Claiming VAT on Director’s Mileage

Claiming VAT on Director’s Mileage

Questions surrounding VAT on mileage claims are common. It can be difficult to work out and hard to ensure that you have the correct evidence to give HMRC.

Let us clear up some of the terms surrounding VAT and mileage.

What is the Advisory Fuel Rate?

As VAT is charged on fuel, HMRC allow you to claim back the VAT from the fuel portion of the mileage. To calculate this, they use their advisory fuel rate, which estimates the amount of fuel used per mile based on engine size.

HMRC asses their Advisory Fuel Rate every quarter. As of March 2019 it stands that employees using a company car can claim between 7 to 21 pence based on car engine size and type of fuel used.

You are only able to claim back VAT on ‘work miles’, i.e not ‘private use’. Private use includes travelling between work and home. Work miles might include travelling to meetings, transporting items, using the vehicle as a taxi or being a driving instructor.

There are different ways to reclaim VAT on fuel, your accountant will be able to advise you on the best way for your business.

  • Reclaim the VAT and pay the correct fuel scale charge for the vehicle (see above).
  • Only reclaim VAT on fuel used for business and ensure that you keep a detailed record of all mileage.
  • Choose not to claim VAT back if it is a very low amount and the claim does not out way the administration effort.

What is the VAT Fuel Scale Charge?

Some businesses choose to provide their staff with the added benefit of ‘free’ fuel or a fuel card. In this case staff are provided with fuel for business and personal use and, therefore, the business can claim back VAT on the fuel purchased.

However, as there is a personal use element to the fuel, HMRC requests an amount of the VAT being claimed.  The amount of VAT requested by HMRC is called the Fuel Scale Charge. HMRC sets out flat rates for this charge, which is based on the CO2 emissions of the car being used – View the full VAT Fuel Scale Charge table here.

To work out your VAT Fuel Scale charge, HMRC has produced a calculator.

  • Simply designate which tax year you are you are wanting to calculate the charge for.
  • Then select the period of time (1, 3 or 12 months of that tax year).
  • Enter the car’s CO2 emissions band (you can use this Vehicle Certification Agency index to find out the CO2 emissions band for your make and model).
  • Your VAT Fuel Scale charge will be calculated and displayed with and without VAT.

What is the VAT Flat Rate Scheme and how does it affect the VAT Fuel Scale Charge?

The amount of VAT a business pays or claims back from HMRC is usually the difference between the VAT charged by the business to customers, and the VAT the business pays on their own purchases. If a business is using the VAT Flat Rate Scheme, then no VAT is reclaimed on fuel and no scale charge is required.

  • You pay a fixed rate of VAT – therefore no estimations or advisory charges are necessary to calculate.
  • You keep the difference between what you charge your customers and pay to HMRC.
  • You can’t reclaim the VAT on your purchases.

Navigating the intricacies of claiming VAT on fuel can be very complicated. There are several hoops to jump through that become more complicated the more staff you have.

If you’re struggling to deduce the amount of VAT you could be claiming or the Fuel Scale Charges you may owe – get in touch today. We’re here to help.

Common contractor finance concerns & how to avoid them

Common contractor finance concerns & how to avoid them

If you are a contractor or are just stepping into the world of contracting – congratulations! Fluctuating income and financial concerns may be brewing, but don’t worry. Many freelancers and contractors have similar concerns and there are many ways to combat then. Ensure that you have a good accountant and be utterly compliant and protected from the start.

We’ve highlighted some of the major finance concerns contractors have voiced – and how to solve them.

Deciding between hourly and daily contract rates

When you start contracting, you’ll need to firm up your pay rates. There are two main pay rate structures: hourly rate and daily rate. Both have their pros and cons.

Daily rate is often used to give one rate for a ball pack ‘day’s work’.  A day’s work can be interpreted to be anything from 6 hours to 10 hours so be sure to have a clear contract which stipulates the expected working hours.

Beware, however, that some companies will expect a lot from one day – or those days might be excessively long. Have watertight terms of engagement before agreeing to any amount of work.

Hourly rate can be used when projects are shorter – or do not have a specific end date. Employers are usually happier with an hourly rate for lower priced services, or will agree a cap on the number of hours to be a worked a week. Hourly rate is great for ongoing retainers or project work – such as marketing, design or consulting.

Going from permanent to contracting at the same company

Whilst there are no laws against contracting to your previous employee, you may need to check your employment contract or their internal policies.

There may also be issues if your old company does not want to pay out more than it did previously, for your services. This may require some negotiation – but remember that you are now liable for paying your own tax and expenses. Take this into account.

IR35 compliance concerns

Another challenge for contractors is IR35. What is IR35? IR35 is tax legislation designed to prevent tax avoidance by workers supplying their services using an intermediary, such as a limited company, whereas the workers would be an employee if the limited company was not used.  Using an intermediary is also called ‘off payroll working’.

The off-payroll working rules are in place to make sure that where an individual would’ve been an employee if they were providing their services directly, they pay broadly the same tax and NICs as an employee.

IR35 means that if you choose to do that, you’ll have to pay a higher rate of tax as a ‘disguised employee’.

If you’re concerned about the tax implications of IR35, check in with your accountant for the most up to date advice.

Taking time off for holidays

During a contract, it’s unlikely that you’ll be able to take more than a week off. Any time you take as holiday will most likely be added to the end of the contract, so be aware of this when booking in future work. There are no set rules for booking holidays as a contractor. Ensure that you have discussed the potential for holiday days with the company you are working with – you may even wish to include this in your contract. Of course, if you are aware of a holiday at the conception of a project, it is a good idea to inform your client.

Negotiating pay and contracts

You may find clients try to use the cost of equivalent employees as a benchmark for what they are happy to pay contractors. This does not work as you are not an employee, you’re a specialist in one key area, your contract has defined outcomes and you get no employee benefits.

Think of the annual salary you would be aiming for and calculate the ideal day rate or hourly rate required to reach your goal. E.g. if you base your rate on working 200 days a year and you know exactly how much you’d like to take home after tax – divide that annual amount by 200 days and add 20% to cover your tax liabilities.

Pay is only one part of the contract. It is important to also think about how you will take time off for holidays, requirements for insurances, tools required for the work, flexibility of working hours, access to resources to support your work etc.

Contracting is an exciting and, at times, lucrative way to make a living. If you can cultivate a good reputation and a large portfolio, it could very well see you through to retirement. If you have financial concerns before or during your contracting, always ask your accountant for advice.



Purchases you didn’t know were tax deductible

tax deductible purchases

Let’s talk about expenses!

There are many benefits of running your own business – flexibility, uncapped earning potential, freedom and a sense of self. However, there are also great financial benefits, including claiming back your expenses and maximising your tax relief options.

Many businesses find that they are missing out on potential tax relief due to expenses they didn’t know they could claim. Things such as travel costs, corporate lunches and certain bills are tax deductible – always ask your accountant if you’re unsure.

Office supplies

Not just pens and paper, but office machinery such as printers, scanners and shredders. This also extends to the furniture used to house your office equipment. Ergonomic chairs? No problem! Laptop rest? Claimed! Anything that is used within your office can usually be claimed back as a business expense. Ensure that you keep the physical or digital receipts for your office purchases and don’t forget to give them to your accountant.

Directors phone bill

If you’re a director of a company, you can take out a business phone contract with most major providers. If you take out the contract in the company name, rather than your own, 100% of the bill can be claimed as an expense. 

Charitable donations

If you donate money, stock, shares, employee time or sponsorship payments to charity, you are able to claim tax relief. As a limited company, you may deduct the amount donated from your taxable profit, saving you money on your corporation tax. If you are an individual or sole trader, your charitable donations are tax free – as long as you keep a record of your donations. You also do not have to pay Capital Gains Tax on land, property or shares that are given to charity. Be sure to communicate all charitable efforts to your accountant to maximise on the tax benefits.

HHousehold bills

If you choose to work from home, then you cannot claim household bills as tax relief. However, if you have to work from home or have a home office for your business, there are a few things you might be able to deduct. You can claim a proportion of some of your household bills, such as telephone or internet costs. Use this free gov.uk calculator to find out how much you could claim, or ask your accountant. Or, if you haven’t got receipts to demonstrate your expenses, you can claim a flat rate of £4 per week (£208 a year) as ‘Work from home allowance’.

Subscriptions

Not gym memberships or magazines, but professional subscriptions can be claimed as an expense. This might be network memberships, training schemes, professional journals or organisation memberships. Software subscriptions such as Abode Creative Cloud, MailChimp, Canva and GSuite are all claimable subscriptions too.

Charity subscriptions, mentioned above, should not be claimed as they have their own set of rules.

Christmas Party

That’s right! If you run a team and want to treat them to a turkey dinner and some terrible dancing – you can! The expense of putting on a Christmas party counts as just that – an expenses claim (within reason):

You don’t have to pay tax on social functions and parties that are:

  • £150 or less per head
  • An annual event (such as business anniversary party, Christmas or summer barbeque)
  • Open to all employees

For more information, always consult the HMRC website.

If you’re ever in any doubt about expenses claims – it’s best to check with an expert. The penalties for incorrect tax returns are high, so don’t risk it.

Want to know more? Why not check out our specialist FREE resources on the topic:

Allowable business expenses for sole traders

Allowable business expenses for limited companies

h

Optimum salary for company directors in 2019-2020

optimum salary

As a limited company owner, there are certain ways in which to take money from your company in salary and dividends, maximising on your untaxed allowances. With the beginning of a new tax year, there are combinations of salary and dividends that will make the most sense for you and save you the most money.

What are dividends?

‘Dividends’ is the name given to money paid out to investors who own shares in a company. Dividends are the distribution of a company’s profits. As a company director, you have shares in your company and may take dividends – these are taxed differently to your salary. 

New tax rates:

Every tax year, tax rates are subject to change and fluctuation. It is important to know the new rates when drawing a salary and/or dividends.

For 2019/20, personal allowance (tax free earnings) has increased from £11,850 to £12,500 and the basic rate limit has increased to £37,500 – as a result, the higher rate threshold will be £50,000.

Dividend allowance remains at £2,000 and any dividends in excess of that will be taxed.

  • You won’t pay tax if your unused personal allowance covers the additional dividend taken
  • Dividends in the basic rate tax band will be taxed at 7.5%
  • Dividends in excess of basic rate tax band will be taxed at 32.5%
  • Dividends within the additional rate band (income over £150,000), will be taxed at 38.1%

Most company directors will opt to pay themselves enough of a salary to satisfy their National Insurance stamp. Additional funds are then taken as dividends for maximum tax efficiency. When paying corporation tax, your company will save 19% on any salary taken. The director then takes dividends, which don’t technically save on corporation tax, as they are declared after tax – but they do save on National Insurance as dividends are NI exempt.

Best Combination: Example 1

If you cannot claim Employment Allowance –

In order to register as paying National Insurance, you need to be earning over the primary threshold – which is £8,632 for tax year 2019/20.

If you pay yourself a salary of £8,632, you can then take dividends of up to £41,386. (Which is within the basic rate band of £50,000). These dividends will incur £2,663 of tax.

Overall, you’ll take home £47,337 after tax – with a saving of £1,640 in corporation tax.

Best Combination: Example 2

If you can claim Employment Allowance –

There is a little more administrative effort involved in this process, but you’ll still save money.

If you pay yourself a salary on £12,500, you would usually have to pay employers National Insurance – at £533.78. With taking £12,500 in salary, your Employment Allowance cancels out your employers National Insurance contribution. You will still have to pay employee’s National Insurance at the lower rate of £464.16. Leaving you £270 better off.

With taxed dividends of £50,000, you’ll take home £55,310.84 after tax.

You can gain an estimation of your own personal dividend tax, using tools such as the Which? Tax Calculator. Please remember that these tools are designed as a guide.

If you’d like to know more about how you can maximise your earnings and take advantage of tax efficient banking, please get in touch today.

7 things you need to discuss with your accountant

7 things you need to discuss with your accountant

As business owners, many of us know that we need an accountant. This might be because we don’t have the time or expertise to keep up with our finances, or because we are concerned about being properly tax compliant.

However, getting an accountant involved in your business doesn’t mean that you no longer need to think about your finances – in fact, it’s good practise to leverage your accountant’s unique skillset in order to learn, implement and grow!

Having had hundreds of detailed financial discussions with our clients over the years, here are my recommendations of a few things you might want to discuss at your next meeting.

1. Your business goals

According to Leon Tec, M.D., A sailor without a destination cannot hope for a favourable wind. When running a business, you must set some goals so that you are clear what a good day’s work looks like. Your accountant will need to know what you are hoping to achieve in order that they can advise and guide you to help you get there. Most successful businesses have their goals documented in a business plan – usually on one page. A business plan is alive document which you should review with your accountant regularly.

2. Your personal goals

Your business goals will be different from your personal goals. Your business should help you achieve your personal goals e.g. having enough time off work, family holidays, financial freedom or to make a difference to your industry. Whatever you are passionate about. It is important to have a clear understanding of what you are trying to achieve for YOURSELF through your business.  And if your accountant knows that too they can help you and hold you accountable.

3. Pensions/Retirement

If you’re in your thirties, forties or fifties – thinking about your retirement may seem a little premature. However, any charted accountant will tell you that it’s never too soon to prepare for the inevitable. Who knows, you might get lucky and be able to retire early if you plan well enough in advance.

Involving your accountant in the early stages of planning for your old age means that you’ll be getting the best advice and maximising your tax benefits from the start. There are several different types of pensions, including: personal, stakeholder, company, Self-Invested Personal Pensions (SIPP) and state pensions – plus many more. Allow your accountant to help you navigate the choices.

4. Managing risks with business insurance

Getting insurance is a great way to protect yourself and your business. An accountant will be able to advise you on insurance types and how to claim the premiums back as expenses. There are many types of insurance, with different business needs in mind. Some examples include: professional liability insurance, property insurance, personal accident cover, life insurance, home-based business insurances, product liability insurance and many more, dependant on your industry. Business insurance will qualify as an allowable expenses to reduce the amount of tax you pay.

5. Business Purchases & Expenses you can claim

Whether you’re a service or product based business, there are many items and services that you purchase in order to run your enterprise. It is often surprising to many people that a lot of their purchases can be claimed back as expenses. From mileage to paper supplies, home offices to dry-cleaning – an accountant will be able to advise on easy areas to save and conserve costs when it comes to your tax return.

6. Taxes – what they are when they are due

The end of the tax year needn’t strike fear into your heart. Your accountant can look after your tax liabilities, whether you’re freelance, contracting, a limited company or VAT registered. In fact, the larger your company gets, the more complicated your tax return can become. Bigger businesses will be required to report their VAT liabilities more frequently than smaller businesses. You can involve an accountant at any point in the process, but it is advised to have some professional input when it comes to preparing your tax returns.

7. Systems for your business

In the digital age, it’s worth understanding the security and storage of your business records. With the increasing use of smart phones and cloud accounting technology, you should consider using systems that allow you to have access to your data securely from any devise. Your accountant can provide the necessary training to help you get confident with using cloud systems. Using cloud accounting systems will also mean that you and your accountant have joint access. It is  beneficial to work with an accountant who utilises your chosen software. Having 24/7 access to your accounts can give you peace of mind and help you to learn about your business finances at the same time.

If you’d like to discuss any of the above points with us, we’re happy to give impartial and no-obligation advice. Check out our services page for more information, drop us an email or give us a call.