Tax Matters Blog

We often get clients saying “someone down the pub said to me that..” or “my mate told me..” and so to clear up the urban myths from reality this blog gives you the low down on what’s true versus those rumours that can lead you into trouble!

Q. If I separate my business into 3 or 4 separate businesses can I stay under the VAT threshold?

A. If you operate more than one business, the sales in all of the businesses must normally be added together to determine whether or not you must register for VAT.

However, if you are involved in the running of several separate legal entities, you may not need to combine the sales of those businesses to find whether you need to be VAT registered.

If HM Revenue & Customs decides that you have artificially separated one business into smaller parts in order to avoid registering for VAT, it can decide that the entire business is a single taxable person and therefore must be registered for VAT.

If you deliberately avoid registering for VAT, then you may be liable to a penalty. For serious offences, the matter will be investigated and you may be prosecuted.

Q.  If I purchase a van for £10,000 can this cost can be offset against my tax liability.

A. The cost of the addition will be allowable, but only as a cost against the profits for the year in question under capital allowances rules.

So you would not get a £10,000 reduction in your tax liability!  The tax relief will be at the relevant rate of tax, i.e. a 20% tax payer would get 20% relief on the addition, so there would be a £2,000 lower tax liability. 

If you then sell the van at a future date, the full capital allowances have been claimed and therefore the asset has a nil value for tax purposes.  This would then be seen as a gain and tax would be payable at the relevant rate on the proceeds. i.e. If the van is sold for £5,000, a 20% tax payer would have an effective £1,000 liability, effectively paying that element of the tax back on the sale/disposal.

Q. To avoid being liable to UK tax you just need to "count the days" and ensure that you are not in the UK more than 180 days in tax year with the day of arrival and departure not counting towards the days spent in the UK.

A. Whilst this was historically used, there have been a number of changes to the residency rules in recent years.

The question of residency for tax purposes is covered by the Statutory Residence Test, which has meant there is more certainty to deciding whether an individual is resident in the UK for tax purposes.

Under the existing rules important facts such as owning property in the UK will be used in the assessment of whether an individual is resident in the UK for tax purposes.

Also in any calculations, the days of departure and arrival DO now count towards the total days in the UK in any given tax year.

So in essence it isn't quite as straight forward as it used to be and it is therefore always best to seek advice based on your personal circumstances.

Q. If my employees set up Limited Companies they can work as contractors and there will be no Employer's National Insurance liability payable.

A. IR35 legislation is designed to tax "disguised employment" and although the payments to limited companies may be made by other businesses with no problems, the important fact is the nature of the engagement specific to each employee/contractor.

If an enquiry from the HM Revenue & Customs deems that the effective relationship(s) in question was(were) that of an employee(s) then you as employer would be liable for the Employer's National Insurance contributions, in addition to the tax that should have been deducted at source.  

Eg. An "employee" is paid £20,000. 

 If this payment was net of tax it would be a total gross payment of £25,073.

 The Employer's National Insurance would be £2,362.

The tax deemed that "should have" been deducted at source for the employees Income Tax and National Insurance would be £5,070.

The total therefore that the HM Revenue & Customs would demand from you as an employer would be £7,430.  That is for one employee on £20,000 per annum for one tax year.  In usual circumstances, we would expect the HM Revenue & Customs to go back a minimum of 4 years and would look at all contractors working for the company.

NB.  In these circumstance there would be an allowed corporation tax deduction for these increased deemed salary if an enquiry was in the HMRC favour, but this would need to be claimed separately. (Assuming 20% corporation tax, this would be £5,070 @ 20% = £1,014 could be claimed back).  

Q. I can save tax if I pay all my children a salary from the business

A. Unfortunately it is not as simple as paying each child up to the National Insurance threshold regardless of their age, as there are other factors which must be considered.

Any remuneration paid must be for actual work completed and this must be able to be proved to the HM Revenue & Customs under enquiry that this work was actually completed.

The remuneration has to be actually paid from the business to the relevant persons account.

Employment laws must also be considered, as the youngest age that a child can work part time is 13 years old and they cannot work full time until they are legally able to leave school.

There are also strict rules on the amount that children under the school leaving age are allowed to work and this also needs to be considered.