Tag Archives: tax

Claiming VAT Back on Mileage Allowance

Aston Martin Vantage Racing Team Car

An employer can claim input VAT back on the fuel element of the tax free Mileage Allowance and Fuel Allowance. Input tax is calculated by dividing the fuel element of the mileage allowance by 6 (for the current VAT rate of 20{8ee99a90b51e2217d12101096daf2ee9e40c43b9c2fa413e32f91dd0a196a214}).

Here is some information provided by HMRC:

The allowance paid to employees must be based on mileage actually done. Business records must be kept to back this up. The business must retain records for each employee claiming a mileage allowance to show:

  • the mileage travelled;
  • whether the journey is both business and private;
  • the cylinder capacity of the vehicle;
  • the rate of mileage allowance; and
  • the amount of input tax claimed.

HMRC officers may check what rates employers have used to calculate claimable input tax on the fuel element of mileage allowances paid to their employees. Current rates as published by motoring associations such as AA or RAC are generally acceptable. HMRC will also accept HMRC’s own advisory rates which are published twice a year and can be found at Company Cars – advisory fuel rates.

Some employers cap employees to a particular level of allowance. For example, the employer may decide that employees with cars with engines over 2000cc will receive only the rate paid for vehicles between 1400 and 2000cc. If this happens HMRC will only allow input tax recovery on the mileage rate that the employer has paid to the employee.

Speak to your accountant for specific advice based on your circumstances before acting on the information above

 

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Tax Free Mileage Allowance

Aston Martin Vantage Racing Team Car

HMRC allows you to pay your employees and directors a tax free mileage allowance for using their own vehicle for business journeys. Provided the payments are no more than HMRC’s mileage approved rates below there will be no tax to pay on the payments and they do not have to be reported as a benefit on forms P9D or P11D.

Below is information provided by HMRC:

Mileage Allowance Payments

Mileage Allowance Payments (MAPs) are what you pay your employee for using their own vehicle for business journeys.

You’re allowed to pay your employee a certain amount of MAPs each year without having to report them to HMRC. This is called an ‘approved amount’.

Work out the Value

To calculate the ‘approved amount’, multiply your employee’s business travel miles for the year by the rate per mile for their vehicle below.

Tax free rates per business mile

Type of vehicle First 10,000 miles Above 10,000 miles
Cars and vans 45p (40p before 2011 to 2012) 25p
Motorcycles 24p 24p
Bikes 20p 20p

Example:

The employee travels 12,000 business miles in their car – the approved amount for the year would be £5,000 (10,000 x 45p plus 2,000 x 25p).

Passenger payments

If your employee carries another employee in their own car or van on a business journey, you can pay them passenger payments of up to 5p per mile tax-free.

It does not matter if your employee uses more than one vehicle in a year – it’s all calculated together.

What to report to HMRC and pay

Who gets the benefit What to do What to pay
Employees at a rate of less than £8,500 a year Report on form P9D Add anything above the ‘approved amount’ to the employee’s pay, and deduct and pay tax as normal
Employees at a rate of £8,500 or more a year Report on form P11D Add anything above the ‘approved amount’ to the employee’s pay, and deduct and pay tax as normal
Directors Report on form P11D Add anything above the ‘approved amount’ to the employee’s pay, and deduct and pay tax as normal

Anything below the ‘approved amount’

If your employee gets paid less than the above rates, you won’t have to report to HMRC or pay tax, but:

  • your employee will be able to get tax relief (called Mileage Allowance Relief, or MAR) on the unused balance of the approved amount
  • you can make separate optional reports to HMRC of any such unused balances under a scheme called the Mileage Allowance Relief Optional Reporting Scheme (MARORS) – contact your HMRC office to join the scheme.

Speak to your accountant for specific advice based on your circumstances before acting on the information above

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New Advisory Fuel Rates

Aston Martin Vantage Racing Team Car

From 1 December, 2015, HMRC lowered the Advisory Fuel Rates (AFR) applying to employees and owner directors using a company car.

 

 

Advisory Fuel Rates from 1 December 2015

These rates apply from 1 December 2015. You can use the previous rates for up to 1 month from the date the new rates apply.

Engine size Petrol – amount per mile LPG – amount per mile
1400cc or less 11 pence 7 pence
1401cc to 2000cc 13 pence 9 pence
Over 2000cc 20 pence 13 pence
Engine size Diesel – amount per mile
1600cc or less 9 pence
1601cc to 2000cc 11 pence
Over 2000cc 13 pence

Hybrid cars are treated as either petrol or diesel cars for this purpose.

Below is information provided by HMRC:

When you can use the mileage rates

The rates only apply when you either:

  • reimburse employees for business travel in their company cars
  • require employees to repay the cost of fuel used for private travel

You must not use these rates in any other circumstances. If you use them correctly you will not need to apply for a dispensation to cover the payments you make.

Reimburse employees for business travel in their company cars

If you pay a rate per mile for business travel no higher than the AFR, for the particular engine size and fuel type, HM Revenue and Customs (HMRC) will accept there is no taxable profit and no Class 1A National Insurance to pay.

You can use your own rates which better reflect your circumstances if, for example, your cars are more fuel efficient, or if the cost of business travel is higher than the guideline rates.

If you pay rates that are higher than the advisory rates and can’t demonstrate the fuel cost per mile is higher, there is no fuel benefit charge if the mileage payments are solely for miles of business travel. Instead, you will have to treat any excess as taxable profit and as earnings for Class 1 National Insurance purposes.

Require employees to repay the cost of fuel used for private travel

If you have correctly recorded all miles of private travel and used the correct rate (or anything higher) to work out the cost of fuel used for private travel that the employee must repay to you, HMRC will accept there is no fuel benefit charge.

The advisory rates will not be binding where you can demonstrate that employees cover the full cost of private fuel by repaying at a lower rate per mile.

 

 

 

 

 

 

Remember to speak to your accountant before acting on the above information

 

 

 

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Dividends Tax Shocker

Tax on Dividends Concept

How do the changes to the taxation of dividends from April, 2016 affect owner-managed and family companies?

At present, owners of owner-managed and family limited companies would would pay themselves a minimum salary to cover the personal allowance and avoid payment of tax and National Insurance on it but enough to qualify for state pension purposes.

The balance of their remuneration would be in the form of dividends (provided there is enough retained profit in the company).

The Present Situation

At the moment, dividends have a 10{8ee99a90b51e2217d12101096daf2ee9e40c43b9c2fa413e32f91dd0a196a214} tax credit so that for every £100 dividend actually paid by the company (the net dividend) is divided by 9 and then multiplied by 10 to get to the gross dividend of £111.11.

How much additional tax would you be liable to pay at present?

  • Provided you are a basic rate tax payer (20{8ee99a90b51e2217d12101096daf2ee9e40c43b9c2fa413e32f91dd0a196a214} band), you have no further tax to pay;
  • If you are a higher rate tax payer (40{8ee99a90b51e2217d12101096daf2ee9e40c43b9c2fa413e32f91dd0a196a214} band), you will have a further 25{8ee99a90b51e2217d12101096daf2ee9e40c43b9c2fa413e32f91dd0a196a214} of the £100 net dividend to pay in tax;
  • If you are an additional rate tax payer (45{8ee99a90b51e2217d12101096daf2ee9e40c43b9c2fa413e32f91dd0a196a214} band), you will have a further 30.6{8ee99a90b51e2217d12101096daf2ee9e40c43b9c2fa413e32f91dd0a196a214} of the £100 net dividend to pay in tax

The reason that basic 20{8ee99a90b51e2217d12101096daf2ee9e40c43b9c2fa413e32f91dd0a196a214} rate tax payers have no further tax to pay is that the company has already been taxed 20{8ee99a90b51e2217d12101096daf2ee9e40c43b9c2fa413e32f91dd0a196a214} on the profit before it is paid out as dividend.

What is the Benefit of Business Owners Paying Themselves with Dividends?

Although the company does not get tax relief on dividends paid (unlike wages and salaries), dividends are attractive as you do not have to pay National Insurance contributions on them and no additional tax is payable until your income goes into the higher 40{8ee99a90b51e2217d12101096daf2ee9e40c43b9c2fa413e32f91dd0a196a214} after income reaches the limit of the basic rate band of £31,785 plus your personal allowance (2015/16).

What will Change from April 2016?

The 10{8ee99a90b51e2217d12101096daf2ee9e40c43b9c2fa413e32f91dd0a196a214} dividend tax credit will be abolished on 6 April, 2016. In its place, all taxpayers will receive a tax free dividend allowance of £5,000 which is offset against the first £5,000 of taxable income. This means that someone who only has dividend income will be able to receive £16,000 in dividends with no further tax to pay (£11,000 personal allowance in 2016/17 plus the £5,000 dividend allowance).

Where dividends are received above the dividend allowance, from 6 April, 2016 the balance will be taxed at 7.5{8ee99a90b51e2217d12101096daf2ee9e40c43b9c2fa413e32f91dd0a196a214} for basic rate tax payers, 32.5{8ee99a90b51e2217d12101096daf2ee9e40c43b9c2fa413e32f91dd0a196a214} for higher rate tax payers and at 38.1{8ee99a90b51e2217d12101096daf2ee9e40c43b9c2fa413e32f91dd0a196a214} for additional rate tax payers.

In effect, from 6 April, 2016, all tax payers receiving dividends above the £5,000 dividend allowance, will be paying 7.5{8ee99a90b51e2217d12101096daf2ee9e40c43b9c2fa413e32f91dd0a196a214} more tax than prior to 6 April, 2016.

This additional tax is tackling owners of owner-managed companies who pay themselves a small salary and take the balance in dividend to avoid National Insurance.

However, like a blunderbuss, it hits the pensioners who do not pay National Insurance anyway and the higher earning employees who pay the maximum National Insurance (at normal rate) that have dividend income from investments.

Dividends in ISA’s and pension funds will not pay the tax.

HMRC Examples

The way the allowance will work in different situations is demonstrated in the examples below.

Where appropriate to the calculations, the examples use the limits that will apply from April 2016:

  • Personal Allowance: £11,000
  • Basic Rate Limit: £32,000
  • Higher Rate Threshold: £43,000

Example 1

“I receive less than £5,000 per year in dividends”

From April 2016 you won’t have to pay tax on your dividend income as it is within your new Dividend Allowance.

Example 2

“I receive dividends of £600 from shares invested in an ISA

As is the case now, no tax is due on dividend income within an ISA, whatever rate of tax you pay.

Example 3

“I have a non-dividend income of £6,500, and a dividend income of £12,000 from shares outside of an ISA

With a Personal Allowance of £11,000, £4,500 of the dividends are under the threshold for tax. A further £5,000 comes within the Dividend Allowance, leaving tax to pay at Basic Rate (7.5{8ee99a90b51e2217d12101096daf2ee9e40c43b9c2fa413e32f91dd0a196a214}) on £2,500.

Example 4

“I have a non-dividend income of £20,000, and receive dividends of £6,000 outside of an ISA

You won’t need to pay tax on the first £5,000 of dividends due to the Dividend Allowance, but will pay tax on £1,000 of dividends at 7.5{8ee99a90b51e2217d12101096daf2ee9e40c43b9c2fa413e32f91dd0a196a214}.

Example 5

“I have a non-dividend income of £18,000, and receive dividends of £22,000 outside of an ISA

Of the £18,000 non-dividend income:

  • £11,000 is covered by the Personal Allowance
  • the remaining £7,000 to be taxed at Basic Rate

Of the £22,000 dividend income:

  • the Dividend Allowance covers the first £5,000
  • the remaining £17,000 of dividends to be taxed at the Basic Rate (7.5{8ee99a90b51e2217d12101096daf2ee9e40c43b9c2fa413e32f91dd0a196a214})

Example 6

“I have a non-dividend income of £40,000, and receive dividends of £9,000 outside of an ISA

Of the £40,000 non-dividend income, £11,000 is covered by the Personal Allowance, leaving £29,000 to be taxed at basic rate.

This leaves £3,000 of income that can be earned within the basic rate limit before the higher rate threshold is crossed. The Dividend Allowance covers this £3,000 first, leaving £2,000 of Allowance to use in the higher rate band. All of this £5,000 dividend income is therefore covered by the Allowance and is not subject to tax.

The remaining £4,000 of dividends are all taxed at higher rate (32.5{8ee99a90b51e2217d12101096daf2ee9e40c43b9c2fa413e32f91dd0a196a214}).

 

 

 

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