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

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Presentation on theme: "Tax Matters. Tim Smith – Tax Partner Deborah Parks-Green Employee Consulting Group."— Presentation transcript:

1 Tax Matters

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

3 Tax Planning You or the tax man ?

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

5 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

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

7 Whats the Difference? The difference between tax avoidance and tax evasion is the thickness of a prison wall

8 Seminar Outline Employee tax Other Income tax Capital gains tax Inheritance tax

9 Employee Tax Matters

10 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


12 What is a benefit in kind? Received by reason of employment Not necessarily from employer Benefits code

13 Who does the benefits code apply to? Directors Higher paid employees

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

15 Company cars Annual charge = list price x CO 2 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)

16 Company cars CO 2 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%

17 CO 2 basis CO 2 PetrolDieselCO 2 PetrolDieselCO 2 PetrolDiesel emissions% % % gm/km 140* *135gm/km from 2008/2009 NB New 10% rate for up to 120gm/km from 2008/2009

18 Cars /2008 supps & discounts PetrolBasis Diesel non-Euro IV+3% Euro IV diesel registered before 2006Nil Euro IV diesel registered from % Electric only-6% Hybrid electronic-3% Gas only-2% Bi-fuel CO 2 for gas-2% Bi-fuel conversionNil

19 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

20 Capital contributions - company car Employer provides new car for 4 years to 40% tax payer List price £20,000; CO 2 % = 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

21 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

22 Fuel benefit Annual charge £14,400 x CO 2 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

23 Company Cars - Advisory Fuel Rates for Company Cars from 1 February 2007 Engine Size PetrolDieselLPG 1400cc or less 9p 6p 1401cc to 2000cc 11p9p7p Over 2000cc 16p12p10p

24 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

25 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 2002/03 First 10,000 business miles in the tax year Each business mile over 10,000 in the tax year Cars and vans40p25p Motor cycles24p Bicycles20p

26 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% CO 2 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:

27 Cash or car £ Extra salary (£4,000) less tax (£1,600) less NIC (£40)GAIN 2,360 Business mileage payments (30,000 40ppm/25ppm)GAIN 9,000 Non-receipt approved mileage (30,000 12ppm)LOSE (3600) Annual tax saving re co. carGAIN 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

28 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

29 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.

30 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%

31 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

32 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

33 Assets made available Gift of an asset by employer to employee is a taxable benefit Benefit = market value at the time it is transferred

34 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

35 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

36 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

37 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

38 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

39 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

40 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

41 Expenses

42 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

43 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

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

45 Annual subscriptions Allowable where: In HMRCs list of approved professional bodies- This list can be found on Employee pays out of their own emoluments The activities of the body are directly relevant to their employment

46 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

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

48 Travel Can claim: Mileage allowance Cost public transport Vehicle hire Toll charges Car parking Accommodation Meals

49 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

50 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

51 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

52 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

53 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

54 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

55 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

56 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

57 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

58 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

59 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

60 Non-qualifying expense deductions Council tax Rent Water rates Mortgage repayments Endowment premiums Household insurance

61 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

62 Tax efficient remuneration

63 Remuneration planning Consider: Tax efficient benefits Pensions Salary sacrifice Share incentive plans

64 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

65 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

66 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

67 Pension payments Higher Basic 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

68 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

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

70 Summary To maximise opportunities to lower tax bill, consider: company car with lower CO 2 emissions capital contributions towards company car whether fuel benefit is worthwhile, or cash alternative whether cash payments would be better alternative to company car

71 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

72 Income Tax Married couples Savings Borrowings

73 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

74 Independent Taxation If your spouse is not already using the 10% and 22% rate bands, the maximum saving in 2007/08 is……….. £6,496

75 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

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

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

78 Mortgage Relief Gone No relief from 6 April 2000

79 Your Mortgage £100,000 mortgage Interest£5,700? £100,000 savings Interest£4,500 Tax payable£1,800 Net£2,700

80 Borrowing No tax relief on home loans 40% tax relief on business loans Turn your home loan into a business loan!

81 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

82 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

83 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

84 CGT – Use of Home as Office Often raised Not an issue, provided: Not exclusively business use

85 Inheritance Tax Remember to use: Annual exemption Marriage gifts Regular out of income Nil-rate band 300k PETs - Unlimited

86 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

88 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

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

90 Questions?

91 Contact details Website - Tim Smith Deborah Parks-Green

92 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.

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