Tax Matters
Tim Smith – Tax Partner
Deborah 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 2007-2008
CO2
Petrol
Diesel
CO2
emissions
%
%
emissions
gm/km
Petrol Diesel
%
%
gm/km
CO2
Petrol
Diesel
emissions
%
%
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
Diesel non-Euro IV
Euro IV diesel registered before 2006
Euro IV diesel registered from 2006
Basis
+3%
Nil
+3%
Electric only
Hybrid electronic
Gas only
Bi-fuel CO2 for gas
Bi-fuel conversion
-6%
-3%
-2%
-2%
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
Approved mileage rates
From 2002/03
First 10,000
Each business mile
business miles in over 10,000 in the
the tax year
tax year
Cars and vans
40p
25p
Motor cycles
24p
24p
Bicycles
20p
20p
Passenger payments:
• 5p per passenger per business mile for carrying fellow employees in a car
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)
Business mileage payments
(30,000 miles @ 40ppm/25ppm)
Non-receipt approved mileage
(30,000 miles @ 12ppm)
Annual tax saving re co. car
Net overall gain
GAIN
2,360
GAIN
9,000
LOSE
GAIN
(3600)
1,200
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
Tax and NI free childcare £55 per week
Income tax savings £2,860 x 40%/22%
NIC Savings:
Employer’s £2,860 x 12.8%
Employee’s £2,860 x 1%/11%
Total savings
Higher
Basic
Rate
Rate
£1,144
£629
£366
£29
£366
£315
£1,539
£1,310
Pension payments
Higher
Rate
Basic
Rate
Employer contributions replace
Employee contributions of £1,500
NIC savings
Employer’s 1500 x 12.8%
Employee’s 1,500 x 1% / 11%
£192
£15
£192
£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
gains tax
settlement rules don’t apply to capital
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
Other Assets
To Daughter
Non-business assets – Nil rate band
Business assets – BPR
£1,000,000
£1,500,000
£ 300,000
£1,000,000
To Wife
Non-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
•Tim.Smith@bakertilly.co.uk
•01256 486815
•Deborah Parks-Green
•Deborah.Parks-Green@bakertilly.co.uk
•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.