Tax Matters

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• Tax Matters

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Tim Smith Tax PartnerDeborah Parks-Green
Employee Consulting Group
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Tax Planning

• You or the tax man ?

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Every man is entitled to order his affairs so
that the tax attaching under the appropriate Acts
is less than it otherwise would be
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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

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Tax Evasion

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

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Whats the Difference?

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

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Seminar Outline

• Employee tax
• Other Income tax
• Capital gains tax
• Inheritance tax

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Employee Tax Matters
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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

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BENEFITS
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What is a benefit in kind?

• Received by reason of employment
• Not necessarily from employer
• Benefits code

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Who does the benefits code apply to?

• Directors
• Higher paid employees

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Types of benefit

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

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Company cars

• Annual charge list price x CO2 emissions
• List price
• Manufacturers list price not what is paid by
  employer
• Increased to include cost of accessories
• Reduced for capital contribution (up to max
  5,000)

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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

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CO2 basis 2007-2008 CO2 basis 2007-2008 CO2 basis 2007-2008 CO2 basis 2007-2008 CO2 basis 2007-2008 CO2 basis 2007-2008 CO2 basis 2007-2008 CO2 basis 2007-2008 CO2 basis 2007-2008
CO2 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 135gm/km from 2008/2009 135gm/km from 2008/2009 135gm/km from 2008/2009
NB New 10 rate for up to 120gm/km from 2008/2009 NB New 10 rate for up to 120gm/km from 2008/2009 NB New 10 rate for up to 120gm/km from 2008/2009 NB New 10 rate for up to 120gm/km from 2008/2009 NB New 10 rate for up to 120gm/km from 2008/2009 NB New 10 rate for up to 120gm/km from 2008/2009 NB New 10 rate for up to 120gm/km from 2008/2009 NB New 10 rate for up to 120gm/km from 2008/2009
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Cars - 2007/2008 supps discounts 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
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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

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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

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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
• (Employers NICs added to this would be 1,560)
• After tax and NICs, employee receive 816
• Overall better off by 736

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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

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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
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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

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Approved Mileage Rates Private owned cars
Approved mileage rates Approved mileage rates Approved mileage rates
From 2002/03 First 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

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

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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

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Cash or car

• Extra salary (4,000) less tax
• (1,600) less NIC (40) GAIN 2,360
• Business mileage payments
• (30,000 miles _at_ 40ppm/25ppm) GAIN 9,000
• Non-receipt approved mileage
• (30,000 miles _at_ 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

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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

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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.

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Cheap loans

• Low interest rate and free loans chargeable
• EXCEPT
• Interest free travel season ticket loan is exempt
• Loans less than 5,000 exempt
• Directors overdrawn current account is treated
  as a loan
• Charge to tax on difference between interest rate
  paid and official rate currently 6.25

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Pecuniary liability

• Personal liability of the employee met by the
  employer e.g. employer pays employees gym
  membership bill
• Benefit is value of the liability
• Entered on form P11D for tax purposes and
  included in gross pay for NIC purposes

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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

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Assets made available

• Gift of an asset by employer to employee is a
  taxable benefit
• Benefit market value at the time it is
  transferred

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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

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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 employers 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

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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

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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

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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

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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

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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 employees tax
  return

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Expenses
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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 employers name

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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

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Expenses

• A tax deduction can be claimed for
• Professional membership
• Annual subscriptions
• Business entertainment
• Travel and subsistence
• Use home telephone

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Annual subscriptions

• Allowable where
• In HMRCs 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

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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 employees 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

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Travel

• Allowable if
• Necessarily incurred travelling in the
  performance of the duties of employment
• Not ordinary commuting
• Not private travel

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Travel

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

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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

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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 doesnt pay, in limited
  circumstance, a tax deduction can be claimed to
  cover additional household expenses

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Internet access

• Where employer subscribes for Internet access at
  employees 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 doesnt affect cost of package

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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

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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

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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
  employers premises, or employee lives too far
  away
• Employee has no choice between working at
  employers premises or elsewhere

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Claim deduction? Example 1

• A is an area sales manager for Scotland, living
  in Glasgow
• Companys nearest office is in Newcastle
• Carries out all admin work at home, where he has
  set aside a room as an office
• Conclusion As 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

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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 companys
  office in Newcastle, but works from home through
  choice, so no relief for homeworking expenses

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Claim deduction? Example 3

• C works at companys 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

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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

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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

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Non-qualifying expense deductions

• Council tax
• Rent
• Water rates
• Mortgage repayments
• Endowment premiums
• Household insurance

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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 employees tax return
• Saves administration
• Will not cover round sum allowances

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Tax efficient remuneration
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Remuneration planning

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

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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

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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 dont attract NICs
• Sacrifice salary for employer pension
  contributions

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Childcare or childcare vouchers

• Higher Basic
• Rate Rate
• Tax and NI free childcare 55 per week
• Income tax savings 2,860 x 40/22
  1,144 629
• NIC Savings
• Employers 2,860 x 12.8 366
  366
• Employees 2,860 x 1/11 29
  315
• Total savings 1,539
  1,310

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Pension payments

• Higher Basic
• Rate Rate
• Employer contributions replace
• Employee contributions of 1,500
• NIC savings
• Employers 1500 x 12.8 192 192
• Employees 1,500 x 1 / 11 15 150
• Total savings 207 342

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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

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Approved schemes

• Save as you earn scheme (SAYE)
• Share incentive plan (SIP)
• Company share option plan (CSOP)
• Enterprise management incentive (EMI)

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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

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Summary continued

• use of interest free or low interest loan
  perhaps to fund capital contribution towards
  company car
• avoid employees NICs by putting contracts in
  employers name
• claiming homeworking expenses
• either from employer
• or as a tax deduction (far more restrictive)
• consider salary sacrifice where available

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Income Tax

• Married couples
• Savings
• Borrowings

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Married Couples

• Dont 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

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Independent Taxation

• If your spouse is not already using the 10 and
  22 rate bands, the maximum saving in 2007/08
  is..
• 6,496

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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

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Savings

• Once you are both paying 40 tax, consider
  investing in
• ISAs
• National Savings
• Pension schemes

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Savings

• Once you are both paying 40 tax, consider
  investing in
• ISAs
• National Savings
• Pension schemes
• Your mortgage!

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Mortgage Relief Gone

• No relief from 6 April 2000

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Your Mortgage

• 100,000 savings
• Interest 4,500
• Tax payable 1,800
• Net 2,700

• 100,000 mortgage
• Interest 5,700?

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Borrowing

• No tax relief on home loans
• 40 tax relief on business loans
• Turn your home loan into a business loan!

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Borrowing

• If youre about to buy a rental property
• Dont 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

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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 dont apply to capital
  gains tax

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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

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CGT Use of Home as Office

• Often raised
• Not an issue, provided
• Not exclusively business use

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Inheritance Tax

• Remember to use
• Annual exemption
• Marriage gifts
• Regular out of income
• Nil-rate band 300k
• PETs - Unlimited

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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

87
Inheritance Tax

• BPR Double Dipping
• Assets
• Business 1,000,000
• Other Assets 1,500,000
• To Daughter
• Non-business assets Nil rate band 300,000
• Business assets BPR 1,000,000
• To Wife
• Non-business assets 1,200,000

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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 husbands death
• 400,000 on wifes death
• Total 800,000

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Inheritance Tax

• Death-bed planning
• Marriage ?!
• Inter-spouse exemptions CGT and IHT
• Gift all assets for CGT uplift on death

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Questions?
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Contact details

• Website - www.bakertilly.co.uk
• Tim Smith
• Tim.Smith_at_bakertilly.co.uk
• 01256 486815
• Deborah Parks-Green
• Deborah.Parks-Green_at_bakertilly.co.uk
• 01256 486845

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