees

Types of benefit

•Cars and fuel•Vans•Cheap loans•Pecuniary liabilities•Gift of asset•Use of asset•Private health•Expense payments•Living accommodation

Company cars

Annual charge = list price x CO2 emissions %

List price:

•Manufacturer’s list price not what is paid by employer

•Increased to include cost of accessories

•Reduced for capital contribution (up to max £5,000)

Company cars

CO2 emissions %:

•140 g/km gives 15%•This increases by 1% for every 5 g/km (see next slide)

•Diesel gives an increase of 3% •Greener cars reduce % (see further slide)•Maximum % is 35%

CO2 basis 2007-2008CO2 Petrol Diesel CO2 Petrol Diesel CO2 Petrol Diesel

emissions % % emissions % % emissions % %

gm/km     gm/km     gm/km    

140* 15 18 175 22 25 210 29 32

145 16 19 180 23 26 215 30 33

150 17 20 185 24 27 220 31 34

155 18 21 190 25 28 225 32 35

160 19 22 195 26 29 230 33 35

165 20 23 200 27 30 235 34 35

170 21 24 205 28 31 240 35 35

*135gm/km from 2008/2009

NB New 10% rate for up to 120gm/km from 2008/2009

Cars - 2007/2008 supps & discounts

Petrol Basis

Diesel non-Euro IV +3%

Euro IV diesel registered before 2006 Nil

Euro IV diesel registered from 2006 +3%

Electric only -6%

Hybrid electronic -3%

Gas only -2%

Bi-fuel CO2 for gas -2%

Bi-fuel conversion Nil

Company cars

•Annual charge is pro-rated if car not available all year

•£ for £ reduction on the charge for employee annual contributions

•Benefit in kind arises on employee for a car provided by company to a family member

Capital contributions - company car

•Employer provides new car for 4 years to 40% tax payer

•List price £20,000; CO2% = 35%

•Employee contributes £2,000 to cost i.e. 10% cost

•Saving in tax £2,000 x 35% x 40% for 4 years = £1120

•Car sold £8,000 and employee gets 10% value = £800

•Employee pays £2,000 but gets back £1920

•Cont next slide

Capital contributions company car

•Employer saves 12.8% = £360 over period

•Employer also saves £1,200 (net) from employee

•Overall saving to employer = £1,560

•If employer makes gross salary payment £1,363

•(Employer’s NICs added to this would be £1,560)

•After tax and NICs, employee receive £816

•Overall better off by £736

Fuel benefit

•Annual charge £14,400 x CO2 emission %

•Benefit pro-rated if car/fuel not available for full year

•All or nothing charge

•No charge if employer reimbursed for all private fuel in which case accurate records must be kept

Company Cars - Advisory Fuel Rates for Company Cars from 1 February 2007

Engine Size

Petrol Diesel LPG

1400cc or less

9p 9p 6p

1401cc to 2000cc

11p 9p 7p

Over 2000cc

16p 12p 10p

Example fuel benefit

•Fuel benefit = £14,400 x 28% = £4032

•HMRC advisory fuel rates indicate – average fuel cost per mile for 1800cc to 2000cc petrol car is 11p

•HMRC view of private miles - £4032/11p = 36,655 miles

•Being taxed on 36,655 private miles pa

•Pers cost - £4032 x 40% = £1613/11p =14,662 miles

•Many drivers better off paying for own fuel for private journeys and negotiating a salary increase to reflect savings made by employer

Approved Mileage Rates – Private owned cars

Passenger payments:•5p per passenger per business mile for carrying fellow employees in a car

Approved mileage rates

From 2002/03First 10,000

business miles in the tax year

Each business mile over 10,000 in the

tax year

Cars and vans 40p 25p

Motor cycles 24p 24p

Bicycles 20p 20p

Cash or car

Example

•Employee taxable at 40% and drives 30,000 business miles•Choice of:

•£4,000 per year gross, put through payroll•Co. car with 20% CO2 emissions; list price £15,000

•If driving co. car for business, paid approved mileage rate of 12ppm•If driving private car, paid business mileage payments of 40ppm•By taking cash option, employee will gain or lose:

Cash or car

£Extra salary (£4,000) less tax (£1,600) less NIC (£40) GAIN 2,360Business mileage payments (30,000 miles @ 40ppm/25ppm) GAIN 9,000Non-receipt approved mileage (30,000 miles @ 12ppm) LOSE (3600)Annual tax saving re co. car GAIN 1,200 Net overall gain 8,960

Employee can spend £8,960 per year to acquire and maintain a car without being worse off compared with having a company car

Company vans

From 6 April 2005

•No benefit where van used mainly for business travel and any private use is insignificant i.e.

•Home to work

•Taking rubbish to tip once/twice a year

•Calling at dentist on way home from work

•Make slight detour to newsagent on way to work

Company vans

•New rules from 6 April 2007•Benefit increase from £500 to £3,000•No reduction in charge if van over 4 years old•If fuel provided for private mileage, additional charge of £500

NB Vans can include a double cab pick-up provided it has a payload of 1 tonne (1,000kg) or more.

Cheap loans

•Low interest rate and free loans chargeable

• EXCEPT:•Interest free travel season ticket loan is exempt

•Loans less than £5,000 exempt

• Director’s overdrawn current account is treated as a loan

•Charge to tax on difference between interest rate paid and official rate – currently 6.25%

Pecuniary liability

•Personal liability of the employee met by the employer e.g. employer pays employee’s gym membership bill

•Benefit is value of the liability

•Entered on form P11D for tax purposes and included in gross pay for NIC purposes

Pecuniary liability

Alternative:

•Employer forms the contract with the provider

•No-longer personal liability of the employee

•Benefit is no longer put through the payroll

•Entered on P11D

•Class 1A NICs not class 1 NICs

•Only employer pays class 1A NICs not employee

Assets made available

•Gift of an asset by employer to employee is a taxable benefit

•Benefit = market value at the time it is transferred

Assets made available

•If company retains ownership of asset but it is made available to employee, the employee is taxed.•Benefit = 20% x market value at the time asset first provided•Unless charged under specific rule e.g. car•No charge on computers provided before 5 April 2006

Assets made available

Computers

•Pre 6 April 2006 £2,500 computer equipment loaned free of tax•Computers provided after 6 April 2006 may incur a tax charge but not always

•No tax will arise when computer equipment is provided for business purposes where private use is not significant

•Not significant: The employer’s policy about private use is clearly stated to employees (within contract or expense policy) and employer makes a commercial decision not to recover the costs of private use

•Employers are not expected to keep detailed records of private use

Computers – significant private use?

Example 1

•Sales manager provided with computer at home by employer•Spends 5 minutes each morning downloading workload for day

•Used for 1 hour a day for private purpose•Sole purpose for provision of computer is business•Private use secondary even though more time spent•Exemption applies

Computers – significant private use?

Example 2

•Employee of financial advisory firm chooses to work at home every Friday.

•Employer provides laptop for use on that day•Business use on Friday is same time as private use rest of week

•Laptop essential provision to working at home on Friday thus primary purpose is business and private use is secondary

•Exemption applies even though choice to work from home

Non taxable benefits

•Subsidised canteen – must be available to all employees

•Mobile ‘phone

•Long service awards up to £50 per year of service

•Suggestion awards and encouragement award

•Some childcare facilities and payments

•Annual staff parties – up to £150 per person

Non taxable benefits

•Trivial benefits – e.g. small seasonal gifts

•Up to £2,500 of IT equipment at home, but provided prior to 6/4/06

•Re-training courses

•Sports facilities – must be available to all employees

•Home working allowance

•Relocation

•Welfare counselling

PAYE settlement agreement

•Annual voluntary settlement by employer

•Employer settles tax and NICs payable by employees on items covered by an agreement

•Items will be minor, one off or difficult to divide between employees

•No need to report on P11D or on employee’s tax return

Expenses

Expenses

•Benefits code ensures expense payments made to employee by reason of employment charged as remuneration

•Includes:•Payments related to specific expenses

•Round sum allowances

•Reimbursements of expenses incurred

•Expenses paid by credit card in employer’s name

Expenses

A tax deduction can be claimed against these expenses where:

•You are obliged to incur and pay as holder of employment

AND

•Incurred wholly, exclusively and necessarily in the performance of the duties of the employment

Expenses

A tax deduction can be claimed for:

•Professional membership•Annual subscriptions•Business entertainment•Travel and subsistence•Use home telephone

Annual subscriptions

Allowable where:

•In HMRC’s list of approved professional bodies-

•This list can be found on www.hmrc.gov.uk

•Employee pays out of their own emoluments

•The activities of the body are directly relevant to their employment

Business entertaining

•Allowable where genuine business reason to entertain customers, suppliers or other business connections in course of duties

•No restriction for the cost of employee’s own food and drink

•Must keep record of who and why•Must be paid by employer specifically for business entertainment and not as part of general round sum allowance

Travel

Allowable if:

•Necessarily incurred travelling in the performance of the duties of employment

•Not ordinary commuting

•Not private travel

Travel

Can claim:

•Mileage allowance•Cost public transport•Vehicle hire•Toll charges•Car parking •Accommodation•Meals

Personal incidental expenses

On business trip spend money on e.g. laundry, newspapers and telephone calls

•No travel expenses in relation to these•Can claim relief for personal expenses incurred and reimbursed by employer

•Maximum relief:•£5 every night away on business in UK•£10 every night away on business outside UK

•These amounts can be averaged over period•E.g. In UK can pay £2 night 1 and £8 night 2

Homeworking expenses

•Employers can provide necessary equipment to work at home free of tax and NICs

•Includes computers, internet access and office furniture

•Employer can also make tax exempt payments to cover additional household expenses

•Where employer doesn’t pay, in limited circumstance, a tax deduction can be claimed to cover additional household expenses

Internet access

Where employer subscribes for Internet access at employee’s home, solely for work purposes – exempt as long as private use is insignificant – just like provision of computers discussed earlier

•HMRC accepts private use is not significant where:•Provided for work purpose

•No breakdown possible between work /private use

•Private use doesn’t affect cost of package

Internet access

•Where employee is subscriber and employer reimburses employee, no scope for exemption

•Reimbursements taxable as expense payments

•Employee claim tax deduction against this expense only where costs relate to use wholly, exclusively and necessarily in performance of duties

•If package provides unlimited access and cannot identify cost that is wholly and exclusively business, no deduction is due.

•Therefore better for employer to subscribe

Additional household expenses

•Accepted that home-working arrangements can result in increased household costs e.g. heating, lighting and insurance

•Employer can make tax-exempt payments to reimburse these costs

•HMRC guideline of £2 per week with no proof needed

•Not a maximum but higher payments need evidence

Additional household expenses

Claim for tax deduction in tax code, as alternative, but only where all following criteria met:

•Duties performed at home substantive (have to be carried out and central to employment)

•Cannot be performed without appropriate facilities•Appropriate facilities not available at employer’s premises, or employee lives too far away

•Employee has no choice between working at employer’s premises or elsewhere

Claim deduction? Example 1

•A is an area sales manager for Scotland, living in Glasgow

•Company’s nearest office is in Newcastle•Carries out all admin work at home, where he has set aside a room as an office

•Conclusion: A’s job requires him to live in Scotland, no employer-provided facilities are available there, so he can claim additional costs incurred as a result of working from home

Claim deduction? Example 2

•B is the area sales manager for North East•Company office in Newcastle •Company has agreed that he can work from home in Durham where he has set aside a room as an office

•Conclusion: B could work from the company’s office in Newcastle, but works from home through choice, so no relief for homeworking expenses

Claim deduction? Example 3

•C works at company’s office in Leeds but he lives in Kings Lynn

•Spends the week in Leeds and travels home at weekend

•Company introduces a homeworking policy for those who wish to work from home and C does, setting aside a room as an office

•Conclusion: C works at home by choice, so no relief for homeworking expenses

Claim deduction? Example 4

•D lives in Gloucester but gets a job with a company based in Birmingham

•Relocation package is offered but D asks if he can work from home

•Agreed and contract states that he will be home based•He sets aside a room as an office•Conclusion: D works at home by choice, contract simply expresses choice, so no relief for homeworking expenses

Qualifying expense deductions

•Additional unit costs of gas and electricity consumed while a room is being used for business

•Metered cost of water used in performance of duties

•Unit costs of business telephone calls

•If impossible to calculate, relief of £2 per week (no records necessary) plus business telephone calls

Non-qualifying expense deductions

•Council tax

•Rent

•Water rates

•Mortgage repayments

•Endowment premiums

•Household insurance

Dispensations

•Formal agreement between employer and HMRC

•Satisfy inspector adequate records kept and certain expense result in no additional tax payable

•Do not need to report on P11D

•Do not need to report on employee’s tax return

•Saves administration

•Will not cover round sum allowances

Tax efficient remuneration

Remuneration planning

Consider:

•Tax efficient benefits•Pensions•Salary sacrifice•Share incentive plans

Salary sacrifice

•Various benefits in kind can be provided free of tax and NICs

•Sacrificing salary in return for a benefit free of tax and NIC is very tax efficient

•Most common:•Pension payments

•Childcare

Flexible benefits – maximise tax savings

•Childcare and childcare vouchers•£55 per week

•Tax and NIC free

•Total savings of up to £1,500 per annum

•Pension contributions•Tax free

•Employee contributions attract NICs

•Employer contributions don’t attract NICs

•Sacrifice salary for employer pension contributions

Childcare or childcare vouchers

Higher Basic

Rate RateTax and NI free childcare £55 per week

Income tax savings £2,860 x 40%/22% £1,144 £629

NIC Savings:

Employer’s £2,860 x 12.8% £366 £366

Employee’s £2,860 x 1%/11% £29 £315

Total savings £1,539 £1,310

Pension payments

Higher Basic Rate Rate

Employer contributions replaceEmployee contributions of £1,500NIC savings

Employer’s 1500 x 12.8% £192 £192Employee’s 1,500 x 1% / 11% £15 £150

Total savings £207 £342

Shares and Share options

•Gift or sale of shares below market value (MV) gives rise to a tax charge and sometimes a NIC charge

•Charge is MV at time of gift or difference between MV and price paid by employee for shares

•NIC due if readily convertible assets i.e. easily to sell

•Various share schemes can be set up to allow generous tax advantages

Approved schemes

•Save as you earn scheme (SAYE)

•Share incentive plan (SIP)

•Company share option plan (CSOP)

•Enterprise management incentive (EMI)

Summary

To maximise opportunities to lower tax bill, consider:

•company car with lower CO2 emissions

•capital contributions towards company car

•whether fuel benefit is worthwhile, or cash alternative

•whether cash payments would be better alternative to company car

Summary continued

•use of interest free or low interest loan – perhaps to fund capital contribution towards company car

•avoid employee’s NICs by putting contracts in employer’s name

•claiming homeworking expenses •either from employer

•or as a tax deduction (far more restrictive)

•consider salary sacrifice where available

Income Tax

Married couples

Savings

Borrowings

Married Couples

•Don’t forget both of you have an annual exemption of £5,225

•Make sure you use them: the saving in 2007/08 is up to …

•£2,090

Independent Taxation

•If your spouse is not already using the 10% and 22% rate bands, the maximum saving in 2007/08 is………..

•£6,496

Savings

•Investments into joint names

•Tax credits on dividends - not repayable

•Ensure non-working spouse and children have at least £5,225 of non-dividend income

•Watch parental settlement rules!

•Consider deposit accounts, government stocks or rental income

Savings

Once you are both paying 40% tax, consider investing in:

•ISAs

•National Savings

•Pension schemes

Savings

Once you are both paying 40% tax, consider investing in:

•ISAs

•National Savings

•Pension schemes

•Your mortgage!

Mortgage Relief Gone

No relief from 6 April 2000

Your Mortgage

•£100,000 mortgage

Interest £5,700?

•£100,000 savings

Interest £4,500

Tax payable £1,800

Net £2,700

Borrowing

•No tax relief on home loans

•40% tax relief on business loans

•Turn your home loan into a business loan!

Borrowing

If you’re about to buy a rental property:•Don’t use your spare cash to buy it

•Use the money to reduce your mortgage

•Borrow to buy the property

•You still owe the same amount, but now you will get tax relief

Capital Gains Tax

•Rate – either 20% or 40%

•Annual exempt amount 2007/08:

•£9,200 for individuals

•Remember that you, your spouse and your children all have exemptions

•Parental settlement rules don’t apply to capital gains tax

Capital Gains Tax

Keep your gains below £9,200 a year

•Bed & breakfast is no longer an option•Bed & spouse?

•Bed & ISA?

•Transfer assets to your spouse before sale

CGT – Use of Home as Office

•Often raised

•Not an issue, provided:•Not exclusively business use

Inheritance Tax

•Remember to use:•Annual exemption

•Marriage gifts

•Regular out of income

•Nil-rate band 300k

•PETs - Unlimited

Inheritance Tax

•Will planning:•Make one – intestacy is not fun!

•Consider a nil-rate band discretionary trust•Save up to £120,000 IHT

•Use trusts for children (and spouse?)

•Lifetime planning:•Write death benefits in trust

•Give away non-income producing assets

Inheritance Tax•BPR Double Dipping

Assets

Business £1,000,000

Other Assets £1,500,000

To DaughterNon-business assets – Nil rate band £ 300,000

Business assets – BPR £1,000,000

To WifeNon-business assets £1,200,000

Inheritance Tax•BPR Double Dipping cont.

Wife buys business from daughter £1,000,000

No CGT – Uplift on death

Survive 2 years 100% BPR

IHT saving - £400,000 on husband’s death

£400,000 on wife’s death

Total £800,000

Inheritance Tax

Death-bed planning•Marriage ?!

•Inter-spouse exemptions CGT and IHT

•Gift all assets for CGT uplift on death

Questions?

Contact details

•Website - www.bakertilly.co.uk

•Tim Smith•[email protected]

•01256 486815

•Deborah Parks-Green•[email protected]

•01256 486845

• Baker Tilly UK Audit LLP, Baker Tilly Tax And Advisory Services LLP, Baker Tilly Corporate Finance LLP and Baker Tilly Restructuring And Recovery LLP are not authorised under the Financial Services and Markets Act 2000 but we are able in certain circumstances to offer a limited range of investment services because we are members of the Institute of Chartered Accountants in England and Wales. We can provide these investment services if they are an incidental part of the professional services we have been engaged to provide.

• Baker Tilly & Co Limited is authorised and regulated by the Financial Services Authority to conduct a range of investment business activities.