Following a recent case in front of the Upper Tier Tax Tribunal involving a doctor with a private practice (Dr Samadian), HMRC are applying the rules for business travel much more strictly.
The “wholly and exclusive” principle states that where there is both a business and a personal reason or benefit in meeting an expense, there is no tax relief for any of the expense. The doctor in question argued that as he was based at home (where he saw some of his patients and ran the business), the expenses of travelling to and from various hospitals and nursing homes should be an allowable business expense. Based on earlier cases, the Tribunal decided that the “habitual” journeys to two hospitals should not be allowed but less regular “itinerant” journeys to other locations would be allowed as a deduction.
Although this case involved a doctor, it has wide ranging implications for other self-employed individuals who operate their business from home and travel regularly to one or two locations. It will become increasingly important to keep a detailed mileage log of business journeys should HMRC challenge the deduction in the business accounts.
Many employees and employers find the current tax rules for dealing with travelling and subsistence claims difficult to understand. This is an area that the Office of Tax Simplification is seeking to make more comprehensible. Consequently, the treasury are consulting on possible changes to the rules, and the way that such expenses are reported. The government intends for any new rules to reflect, rather than drive, commercial decisions and that it will be responsive to 21st century working patterns. As is currently the case, any new system would not provide tax relief for private travel or ordinary commuting.
Note that unless the employer holds a dispensation from reporting such expenses, they need to be included on the employee’s or director’s end of the year Form P11d.
If the tax rules or reporting requirements change, we will get in touch to explain the implications for your business.
Anyone with an open enquiry (or appeal) concerning a tax avoidance scheme may be issued with follower notices and accelerated payment notices under new legislation in Finance Act 2014. It is understood that 43,000 payment notices will be issued by HMRC (33,000 to individuals and 10,000 to corporates) and will cover about £7.1 billion of disputed tax. The vast majority of the notices will be issued over the course of 2014/15 and 2015/16.
By issuing a follower notice, HMRC are seeking to bring the enquiry to an end by requiring the taxpayer to make the necessary “corrective” amendments to his return (and pay the disputed tax) or face a penalty of 50% of the tax in dispute. Taxpayers will therefore have to consider matters carefully before deciding whether or not to capitulate and press on with litigation. If this applies to you please contact us straight away to consider what action to take.
Some lawyers have suggested that it may be possible to challenge a follower notice or an accelerated payment notice by way of an application for judicial review, to restrain HMRC from exceeding or abusing their powers under Article 6 European Court of Human Rights (right to a fair trial).
Experience shows that a significant number of taxpayers in the current environment do not wish to experience the hassle, expense and potential stress of litigation involving HMRC and will choose to settle by making the necessary amendments to their return, effectively bringing the enquiry to an end.
The National Insurance Contributions Bill was published on 18 July 2014. It will introduce legislation (which was consulted on last year) to reform the collection of Class 2 NICs by enabling the self-employed to pay their Class 2 contributions through self-assessment alongside their income tax and Class 4 NICs.
Liability for Class 2 NICs will arise at the end of each tax year and will be collected through self-assessment from April 2016 for the 2015/16 tax year onwards. This will replace the current method of collection of Class 2 NICs via direct debits or quarterly demands.
Taxpayers will also be able to make voluntary payments of Class 2 if their profits are below a certain threshold to retain their entitlement to certain state benefits.
HMRC has amended its guidance for charities that claim Gift Aid on the sale of donated goods.Gift Aid normally only applies to gifts of money by an individual. However, in certain situations, Gift Aid can be claimed by charities or community amateur sports clubs on the income from the sale of supporters’ goods on their behalf.
The charity can offer to act as an agent for private individuals and sell goods on their behalf, so that at the point of sale the funds actually belong to the individual. If the owner agrees to donate the sales proceeds to the charity, Gift Aid can be claimed by the charity on the net sales proceeds, subject to all other Gift Aid conditions being satisfied. The charity is then able to reclaim tax at the basic rate. A number of charities, such as Oxfam, operate such schemes. The charity provides the donor with details of the value of goods sold in order for the donor to claim tax relief on their self-assessment tax return.
Remember that the Gift Aid payments, grossed up for basic rate tax, are an effective way of reducing income where an individual’s personal allowance is restricted by income in excess of £100,000 a year.
Higher rate taxpayers also benefit from additional tax relief. For example, if a suit is sold for £40, the charity is able to reclaim £10 basic rate tax from HMRC (£50 gross) and a higher rate taxpayer obtains a further £10 tax relief – win win!
Although the loan to the business in the example above is tax efficient (in that there is no income tax due from 6 April 2014) it would also be important to consider the CGT and IHT implications of the loan.
Should the business default, it may be possible to obtain relief as a capital loss against capital gains in the same or future years. There would, however, be no inheritance tax business property relief should the lender die with the loan in place.
If you have made a loan to your business you should consider paying interest on the loan, as this will be an allowable deduction against the business profits. However, the interest will be taxable on the lender, so you need to consider the tax rate applicable to both parties.
For example, if the company pays tax at 20% and the director/shareholder pays tax at 40% this would clearly not make sense! If the loan is made to a company, the company will normally also need to deduct 20% tax at source and pay this to HMRC quarterly.
If the lender only has a small amount of other income, such as a small salary or pension below £10,000, the first £2,880 of savings income is only taxed at 10%.
Next year, however, the first £5,000 of savings income will be tax free which will provide a planning opportunity for some, as shown by the example:
Mr Wonger needs £100,000 to expand his sole trader business. His wife has just inherited a similar amount from her mother and decides to loan it to her husband’s business at 5% per annum. Her only other income is a small salary of £10,000 a year from her husband’s business. The £5,000 interest would potentially save up to 45% income tax plus national insurance for Mr Wonger, whereas Mrs Wonger would receive £5,000 interest tax free.