Updates to Businesses – UK Tax & COVID-19
07/04/2021
In this blog post, we highlight some recently published financial and fiscal news that is likely to affect UK businesses, and particularly SMEs.
Business Vans Used by Private Employees
HM Treasury announced that for the tax year 2021/22 (as from April 6 2021) the new taxable benefits charge for business vans used by employees for private mileage will go up in line with the consumer price index (CPI). The cost will go up slightly from £3,490 to £3,500 from 2021/22. Likewise, where fuel is provided by the employer for the van used by the employee for private mileage – the annual flat rate fuel benefit charge will increase lightly from £666 to £669, in 2021/22.
Employer Owned Cars – For Private Employee Milage
The current rates for taxation of cars are based on the car’s CO2 emissions. When cars are provided by the employer to their employee and includes private milage, there is no change in the coming tax year.
However, where the employer pays for all of the car’s fuel costs the annual car benefit multiplier value used to calculate the additional fuel taxable benefit charge on the employee for 2021/22 is slightly higher – at £24,600 (compared to the current multiplier value of £24,500). In short, the taxable benefits for 2021/22 for an employee’s private use of so-called ‘company cars’ will only be slightly higher than the current taxable benefits rates.
Electric Company Cars
As we’ve written about before, electric company cars have significant advantages for employers. Those who provide hybrid or electric cars to employees for businesses and private use can access benefits – which are soon to be updated. We will write about the updates when they are announced later this month.
Employee PAYE Coding Notices
For employees not required by HMRC to file an annual tax return, under the self-assessment tax system, one of the most important documents issued by HMRC will be their PAYE coding notice. This is a timely reminder of the employee to check their PAYE coding notices over the last month or so. HMRC have issued employees with their PAYE coding notice to be operative for the up and coming tax year (2021/22).
In addition to the inclusion in your 2021/22 PAYE coding of the routine personal allowances, HMRC will include an estimate for other taxable income such as employee benefits-in-kind and investment income. HMRC will also include the appropriate adjustment to collect any unpaid tax from previous tax years. The latter should be based on unpaid tax previously evidenced to the employee via the tax calculation resulting from the HMRC annual reviews -so can be and should be checked. The other inclusion in the annual PAYE coding notice will be HMRC’s estimates for any other tax reliefs available to the employee e.g. personal pension payments.
HMRC do their best but they can only estimate the employee’s other taxable income and any other tax reliefs whereas the employee will have access to the actual amounts involved or at least a better estimate than HMRC. Given this, employees should check their respective 2021/2022 PAYE coding notice and notify HMRC of any changes they believe are due based on the evidence available to them as regards their other taxable income and tax reliefs that will be available for the tax year to 5 April 2022.
Business Recovery From COVID-19 – New Finance Scheme
HM Treasury has issued guidelines (see the link below) providing the information as to the new government-backed loan scheme (the government will guarantee 80% of the new loan finance). The new loan scheme to be in operation from 6 April 2021 to 31 December 2021 by a network of lenders in order to provide funds (up to £10m per business) to help businesses access further loan finance as a recovery tool from the business disruption caused by Covid-19. It is proposed that the terms for the loan finance will be for a loan term of up to 6 years with also asset finance facilities.
Company Loans to Directors – How to Repay Them
What if, given these Covid times, you have funded your personal living costs with money borrowed from your company i.e. you now have a director’s loan? How should you repay the loan and minimise any ‘tax nasties’?
If your company is owned solely by you, then you would usually look to declare a dividend to repay the director’s loan. This is tax efficient as you will pay income tax at the lower dividend tax rates with no liabilities to NIC, provided the company has sufficient net distributable reserves to cover the dividend to be paid. It can become a problem if you have other shareholders with the company that own shares of the same class as your shares. In this case, the dividend would also have to be declared and paid to them and therefore the company’s net distributable reserves would have to be sufficiently high enough to cover the total dividend to be paid to all of the company’s shareholders.
The repayment of the director’s loan by the payment to you of a bonus salary will be your employment income and liable to both income tax and NIC – although the company will obtain Corporation Tax relief on the gross cost of the bonus plus the additional employer’s NIC paid by the company on this director’s bonus. The bonus can be in effect paid to you by a book entry to clear your loan but it would only be the net bonus after-tax/NIC that would be available to clear the director’s loan. This method of repaying the director’s loan is the most tax-inefficient.
This leaves declaring a dividend as mentioned above as the most tax-efficient way to repay your director’s loan. However, what if your company has insufficient net distributable reserves to declare the above-mentioned dividend particularly if there are other shareholders involved?
If you do not repay the director’s loan the first problem is that if your director’s loan is more than £10,000 then to avoid an annual Income Tax charge on you interest would need to be paid by you on the loan at the ‘HMRC official rate’ currently 2.25% pa. The second problem is that there is a further higher tax cost as any director’s loan not repaid at the end of the company’s accounting year will be liable to a ‘32.5% Section 455 tax charge’ on the company but this S 455 tax is repaid when the loan is repaid. Furthermore, if you repay the director’s loan within 9 months of the company’s accounting year-end date then the above-mentioned S 455 32.5% tax liability is not charged by HMRC.
Can you just have the loan written off?
The issue here is that HMRC may treat the loan written off as liable to NIC (at both employee and employer rates) if it can be shown that the loan write-off is in respect of services provided by the director to the company. However, for Income Tax purposes the loan written off is taxed as a dividend-not employment income – so again there needs to be sufficient net distributable reserves to cover the loan write off value. The benefit here is that if there are other shareholders then there is no additional dividend needed to be covered by the company’s net distributable reserves – just the value of the loan written off needs to be covered.
The write off of the director’s loan should be recorded legally that is under Deed so that the loan liability is clearly extinguished!
Likewise at the outset, the terms of the director’s loan account should be agreed in writing and signed off by all of the company’s directors to include that the loan is not made for employment services provided and for loans above £10k that interest is charged at the HMRC official rate with such interest payable on the whole loan.
All dividends should be declared and paid correctly to include a company’s minute detailing the directors’ agreement as to the rate of the dividend and the dividend payment date.
Finally, just make sure that if you have a director’s loan from your company that the above matters are reviewed and action is taken within 9 months of your company’s accounting year-end date to avoid the cash-flow cost of the 32.5% Section 455 tax charge as detailed above!
HaesCooper can help you with your UK fiscal requirements whether they are small, medium or large. To learn more or to discuss your needs contact us.
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