Tax and NIC implications of private bills being paid for by a company
Tax and NIC implications of private bills being paid for by a company
Working from home during the Coronavirus pandemic created a range of tax issues, not least where private bills, such as for internet usage, were paid for by the company. The tax and NIC implications are different depending on who pays for the item or service and how the payment is made. The first point to consider is in whose name is the contract – the employee, or the employer.
Employee’s name
- Where the employer indirectly pays a bill that is in the employee’s name by giving them the cash with which to pay (or reimburse if already paid), then PAYE is operated as normal as the employer is paying cash earnings to the employee. The employee has made the contract but it is the employer who has provided the money, so Class 1 NIC for both employee and employer is chargeable.
- Should the contract/ purchase be in the employee’s name but the employer pays the bill direct, then the employer would have discharged the employee’s debt. The employer is required to apply NICs as if the employee had been paid in cash as the employer is making a payment which is remuneration or profit derived from the employment made for the benefit of the employee. The amount is included in gross pay for NIC. However, the approach for income tax purposes is that tax cannot physically be deducted from a payment that has been made to a third party and, instead, the payment needs to be recognised as a taxable benefit-in-kind on the employee’s Form P11D section B (Pecuniary Liability) for the tax year. Class 1 NIC is accounted for in the tax month that the bill is paid on the employee’s behalf. The end result, however, is the same as if the employee had been paid in cash such that the employee pays both income tax and primary NICs, and the company pays employers’ NICs on the same amount.
Employer’s name
If the employer makes the contract, then it is a company expense and probably a benefit-in-kind assessable on the employee as the employer is providing a free service in kind. The cost is reported on the employees form P11D and the employer is liable to Class1ANIC on the value of the benefit. The key difference being that, as a benefit-in-kind, there is no exposure to employees’ NICs although Class 1 NIC is payable by the employer.
Directors
If the employer makes payments to, or on behalf of, the directors for their personal bills, and (importantly) these payments do not form part of their remuneration package, then according to the HMRC’s ‘Checklist for Directors’ Loan Accounts’ these payments should normally be debited to the appropriate director’s loan account (DLA). The employer is paying for something on the basis that the employee/director will eventually reimburse the company – i.e. a loan. Overdrawn DLA’s are settled either via payment of a salary (or bonus) or dividends (or repayment of the overdrawn amount). A NIC liability will only arise where the overdrawn balance in respect of the bill is cleared by a payment of salary or by a bonus.
If the company owes the director money because the loan account is in credit, and the director requires the company to apply some of his or her funds to the settlement of a third party debt, then that payment does not arise out of the director’s employment, does not become earnings and as such is not liable to NIC.
New lower SDLT residential threshold
New lower SDLT residential threshold
Back in July 2020, the residential stamp duty land tax threshold in England and Northern Ireland was increased to £500,000 to help stimulate the property market after the first wave of the Covid-19 pandemic. The increased threshold was originally due to apply from 8 July 2020 until 31 March 2021, but as the Covid-19 pandemic continued to run, the Chancellor announced at the time of the 2021 Spring Budget, that the temporary threshold would remain at £500,000 until 30 June 2021. From 1 July 2021, the threshold falls to £250,000, remaining at this level until 30 September 2021, before reverting to the usual level of £125,000 from 1 October 2021. For first time buyers, the threshold reverted to £300,000 from 1 July 2021 for properties costing £500,000 or less.
Similar initiatives were introduced in Scotland in relation to land and buildings transaction tax (LBTT) and in Wales in relation to land transaction tax (LTT). In Scotland, the LBTT threshold was increased to £250,000 from 15 July 2020 until 31 March 2021. However, there was no extension beyond 31 March 2021, and the threshold reverted to £145,000 from 1 April 2021. In Wales, the LTT was increased to £250,000 from 27 July 2020, originally until 31 March 2021. However, this was extended until 30 June 2021. The threshold reverted to £180,000 from 1 July 2021.
Missed the 30 June deadline
If you are looking to buy property in England or Northern Ireland and missed the 30 June 2021 deadline, there is still the opportunity to benefit from a reduced temporary threshold, as long as the purchase completes by 30 September 2021.
Completing by this deadline could save up to £2,500.
Investment properties
For SDLT purposes in England and Wales and for LTT purposes in Scotland, investors and second-home owners were able to benefit from the increased threshold, with the second property supplement (3% for SDLT purposes and 4% for LTT purposes) being applied to the rates as reduced. However, those buying second homes in Wales were not able to benefit.
Example
Julia is looking for a property to let out as a holiday let. She finds a property in June 2021 and her offer of £400,000 was accepted.
If she is able to complete by 30 September 2021, she will pay SDLT of £19,500 ((£250,000 @ 3%) + (£150,000 @ 8%).
However, if she misses this deadline, completing on or after 1 October 2021, she will pay SDLT of £22,000 ((£125,000 @ 3%) + (£125,000 @ 5%) + (£150,000 @ 8%)). Completing by 30 September 2021 will save her £2,500 in SDLT.
Relief for losses in the early years of a trade
Relief for losses in the early years of a trade
It is not uncommon to realise a loss in the early years of a trade. However, traders who commenced their self-employment in 2019 or 2020 may also have suffered as a result of the pandemic. Although the Self-Employment Income Support Scheme (SEISS) provided help for traders who also suffered from the impact of the pandemic, those who started trading in 2019/20 were unable to benefit from the first three grants (qualifying only for grants 4 and 5 if they had filed their 2019/20 tax return by 2 March 2021 and met the other eligibility criteria). Traders who started a business in 2020/21 are not able to benefit from the SEISS.
However, they may be able to claim loss relief under the early trade losses relief rules, and generate a tax repayment in the process.
Nature of the relief
The relief for losses in the early years of the trade allows a trader who makes a trading loss in any of the first four years of a new trade to carry that loss back against taxable income of the previous three years. The loss is set against the income of the earliest year first.
Accruals basis not cash basis
Relief for the loss under these rules is only available where the accounts are prepared on the accruals basis. Thus, if losses in the early years are likely, it is worth considering preparing accounts using the accruals basis to open up a claim to relief. This relief is not available where accounts are prepared under the cash basis – where this is the case, the loss can be carried back against any previous trading profits of the same trade, should they exist, or carried forward and set against future profits of the same trade.
Case study
Polly was employed as a beautician earning £25,000 a year prior to setting up her own beauty business on 1 June 2020. Her business was badly affected by the pandemic, and in the 10 months to 5 April 2021, she makes a loss of £10,000. This is a loss for the 2020/21 tax year.
She can carry the loss in her first year back against her income of 2017/18, 2018/19 and 2019/20, setting the loss against her income for 2017/18 first.
She carries the loss back to 2017/18, setting it against her employment income for that year of £25,000, reducing her taxable income to £15,000 in the process. Carrying the loss back generates a tax repayment of £2,000 (£10,000 @ 20%).
Personal allowances may be lost
It should be noted that the loss carried back cannot be tailored to preserve personal allowances, which may be lost as a result.
Tax relief on loans to close companies
Tax relief on loans to close companies
Family and personal companies are often ‘close’ companies. Broadly, this is one that is controlled by five or fewer shareholders or any number of shareholders all of whom are directors.
In a close company, the directors and shareholders may borrow money from the company (in respect of which a tax charge may arise if the loans are not repaid by the time that the corporation tax for the period in which the loans were made is due nine months and one day after the end of that period).
The directors and shareholders may also lend money to the company. This may be more prevalent over the last 18 months as a result of the Covid-19 pandemic. Where the director borrows money in order to lend it to the close company, tax relief may be available. Tax relief may also be available where a shareholder borrows money to buy more shares in the company.
Availability of interest relief
Individuals are only entitled to tax relief for interest payments on certain loans. The list of eligible loans include a loan to buy an interest in a close company.
An individual can benefit from tax relief if they borrow money to buy ordinary shares in a close company in which they own at least 5% of the ordinary share capital (either alone or with associates). Where the 5% test is not met, relief is available for a loan to buy shares in a close company in which the individuals owns some shares and in which they work for the greater part of their working time in the management and conduct of the company’s business, or that of an associated company.
Tax relief is also available if the individual borrows money to lend it to a close company in which they have an interest, as long as the money is used wholly and exclusively for the purposes of the business or that of an associated company, provided that company is a close company and is not a close investment holding company. Again, to qualify for the relief, the individual must either own 5% of the ordinary share capital (either alone or with associates), or own shares in the company and spend the greater part of their working time working for the company, or an associated company.
The relief is lost if the borrowings are recovered from the close company. This would be the case if, say, a directors borrowed £50,000 to lend to the close company and the company repaid this, but the director did not clear the original loan. In this situation, the director would not be able to continue to claim tax relief on the interest paid on the original loan.
Relief must be claimed
Tax relief on eligible borrowings must be claimed. This can be done via the self-assessment tax return.
The income tax relief cap applies – this is the greater of £50,000 and 25% of adjusted net income.
Termination payments and Class 1A National Insurance
Termination payments and Class 1A National Insurance
As the Coronavirus Job Retention Scheme comes to an end, employers with employees who are still on furlough will need to decide whether they are able to bring the employee back to work, either full time or part time, or whether they will have to terminate the employee’s employment.
When terminating an employee’s employment, the employer may need to pay Class 1A National Insurance contributions on a termination award made to the employee.
Taxation of termination payments: Recap
Where an employee’s employment is terminated, the employee may receive termination payments, such as pay in lieu of notice and ex-gratia lump sums, in additional to normal wages and salary payments.
Normal payments from the employment, such as salary and holiday pay, are taxed as earnings and are liable to employee’s and employer’s Class 1 National Insurance contributions. However, the treatment of termination payments depends on whether, and if so the extent, to which they exceed what is known as the employee’s ‘Post Employment Notice Pay’ (PENP). Detailed consideration of how this is determined is outside the scope of this article, but broadly, PENP is the amount that the employee would have earned had they worked their notice period.
PENP is taxed as earnings and is liable to employee’s and employer’s Class 1 National Insurance.
Where the employee’s termination payment exceeds their PENP, the first £30,000 of the excess is tax-free. Amounts over £30,000 are taxable but not liable to employee’s National Insurance.
Employer liability to Class 1A NIC
Where a termination payment exceeds the £30,000 threshold, since 6 April 2020, the employer must pay Class 1A National Insurance on the excess over £30,000 at 13.8%.
Unlike Class 1A National Insurance contributions on benefits-in-kind, the Class 1A payable on a termination payment is not included in the Class 1A liability reported on the P11D(b); instead it is reported to HMRC via Real Time Information (RTI) on the Full Payment Submission (FPS) for the period in which the termination payment was made to the employee.
The Class 1A National Insurance payable on the termination award must be paid over to HMRC with the tax and Class 1 National Insurance for that period, i.e. by 22nd of the month where payment is made electronically or by the 19th of the month where payment is made by cheque, rather than with the Class 1A on benefits in kind, which must be paid by 22 July after the end of the tax year where payment is made electronically (or by 19 July where payment is made by cheque).
Example
An employee has been on furlough since March 2020. In September 2021, his employer decides that they are unable to keep the employee on. The employee’s employment is terminated with effect from 1 October 2021.
The employee receives a termination payment of £100,000, paid to him on 1 October 2021. The employee’s PENP is £15,000. The excess over the PENP is £85,000 (£100,000 – £15,000), of which the first £30,000 is tax-free. The remaining £55,000 is taxable and liable to Class 1A National Insurance.
The employer’s Class 1A National Insurance liability is £7,590 (£55,000 @ 13.8%). The payment is made to the employee in month 6 (month to 5 October 2021). The employer’s Class 1A National Insurance on the termination payment must be paid to HMRC with the PAYE tax and Class 1 National Insurance for month 6. Payment must be made by 22 October 2021 where it is made electronically, or by 19 October 2021 if payment is made by cheque.
Employers terminating employees’ employments will need to budget for the Class 1A liability, as well as the cost of the termination packages.
Claim tax relief for additional costs of working from home
Claim tax relief for additional costs of working from home
During the Covid-19 pandemic, the advice was ‘work from home if you can’. As a result, millions of employees found themselves working at home, often at very short notice. Many still have not returned to the workplace, and homeworking (whether fully or flexibly) is here to stay.
Employees will generally incur additional costs as a result of working from home. They will use more electricity to run their computer and light their workspace and may use more gas as a result of having the heating on during the day.
While for many years there has been a statutory exemption that allows employers to meet or contribute towards the additional costs of working from home, in recognition of the homeworking requirements imposed by the pandemic, employees who do not receive homeworking payments from their employer are able to claim tax relief for the extra household costs that they have incurred while working from home.
Exemption for costs met by the employer
Employers can pay employees a homeworking allowance of £6 per week (£26 per month) tax-free, and without the employee having to demonstrate that they have actually incurred additional household costs of at least this amount as a result of working from home. The tax-free amount is the same, regardless of whether the employee is required to work from home full-time or one day a week. Consequently, the payments can be made to employees who work flexibly, working from home part of the time and at the employer’s workplace part of the time.
Where the employee’s actual additional household costs as a result of working from home are more than £6 per week, the employer can meet the actual costs tax-free, as long as the employee is able to provide evidence in support of the actual additional costs.
Tax relief for employees
Employees who have been required to work from home can claim tax relief for the additional costs of doing so where these are not met by the employer. HMRC will accept claims of £6 per week/£26 per month without needing evidence of the actual additional costs. Where these are higher, the higher amount can be claimed, as long as this can be substantiated.
HMRC are now accepting claims for 2021/22. Claims can be made online at www.tax.service.gov.uk/claim-tax-relief-expenses/only-claiming-working-from-home-tax-relief?_ga=2.193253997.1398232652.1624373729-980780301.1612354164.
Relief is given for the full tax year, even if the employee returns to the workplace before 5 April 2022. Employees who were entitled to the relief for 2020/21 can also claim for that year if they have not yet done so.
Where an employee is required to complete a self-assessment tax return, the claim can be made on the return.
A claim of £6 per week (£312 for the year) will save a basic rate taxpayer £62.40 in tax and a higher rate taxpayer £124.80 in tax.
Take dividends while you can
Take dividends while you can
For personal and family companies, a tax efficient strategy for extracting profits is to take a small salary and to extract any further funds needed outside the company in the form of dividends. However, while there are no restrictions on taking a salary if the company is making a loss, the same is not true of dividends.
Need for retained profits
Dividends can only be paid out of retained profits (i.e. profits left in the business after corporation tax has been paid).
However, if a company make a loss for a particular year, this does not necessarily preclude the payment of a dividend, as long as the company had retained profits at the start of the year, and the loss has not completely eliminated those profits.
Example
Andrew runs a personal company A Ltd. He prepares accounts to 31 July each year. At 1 August 2020, he had retained profits of £20,000. He expects to make a loss for the year to 31 July 2021 of £5,000. He will have retained profits available after taking account of the predicted loss of £15,000 from which to pay dividends.
Plan ahead
If a company needs funds outside the business and is unsure regards to future profitability, it may be worthwhile taking dividends while there are retained profits available.
Using the figures in the above example, assuming that Andrew has cash available, he may wish to extract all his retained profits as a dividend while he can to benefit from the more favourable tax treatment of dividends. If he makes further losses, his remaining profits may be eliminated, removing the option of taking a dividend.
The dividend will be tax-free to the extent to which it is covered by the dividend allowance (set at £2,000 for 2021/22) and any unused personal allowance. Thereafter, dividends (treated as the top slice of income) are taxed at 7.5% to the extent to which they fall in the basic rate band, at 32.5% to the extent to which they fall in the higher rate band and at 38.1% if they fall in the additional rate band. There is no National Insurance on dividends.
It is prudent to prepare management accounts to show that the company had retained profits at the time at which the dividend was paid, in case of a challenge by HMRC.
No retained profits
In the absence of retained profits, it is not possible to pay a dividend; any payment made that is classed as a dividend, will be made illegally and may be challenged by HMRC and reclassified as a salary or bonus payment, and taxed accordingly.
However, if the company is loss making, but funds are need to meet personal liabilities, it is possible to pay a higher salary or a bonus, even where this increases the amount of the loss. The salary or bonus payment, and any associated employer’s National Insurance, can be deducted in working out the taxable loss, which may be carried back to generate a repayment of corporation tax.
SDLT Multiple Dwellings Relief
SDLT Multiple Dwellings relief
Multiple dwellings relief’ (MDR) allows a rate to be charged at the percentage payable on the ‘average value’ price (referred to as the ‘Average Value SDLT’ (AVSDLT)) should more than one property be purchased at one time, rather than on the total consideration. MDR is only available for residential transactions.
The purpose of this relief is to simplify the calculation of SDLT when a single transaction includes the purchase of more than one dwelling. As such, rather than separately calculating the SDLT on each property acquired, SDLT is computed as follows:
- Calculate the ‘AVSDLT’ i.e. total dwellings consideration/ total number of dwellings.
- Multiply the resultant figure by the total number of dwellings.
The answer is the total SDLT liability.
NOTE 1: The SDLT must be at least equal to 1% x total dwellings consideration.
NOTE 2: the dwellings are not the main residence of the purchaser and as such the additional rate of 3% applies.
Basic example
A single transaction (post 1 October 2021) comprises the purchase of 4 ‘dwellings’ for £950,000.
- £950,000/4 = £237,500 per dwelling
Tax per dwelling =
- 3% x £125,000 = £3,750
- 5% x £112,500 = £5,625
£9,375 x 4 dwellings = £37,500
The minimum tax is 1% of the purchase price = £9,500
Tax payable without claiming MDR would be £67,250.
Definition 1: ‘Dwelling’
Legislation does not define ‘dwelling’ but is widely accepted as being a building or part of a building that accommodates all of a person’s basic domestic living needs. The definition has seen granny annexes, converted garages, pool houses, converted party barns and garden offices all qualify for the MDR relief.
The nearest the legislation gets to providing a definition is FA 2003 sch 6B para which states that a dwelling is:
‘A building or part of a building counts as a dwelling if-
- It is used or suitable for use as a single dwelling, or
- It is in the process of being used constructed or adapted for such use.’
One area where there have been several tax cases that have considered this definition centre round ‘granny flats’. HMRC has confirmed that provided the granny flat is a self-contained dwelling and the main house comprises more than two thirds of the total, then MDR can be claimed. One of the main issues is where a property has an additional dwelling that cannot be accessed independently. For example, in a recent tax case relief was refused as there was no door separating the house from its annexe; it also did not have a separate postal address, council tax or utility supply.
The relief does not apply to the transfer of a freehold reversion or head lease where a dwelling has a long lease of 21 years or more.
Definition 2 – ‘Single transaction’
MDR can be claimed where the transaction involves an interest in at least two dwellings or at least two dwellings and some other property.
Where six or more separate dwellings are the subject of a single transaction involving the transfer of a major interest in, or the grant of a lease then the SDLT rules treat those dwellings (for that transaction alone) as being non-residential property. This rule applies automatically. Therefore, depending on the figures, it might be better not to make an MDR claim. If one is made it is made on a land transaction return (due within 30 days of completion) or in an amendment to a return, the time limit for which is 12 months from the filing date.
Limited liability partnerships
Limited liability partnerships
A limited liability partnership (LLP) is not a partnership but a body corporate with a difference – there are no shareholders or guarantors (as there would be for a company limited by guarantee) but partners (designated ‘members’) carrying on a trade or business with a view to profit. It is a structure commonly used by professionals such as doctors, attorneys, and accountants who go into practice together.
As a ‘body corporate’ it must be registered with Companies House however, the entity does not pay Corporation tax, instead the individual members are subject to the normal partnership rules (i.e. taxed individually as being self employed on their respective share of the profit) regardless of the amount they withdraw from the business.
Members receive an income/profit share proportionate to their capital account balance. However, certain members can be allocated a disproportionate amount of profit by allowing a ‘salary’ in recognition of the work they do, which could be disproportionate to their income/profit share e.g. a new member may contribute little or no equity but take on a significant share of the management of the business. There are anti avoidance rules in place that treat a member as employed should they receive a fixed rather than varied amount of partnership profit.
Number of members
Each LLP must have at least two ‘designated’ members responsible for various administrative tasks; however there is no upper limit to the number of members. Members can be either individuals or limited companies with each member being able to sign binding contracts on behalf of the LLP (thus avoiding a problem sometimes encountered by ordinary partnerships where every partner has to sign certain documents).
Advantages of an LLP
The main advantage of setting up an LLP is to give some protection to a member going bankrupt where claims are made against the LLP only and members’ personal liability is limited to their capital contribution. However, all members can be held responsible for another member’s negligence if that negligent member is operating within the scope of their authority in the business. In comparison a partner’s personal assets can be seized to settle the partnership’s debts in an ordinary partnership.
A further potential advantage is that under an LLP structure different proportions of income and capital entitlements can be allocated each year to the different members; this makes LLPs a flexible method of withdrawing profits particularly where different members have different percentage interests in the business e.g. one member may undertake the majority of the administration but have a lower percentage interest in the partnership. In this instance that member can be allocated a higher (variable) share of the profit rather than being paid a fixed salary for the work involved. This ability to change the profit split year on year is also a benefit for those partnerships with different members with different marginal tax rates.
If an LLP goes into liquidation it is treated as a company rather than a partnership for Capital gains tax purposes.
Loans to participators
Loans to participators
Where a close company (or LLP) makes a loan (otherwise than in the ordinary course of a business) to an individual who is a participator or an associate of a participator, a tax charge of 32.5% is payable by the company should that loan remain outstanding nine months after the end of the accounting period. The charge applies to loans to directors who are also participators, to participators who are not directors, but it does not apply to directors who are not also participators.
A ‘participator’ may be a shareholder of the company whose interest in the company is more than 5% of the share capital but the definition also includes any person having a share or interest in the capital or income of the company. An ordinary trade creditor is not a ‘participator’.
A ‘close company’ is a UK resident company under the control of:
(a) 5 or fewer participators, or
(b) of any number of participators who are also directors.
The rate of tax payable is the same as the higher ‘dividend tax’ rate at 32.5%. Should the charge be paid and then the loan subsequently be repaid, repayment can be claimed but will not be so until nine months and one day after the end of the company’s accounting period in which the loan was repaid or reduced.
Where the loan has been made before the individual becomes a participator e.g. the loan is made to an individual who subsequently becomes a shareholder, then no charge is levied provided there is no link between the loan and the individual becoming a shareholder.
Material interest
As long as the participator is not also a director or employee in the company, there is no immediate tax charge for the participator. The scenario is different where the participator does not have material interest but works full time for company as there will be a charge under the benefit in kind rules should the loan exceed £15,000. There is also the possibility of a double income tax charge if the loan is subsequently waived or written off. In such circumstances not only will there be a benefit in kind on the granting of the loan but HMRC could deem the waiver to be a distribution to a participator or as earnings to a director or employee. However, there is provision in the legislation that prioritises the distribution treatment in this situation. There is no similar provision in the national insurance legislation and so this means that the income would be taxable as a distribution (dividend income) and Class 1 national insurance (both employer’s and employee’s contributions) be payable. In most small companies the director will be a shareholder entitled to vote at board level and so will also be a participator. Therefore, the distribution treatment will apply to any loans made and written off to the director or his family.
A participator who does not have material interest but works full time for company could receive small loans over several accounting periods such that eventually the aggregate exceeds the £15,000 exemption limit. HMRC’s gives the example of a director receiving:
- £5,000 in accounting period 1
- £2,000 in accounting period 2
- 10,000 in accounting period 3
Individually these loans would qualify for the exemption but in total an amount of £17,000 has been received. HMRC state that the two earlier amounts in period 1 and 2 meet the requirements for the exemption and therefore the company is not charged on those amounts. However, the full amount of £10,000 in period 3 is chargeable as not meeting the condition under s456 CTA 2010 which states that:
- the amount of the loan in question plus the outstanding amounts of loans made to the borrower does not exceed £15,000 (Condition A)
Details of the loan are required to be declared on the company tax return; the usual interest being charged on payments made late to HMRC.