Tax where cares are are used for business and private purposes

There are a number of situations where care needs to be taken in the way in which claims are made for the business use of a vehicle, usually a car,  that has duality of use – business and personal.

Here are some of the situations to be aware of.

 

1.    If you are self-employed and your business assets include a car, you should be reducing your claim for capital allowances and running costs based on your private use of the vehicle. The percentage added back should be based on documented evidence. This usually means keeping a mileage log for at least a part of the year.

2.    If you are employed and your employer requires that you use your own vehicle for business trips there are two aspects to consider: the rate per mile you are paid (HMRC allow you to receive up to 45p per mile for the first 10,000 business miles each tax year and 25p per mile thereafter); and, the number of miles you claim. The 45p/25p rate HMRC allow is a maximum as regards being non-taxable. Employers are free to pay up to this limit without triggering benefit-in-kind issues. Again journeys should be logged and recorded to evidence the number of miles claimed.

3.    If you have the use of a company car and your employer pays for your private petrol you will be liable to a hefty benefit-in-kind charge. In other words fuel for private use is a benefit you probably do not want – because the tax charge is so high. You can eliminate this charge if you reimburse your employer for the cost of private petrol provided. Unless you do an exceptionally high amount of private motoring, then the cost of reimbursing the employer for the fuel will be much less than the tax charge created by the benefit-in-kind assessment.

 

In examples 1 and 3 above you will need to record your private mileage of the vehicle, in example 2 your business mileage. In all three you will need to provide evidence should HMRC visit and select mileage claims for audit. Generally speaking you should:

 

•         Record the postcode at the beginning and end of the journey so an accurate check can be made of mileage claimed. London to Birmingham would be too vague.

•         The business miles claimed should not be rounded.

•         Home to work mileage should be excluded.

Medics travel expenses

In what might be a landmark decision in the
interpretation of ‘wholly and exclusively’ expenditure, Dr Samadian has lost his protracted battle
with HM Revenue & Customs (HMRC) over his claim for business
mileage. Dr Samadian has 56 days to appeal against the ruling made on 28 January 2013.
Dr Samadian has endured an enquiry which started over 7 years ago and has gone through 3
Tribunal Hearings.

Dr Samadian is a geriatrician, and specialises in the health care of elderly people.
He works full time for the Epsom and St Helier NHS Trust, in an employed (PAYE) capacity, at two hospitals in south
London; the St Helier and the Nelson. He has a permanent NHS office, with full administrative
support, including a secretary.
In addition, Dr Samadian holds weekly out-patient sessions at two private hospitals; St Anthony’s in
Cheam and Parkside in Wimbledon. His NHS secretary acts as his secretary in his private practice in
her spare time.
His private patients are generally wealthy, insured, over 75 years of age and with multiple medical problems.

 

The Tribunal panel led by Judge Kevin
Poole, acknowledged that Dr Samadian had a dedicated office
in his home which was used for his professional
activity.

However, the panel did not accept that the home
office was the starting point for calculating  business mileage involving habitual journeys.

The decision might have a wide interpretation across all professional self-employed activity, where
the business owner undertakes substantive work at home, but also has another business base at
which they deliver their expertise on a regular basis.

For example, a surveyor may draw plans in a home office, but finalise the work in a studio at
his office premises.

An accountant may regularly work at home in the morning  and then travel into the main office to conduct a meeting in the afternoon. If business mileage is claimed, HMRC could now argue that mileage is disallowable.

HMRC destroy a family company and 32 jobs !

The Daily Telegraph has described how HMRC applied to a Judge for the right to liquidate a company, saying that fraud was being comitted, when actually, there was no evidence of fraud. The application was granted, and HMRC liquidated the company. Thirty two people lost there jobs as the liquidator made them redundant.

It was later found that there was not a single item that proved that anyone at Abbey Forwarding Ltd had been involved in any conspiracy to defraud HMRC, or indeed any fraud at all, and the Judge dismissed the action against the directors.

Judge Lewison was astonished when one HMRC employee admitted that he had no evidence that Abbey had been involved in fraud, but maintained that he had no proof that it was not involved in criminal activity — which, as the judge pointed out, is not grounds in law for liquidating the company.

HMRC and their lawyers were ruthless. Two months before Judge Lewison reached his decision, they sent a letter reminding the directors that they were “bound to lose all of their assets and are all likely to go bankrupt”, and that there would be actions against their “family members who have profited unduly from Abbey”.

It warned them that they could only “avoid complete ruination” by admitting their guilt and settling the case.

”We knew we were innocent,” stresses Mr Hone, a director

“We were never going to give in, not even if they took everything from us.”

And despite Judge Lewison’s ruling, they came very close to doing precisely that.

Not only did HMRC maintain they had been right to close the company, they increased the assessment of the amount owed to £7million. Ms Brittain, the liquidator appointed by HMRC and the only individual with legal standing to appeal HMRC’s assessment, refused to appeal it. HMRC’s strategy seemed to be to wear down the directors by attrition: there were further hearings, costs mounted.

Backed by the state, HMRC had infinite funds. They knew that their opponents had very limited resources.

But they did not give in. They won a series of rulings against the prevaricating tactics of HMRC. On August 4, 2011, five days before their appeal against HMRC’s assessment and tactics was finally to be heard in court, HMRC withdrew their assessment claiming that Abbey’s ex-directors owed £7 million in taxes and duties.

Last week, the directors were in court again, suing the liquidator and HMRC for damages for having wrongly frozen their personal bank accounts. After that, they hope to launch a case against HMRC for the loss caused by the liquidation of their company, which amounts to millions of pounds in legal and other fees.

What happened to Abbey Forwarding is not an isolated case. Lawyers who specialise in liquidation proceedings note that HMRC frequently use ex-parte hearings to obtain liquidation orders against companies they suspect of fraud. Of course, many are guilty as charged. But some are not.

This case illustrates how beneficial it can be to have professional fee protection insurance.

Swiss Bank Accounts

Swiss bank account holders beware.

UK residents with Swiss bank accounts should be aware that new taxation arrangements are scheduled to come into force on 1 January 2013.

The new tax agreement between the UK and Switzerland means that account holders must either provide full details to HM Revenue & Customs (HMRC) or pay over a proportion of the money in their account and a future withholding tax.

Jennie Granger, HMRC Director General, Enforcement and Compliance, said:

“Swiss banks or accountants are writing to people affected by the agreement. Some may be asking customers to close their accounts. If this happens, UK residents must ensure that any outstanding tax liabilities are paid. Anyone in these circumstances is strongly advised to contact HMRC as soon as possible.”

The agreement includes a withholding tax to deal with the tax on income and gains. Rates currently range from 27 per cent on capital gains up to a maximum of 48 per cent for interest or other non-dividend income. Where the payment option is chosen, any past liability to specified taxes will be dealt with by paying a one-off charge of up to 41 per cent of the total value of the account.

Rag trade and alcohol industry targeted

HMRC has launched taskforces to tackle tax cheats in the rag trade, the alcohol industry, and property rental sector on 19 November by HMRC.

The specialist taskforce teams will target those who do not pay the right amount of tax in:

• the rag trade in the Midlands, North Wales and North West, including manufacturing, wholesale, retail and textile recycling;

• the alcohol industry in Scotland, including Aberdeen and Inverness;

• the rental property sector in the South East;

They are expected to recover around £17 million.

David Gauke, the Exchequer Secretary, said:

“The vast majority of people play by the rules. We will not tolerate tax evasion and will crack down on the minority who choose to break the rules.

It cannot be fair that, while most people are paying the right tax, a tiny minority are not paying what they should.

HMRC is on target to collect more than £50 million as a result of taskforces launched in 2011-12.”

Business records checks

HMRC relaunched its Business Record Check (BRC) initiative on 1 November 2012. HMRC has the power to impose penalties where

EGL P&L web

EGL P&L web (Photo credit: word_dancer51)

records are deficient. When the program was first unveiled in January 2011, HMRC intended to visit 50,000 small businesses across the UK. A year later the whole process was reviewed and subsequently suspended following concerns raised by professional bodies and accountants. According to HMRC: “Up until 17 February 2012, 3,431 BRCs had been carried out. These found that 36 per cent of businesses had some issue with their record-keeping of which 10 per cent had issues serious enough to warrant a follow up visit. Following a review, HMRC announced a fresh approach to its pilot BRC programme on 3 February 2012. The review of the pilot programme, which included discussions with trade and professional bodies’ representatives, found clear evidence that the programme was effective in improving record-keeping practices amongst SMEs. However, it recommended that the checks were better targeted in future, and linked to wider education and support activities. In order to implement the review’s recommendations, all new BRC activity was paused from 3 February to 31 October 2012 to allow HMRC to redesign the BRC process.”

Essentially, a BRC is just what it says on the tin, an enquiry from HMRC staff to make sure that record keeping is adequate. The relaunch has introduced a change of emphasis: HMRC now intends to:

• Write to those SMEs selected for a BRC.

• Telephone the selected SMEs to talk through their business record keeping. The call is expected to last 10 – 15 minutes. Based on the responses received:

• The HMRC officer will assess whether a face to face BRC visit is required.

• If the business records are deemed to be adequate, the HMRC officer making the call will tell the SME and then confirm the decision in writing.

• If the business records are deemed to require improvement, an HMRC officer from the Business Education and Support Team will make contact with the SME.

• If the business records are deemed to be inadequate and a visit required, the HMRC officer will ask one of their colleagues on the booking team to call to make the arrangements.

This appears to be very similar to the traffic light system used by HMRC prior to the suspension. Adequate records were given the green light, records in need of improvement were given the amber light and inadequate records awarded a red light.

Tax and the Christmas Party

Viborg Christmas street illumination 2010-11-30

Viborg Christmas street illumination 2010-11-30 (Photo credit: Wikipedia)

It is possible to write off the costs of the annual Christmas bash against tax, however, it is important to keep the expenditure within certain limits. Here’s what you need to do:

The cost of a staff party or other annual entertainment is allowed as a deduction for tax purposes. Also, as long as the criteria below are followed, there will be no taxable benefit charged to employees:

1. The event must be open to all employees at a particular location.

2. The cost is only tax deductible for employees and their guests (which would include directors in the case of a company) but not sole traders and business partners in the case of unincorporated organisations.

3. An annual Christmas party or other annual event offered to staff generally are not taxable on those attending provided that the average cost per head of the functions does not exceed £150 p.a.. The guests of staff attending are included in the head count when computing the cost per head attending.

4. All costs must be taken into account, including the costs of transport to and from the event, accommodation provided, and VAT. The total cost of the event is merely divided by the number attending to find the average cost. If the limit is exceeded then individual members of staff will be taxable on their average cost, plus the cost for any guests they were permitted to bring. No deduction will be allowed for the £150 exemption.

5. VAT input tax can be recovered on staff entertaining expenditure. If the guests of staff are also invited to the event the input tax has to be apportioned, as the VAT applicable to non-staff is not recoverable. However, if non-staff attendees pay a reasonable contribution to the event, all the VAT can be reclaimed and of course output tax should be accounted for on the amount of the contribution.

If these limits are breached employers can pick up the tax cost by using a PAYE settlement agreement.

A final note on ‘Trivial’ gifts for employees.

Employers may find the following Revenue concession useful – we have copied the note directly from the HMRC handbook:

“An employer may provide employees with a seasonal gift, such as a turkey, an ordinary bottle of wine or a box of chocolates at Christmas. All of these gifts are considered to be trivial and as such are not taxable. For an employer with a large number of employees the total cost of providing a gift to each employee may be considerable, but where the gift to each employee is a trivial benefit, this principle applies regardless of the total cost to the employer and the number of employees concerned.”

One final cautionary note regarding VAT and staff gifts, VAT is chargeable by the employer when an employee receives gifts totalling more than £50 in a year. Turkeys however, are zero rated for VAT purposes!

Tax return penalties

The filing deadline for paper copies of your Self Assessment tax return for 2012 was 31 October 2012. If you file a paper

English: East entrance of HM Treasury Français...

HM Treasury (Photo credit: Wikipedia)

return after this date penalties will apply.

Would readers note that, if we prepare your return it will be filed electronically, the deadline for electronic filing of 2012 Self Assessment returns is 31 January 2013.

 

If you have still not sent us the information we will need to complete your return, could you attend to this as soon as possible. The penalties for late filing are now rigorously enforced by HMRC. If the filing deadline is breached you will be facing the following charges:

• 1 day late – A penalty of £100. This applies even if you have no tax to pay or have paid the tax you owe.

• 3 months late – £10 for each following day – up to a 90 day maximum of £900. This is as well as the fixed penalty above.

• 6 months late – £300 or 5% of the tax due, whichever is the higher. This is as well as the penalties above.

• 12 months late – £300 or 5% of the tax due, whichever is the higher.
In serious cases you may be asked to pay up to 100% of the tax due instead.
These are as well as the penalties above.

Child Benefit lost for high earners

From January 2013 a person who earns more than £50,000 must advise HMRC if they receive Child Benefit personally,

A smiling baby lying in a soft cot (furniture).

(Photo credit: Wikipedia)

or if they are the higher earner of a couple where their partner receives Child Benefit. If you fall into this category you may be receiving a letter soon from HMRC advising you of the new tax charge.

 

We have summarised below the details of the tax charge that will apply from 7 January 2013:

 

1. Child Benefit is not being made liable to tax, the amount claimed is unaffected. The tax charge simply claws back the value of the benefit of those with higher incomes.

2. Child Benefit claimants can elect not to receive benefit if they or their partner do not wish to pay the new tax charge. This election can subsequently be withdrawn if circumstances change.

3. The amount of the tax charge will be collected through Self Assessment and PAYE.

4. The tax charge will be 1% of the amount of the Child Benefit you receive for every £100 of income you earn in excess of £50,000. This sliding scale will apply to earnings up to £60,000.

5. The tax charge will recover all of the Child Benefit you or your partner receives if your income exceeds £60,000.

6. An individual who has an income over £50,000 but does not receive Child Benefit themselves will only be subject to the tax charge for any part of the tax year during which they live with a Child Benefit claimant whose income is below £50,000.

 

A couple or partnership affected by these new rules comprises:

 

• a married couple living together;

• civil partners living together;

• a man and a woman who are not married to each other but who are living together; or

• a man living with a man or a woman living with a woman who are living together as if they were civil partners.

 

What planning could reduce this tax charge?

 

If the highest earner’s income is marginally over £50,000 the simplest way to reduce or eliminate this new tax charge is to reduce your income for tax purposes. One way that you can do this and retain benefit for your family is to make a lump sum contribution into your pension scheme. You will create higher rate tax relief on the contribution and save all or part of the higher Income Tax charge to recover Child Benefit. Depending on the number of children you claim for, this could create tax savings of over 70%.

 

Couples affected would be wise to seek professional help to ensure this new tax charge is kept to a minimum, especially for families where the highest income earner’s income only marginally exceeds £50,000.

HMRC Advisory Fuel Rates

Where an employer reimburses an employee for fuel only, the employer can choose to reimburse using the ‘advisory

Old gasoline pumps, Norway

rates’ issued by HMRC. If  different rates are used, the employer would need to be able to justify this with some supporting evidence.

New advisory fuel rates have been issued by HMRC that took effect from 1 September 2012.
They are:

Engine size:  Petrol;  LPG

1400cc or less:  15p;  10p
1401cc to 2000cc:  18p;  12p
Over 2000cc:  26p;  17p

Engine size:  Diesel

1600cc or less:  12p
1601cc to 2000cc:  15p
Over 2000cc:   18p

Employers please note that employees can only avoid the car fuel benefit charge if the amount they repay in respect of private fuel at least equals the amounts based on these and previous published fuel rates.

Petrol hybrid cars are treated as petrol cars for this purpose.

These rates can also be used to reclaim VAT input tax on the fuel element of car mileage payments although businesses will also need to retain fuel receipts.