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Buying a Car through Limited Company

Buying a Car through Limited Company

Is it worth buying a car through Limited company? What are the advantages and disadvantages?

If the Company Buys:

On Full Payment

If you buy a new car through your company then it will attract a capital allowance. The amount of capital allowance will depend on the amount of CO2 emission by the car. If CO2 emission is 75g/km or less (50g/km from April 2018) than the capital allowance (First Year Allowance FYA) will be 100% of the price of the car. If CO2 emission is from 76-130 g/km then 18% written down allowance (WDA) will be available to claim. But only 8% WDA can be claimed for the cars having CO2 emission above 130g/km.

If you buy a car for use in business (100%), then you can claim 100% of VAT paid on that car. If the car will have private use then VAT cannot be recovered and car will be called as “VAT blocked”.

For example, your company buys Audi A4 Saloon 2.0 Petrol for £31,450, the CO2 emission is 134g/km. You can claim WDA = £31,450 × 8% = £2,516

The WDA of £2,516 will save corporation tax of £478.04 for your company at the rate of 19% (2017-18).

The recovered amount of input VAT will be £6,290 (£31,450 × 20%) assuming 100% business use.

On Leased

There are two types of leases agreements available i.e. finance lease and operating lease. Both have different tax implications. Details are below:

  1. Under an operating lease, your company (the lessee) simply pays lease payments and either extends the lease, or returns the car at the end of the contract term. The car dealer (lessor) retains ownership of the car throughout and assumes the “risks and rewards” of ownership. For a lease on a car to be treated as an operating lease, there must be no option to purchase the car at the end of the lease, with the car being returned to car dealer. Your company can claim corporation tax relief on full amount of lease payment. On operating lease car doesn’t qualify for any kind of capital allowance. If the CO2 emission of the leased car is more than 130g/km then 15% portion of the lease payment will be disallowed expense for the company.

If you buy a car through lease for use in business (100%), then you can claim 50% of VAT paid on that car. If the car will have private use then VAT cannot be recovered and car will be called as “VAT blocked”. Most company cars are VAT blocked.

For example, your company buys the above car by an operating lease agreement and the lease payment per month is £500. The allowed expense for your company will be £500 which will save, annual corporation tax of £969 (£500 × 12 × 19% × 85%).

The amount of VAT recovered will be £ 600 per year (£500 × 12 × 20% × 50%) assuming 100% business use.

  1. With a finance lease, your company (lessee) also pays lease payments and the car dealer (lessor) still legally owns the asset, however, the substance of this type of agreement is different. A finance lease is effectively a loan to purchase an asset, where the loan is secured on the asset. The lessee has the “risks and rewards” of ownership and “in substance” owns the asset. Many cars bought under a hire purchase contract fall under the category of a finance lease as legal ownership of the car may transfer to the lessee at the end of the lease, or there may be an option of a final “balloon” payment to purchase the car at that time.

Generally, the legal owner of an asset has the right to claim capital allowances, but, in this case, the lessee may treat the car as a capital purchase and claim the allowances on the cost of the car, subject to a business use element. The lease payments that the lessee does contain a capital element and an interest/finance charge element. Only the capital element is eligible for capital allowances and is written down at the relevant rate. The interest element is not eligible for capital allowances, but, instead, will be claimed as part of your general motor expenses.

For example, your company buys the same car by a finance lease agreement. It can claim capital allowance as per the WDA rate i.e. 8% for 2017-18 for car with CO2 emission over 130g/km. The allowed expense for your company will be £2,516 which will save, annual corporation tax of £478 (£31,450 × 8% × 19%) assuming 100% business use.

NOW PERSONAL SIDE

The above calculation relates to company taxation. You, being the beneficiary of the company car, will be taxed for the car benefit. If you use the car only for business purpose and not for private use then you won’t have to pay any tax. The car benefit for private use is called “benefit in kind” (BIK).

The HMRC definition for private use is:

“Private use includes employees’ journeys between home and work, unless they’re travelling to a temporary place of work.”

How much tax you will be charged depends on the list price of the car. The list price is the price of the car when it was new, therefore it is irrelevant how much you paid for that car. In case of second hand car, the list price of the car that is used for the calculation of tax is the price of that car when it was new.

The second factor on which tax calculation is based on is the CO2 emission of the car. Lower the CO2 emission lower will be the percentage and vice versa.

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Using the above example, your BIK for the tax year 2017-18 is £3,145 (£31,450 × 25% × 40%). Assuming your personal tax rate is 40%.

If the company pays for the fuel you use for that car, then your company can claim back the VAT it pays for the fuel as long as there has been no private use of the car. However, if there has been any private use, you may only recover the business element of the total input VAT you pay. The company can treat the file as an allowed expense for corporation tax purposes. But you will be taxed for the fuel benefit that your company provides you. The fuel benefit will be calculated by using the car percentage as per CO2 emission of the car and the fuel multiplier (see below table). For the above car, the car fuel benefit is £2,260 (£22,600 × 25% × 40%). Even allowing for claiming the VAT back, unless you’re doing a lot of miles, it’s likely the personal tax bill will be greater than the company tax saving.

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If you buy yourself:

If you buy the car yourself and use for business purpose, then you can charge your company a mileage allowance and the company can treat the mileage allowance as allowed expense for corporation tax calculation. Buying vehicle yourself is a tax benefit in most cases as it attracts a mileage allowance which is tax free for your personal tax and an allowed expense for your company.

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However, in case of electric vehicle the situation may be reverse because BIK rate is only 7% and there is no fuel benefit.

For example, you buy an electric car through your company of price £59,000. 100% first year allowance will be available to your company that will save corporation tax of £11,210 (£59,000 × 19%). There is no fuel benefit charge for your personal tax and BIK will be £1,652 (£59,000 × 7% × 40%). So, an electric car would be tax beneficial if purchased through your company. HMRC tax relaxation for lower CO2 emission cars are to promote environment friendly vehicles and to save the environment.

Tax on company cars is complex, so it’s always worth asking an expert before you buy.

Dividends & Tax implications

What is a dividend?

A dividend is a payment a limited company can make to shareholders when it has made and retained sufficient profit.

The most common way to pay yourself as the director of your limited company is using a mixture of salary and dividends. Keeping your salary low, minimizes the amount of NICs you have to pay, as dividends do not attract National Insurance, which are due on a sole trader’s profit and payments to employees. Therefore, most directors take a small salary and the remainder of their company’s profits as dividends as this is the most tax-efficient payment method.

How to pay yourself a dividend?

Your first step is to assess the available profit of the limited company, also known as ‘retained profits’, which can be calculated by deducting expenses such as PAYE, use of home as office and training (among other potential expenses), and any tax liabilities – including the corporation tax due on the profit which is currently 20%  ( reducing to 19% from April 2017)for profit below £300,000. This is the amount which is available for payment as dividends. Be aware; this is the cumulative balance ever since the company was formed, so needs to take into account liabilities on any loans, for example, and previous dividends. The first time you approach this important calculation, it is sensible to enlist a qualified accountant.

You will then need to document the dividend, by creating a dividend voucher. This is a legal document that all companies that issue dividends create and issue to shareholders and most good contractor accountants will normally do this for their clients for a small fee.

The dividend voucher should detail the date, company name, names of the shareholders being paid a dividend; the amount of the dividend, and (until April 2016) the amount of the notional dividend tax credit. Once a dividend voucher has been created, you can then actually pay a dividend.

You should be aware that your dividend could be illegal if you distribute an amount higher than is available or if you fail to create a dividend voucher and complete the necessary paperwork.

It is also worth bearing in mind that as dividends are the distribution of profits after tax, if you don’t document and follow this process correctly, HMRC may take the figures you have drawn and not documented correctly and claim that they are either a salary or that they are forming a Directors’ Loan, both of which would have negative tax consequences.

How are dividends taxed from April 2016?

As of April 6th 2016 limited company contractors no longer receive their notional 10% tax credit on dividends. Instead, they have been given a £5,000 tax free allowance on dividend income ( reducing to £2,000 from April 2018), which is in addition to the £11,500 personal allowance for the 2017/18 tax year. Any dividends that you draw out beyond this limit will be taxed at 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers, and 38.1% for additional rate taxpayers, which will need to be paid using the self-assessment system.

When’s the best time to take a dividend?

As a limited company owner you are free to distribute dividends, however often you like as well as being able to determine the amount you distribute, so long as the sum of the dividends distributed in your company year does not exceed the amount of profit your company has made. The frequency with which dividends are declared is much less important than whether they are legal or not i.e. not exceeding profit and completing necessary paperwork.

You may wish to discuss the tax implications with your accountant, who will be able to advise you on how to utilise your tax allowances year-on-year. For example, if your company has sufficient profits and you still have some of your basic rate tax band left, you can declare a dividend with the intention of taking it at a later date should you not want to pay yourself at that time.

Many accountants suggest processing dividend payments on a monthly or quarterly basis, to keep record-keeping simple, and also advise keeping dividend and salary payments separate in order to provide a clear audit trail.

The pitfalls of the low salary-high dividend mix

Dividend levels are said to be monitored by HMRC to identify potential IR35 suspects. Having a disproportionate ratio of dividends versus salary declared on a tax return has been known to spark an IR35 investigation.

It is important to understand that IR35 is not based on how you extract money from your company; it is based on how the money got there and whether you were acting as a disguised employee when you made that money.  If you have paid all your company profits as PAYE salary then HMRC won’t be checking for IR35, as there won’t be any return if they do.

However if you draw most of your company profits as dividends then you are paying less tax and NICs than you would for a PAYE salary – which means that there is more potential return for HMRC if they found that you were inside IR35.

Ultimately, dividend levels don’t put you inside or outside IR35 — but they may pique the Revenue’s interest and prompt an enquiry.

How were dividends taxed before April 2016?

As corporation tax was already paid on your company’s profits, a ‘notional tax credit’ of 10% was available to the shareholder to avoid double taxation. This was offset against income tax that would otherwise be due on the dividend income received.

The dividend paid by the company to the shareholder, classed as a ‘net dividend’, if multiplied by 10/9 will give you the ‘gross dividend’ amount, which is the sum upon which income tax is payable.

For basic rate taxpayers (where income was between £0 and £31,785 for 2015/16 tax year) there was no further tax to pay on dividends, as the basic dividend tax rate and tax credit were both 10% and as such cancelled each other out. Therefore their effective dividend rate was 0%.

For higher rate taxpayers (where income was between £31,785 and £150,000 for 2015/16 tax year) the effective dividend tax rate was 25%, and for additional rate taxpayers (where income was over £150,000 for 2015/16 tax year) the effective dividend tax rate was 30.56%.

Source – Contractors UK

Tour Operators Margin Scheme (TOMS)

The information provided in this article shows how you must account for VAT if you buy-in and re-sell travel facilities as a principal or an undisclosed agent (that is, acting in your own name).

TOMS is the special name given to businesses that buy-in and re-sell travel, accommodation and certain other services. Traditional tour operators are not under the jurisdiction of this scheme. Read More

Stamp Duty Changes – April 2016

  • From 1 April 2016 existing SDLT residential property rates will be increased by 3% for purchases of additional properties such as buy to let properties and second homes.
  • Broadly, the higher rates will not apply if at the end of the day of the purchase transaction:
    • an individual owns only one residential property, irrespective of the intended use of the property; or,
    • an individual owns two or more residential properties, but they are replacing their main residence (subject to certain conditions).

This change will clearly impact buy to let landlords on top of other recently announced tax changes such as the restriction on interest relief deductions. However, the impact will be wider, potentially affecting anyone buying a second property, even where their other properties are overseas. Further details below.


Background
The increase in SDLT rates by 3% on purchases of additional residential properties was announced in the Autumn Statement. Last week, the Government published a consultation on the changes which explains in detail how the higher rates are intended to apply in various scenarios.

Overview
The higher rates will apply to most purchases of additional residential properties in England, Wales and Northern Ireland where, at the end of the day of the transaction, purchasers own two or more residential properties, and they are not replacing their main residence.

First time buyers purchasing their first property, or home owners moving from one main residence to another, will not be affected.

Points to note

  • SDLT only applies to purchases of land and property in England, Wales and Northern Ireland. Purchases in Scotland are subject to the separate Land and Buildings Transactions Tax (LBTT) regulations (beyond the scope of this note).
  • Property owned globally will be relevant in determining whether a property purchase is an additional property. So for individuals owning property overseas, they may pay the higher SDLT rates even if this is their first property purchase in England, Wales or Northern Ireland.
  • If the purchaser has sold a previous main residence within 18 months before the day of the transaction and the transaction is a purchase of a new main residence, the higher rates will not apply, even where they hold other properties (e.g. buy to let properties).
  • If a new main residence is purchased whilst a previous main residence is still owned, the higher rates of SDLT will apply. However, a refund will be available if the previous main residence is sold within 18 months of the purchase of the new residence.
  • In cases of joint purchasers, the Government is proposing that if any of the purchasers has more than one property and they are not replacing a main residence, the higher rates will apply to the entire consideration for the transaction. However, they have asked for responses as to whether this is a fair approach.
  • The higher rates of SDLT will apply to all purchases of residential property by a company or collective investment vehicle (subject to the availability of an exemption for “large scale investors” explained below).
  • The Government is considering an exemption for “large scale investors”. The exact details of the exemption have not yet been decided. The exemption could be applied either to cases where the purchaser has an existing portfolio of 15 or more properties, or only in cases of bulk purchases of 15 or more properties. The exemption may be restricted to companies and funds but could be widened to include individuals.
  • Purchases by trustees for beneficiaries with life interests or interests in possession will be treated as if the purchase were made by the individual beneficiary themselves. However, purchases by discretionary trusts will always be liable to the higher rates.
  • The higher rates will not apply to purchases below £40,000 or purchases of caravans, mobile homes or houseboats.

Other taxes
The higher rates of SDLT will need to be considered in addition to other tax charges when purchasing residential properties. Other tax charges will vary depending on the circumstances and include capital gains tax, income tax, inheritance tax and the annual tax on enveloped dwellings.

 

Courtesy: PWC

Tax Rules are Set to Tighten

In the 2015 Summer Budget [1], the Chancellor announced new proposals to restrict what landlords can claim against tax. As a result, it’s now even more crucial that landlords ensure they understand the profitability of their buy-to-let portfolio, however small or large it is.

According to the National Landlords Association, 31% of single-property landlords and 17% of those with between 2 and 4 properties either lost money or only managed to break even on their properties between April and June this year [2].

Such financial juggling may have been easier when landlords were able to claim a percentage of the mortgage interest they paid against their marginal tax rate, which could be as high as 45% for some earners.

However, from 2017 landlords may only be able to claim tax relief on their mortgage interest payments at the basic tax rate of 20% [3]. Under current plans, the new rule will be phased in gradually over 4 years.

If you currently claim for interest relief and pay 40% or 45% tax, or expect to do so in the future, you may find that you have to pay more income tax on any buy-to-let income than you do currently. But if you only pay the basic rate of income tax (20%) and this doesn’t change, then you probably won’t see any difference.

Say your buy-to-let property generates a rental income of £10,000 a year, while you pay £9,000 interest on your annual mortgage payments.

Under the current rules, you would receive tax relief on the full amount of interest on your mortgage payments, no matter what level of income tax you pay. You’d only pay income tax on the difference.

So if you’re a basic-rate taxpayer, you would pay 20% income tax on £1,000 (£200). If you pay the higher rate of tax (40%) you’d owe £400, while if you pay the 45% additional income tax rate, it would be £450.

Under the new proposals, the amount that higher and additional-rate taxpayers need to pay in income tax will rise. This is because only 20% of the mortgage interest can be claimed in tax relief, rather than the full amount.

If you pay the higher rate of income tax (40%), you would owe £2,200 in income tax, an additional £1,800 compared to the current rules. Those who pay the additional 45% tax rate would owe £2,700, an extra £2,250.

That’s not all that may be changing. From April 2016 onwards, the Chancellor has proposed that you’ll only be able to claim for ‘wear and tear’ costs on furnished rental properties by providing itemised receipts that show the replacement goods you’ve purchased or repairs you’ve carried out [4]. Currently, you’re given an allowance regardless of your expenditure [5].

Prospective landlords and those with existing properties may want to work out how their plans will be affected by the proposed new rules to avoid a surprise later on. When planning, remember that just as these rules are changing now, they might do so again in the future. The effect of tax rules always depends on individual circumstances and these too can change. Bear in mind that we don’t offer tax advice. If you have further questions, please speak to a financial adviser.

Safety rules are changing

Landlords must already follow certain safety rules. These include obtaining an Energy Performance Certificate for a property before advertising it to tenants [6], as well as an annual Gas Safety Certificate [7] for their property’s boiler and other gas appliances. New measures include rules for preventing legionnaire’s disease [8] and for fitting smoke and carbon monoxide alarms [9].

To encourage landlords to meet their responsibilities, the government is proposing new rules to make it more difficult for them to evict a tenant if the property’s appliances don’t have a current Gas Safety Certificate [10].

Focus on the long term

With changing tax rules and tighter regulations being introduced for buy-to-let landlords, it’s vital to think carefully about the type of investment you want to make. Properties can offer both asset growth through rising house prices and an income from rents – although neither of these can be guaranteed; values can fall and any rent might be exceeded by outgoings.

Another point to consider is your own level of involvement. Managing a property with multiple individual tenants or a large portfolio of separate properties takes time and involves lots of paperwork.

Once you’ve decided on your priorities, you’ll need to think about location. Ben Newman, buy-to-let specialist at property company Savills, says it’s all about the level of risk you’re happy to take on. “For example, if you want a good income then you’ll have to invest in an area where yields [annual gross rent as a percentage of a property’s value] are high,” he says. “To achieve that, you may have to invest in an unfamiliar property market.”

If you’re thinking about investing in buy-to-let, bear in mind that it’s a relatively high-risk and illiquid investment. Also remember that, just as tax rules are changing now, they could change again in future and their effect on you will depend on your circumstances – which can also change.

( courtesy – Barclays )

Property Repair & Maintenance Expenses

Repair means the restoration of an asset by replacing subsidiary parts of the whole asset. An example is the cost of replacing roof tiles blown off by a storm. There won’t be a repair if a significant improvement of the asset beyond its original condition results – that will be capital expenditure

Read More

VAT Registration | VAT Advantages & Disadvantages

Should I Register For VAT?

A common question amongst small business owners is whether or not they should register for VAT and what is the Vat Threshold? Hopefully this article will help you make up your mind about Vat registration and the benefits of this. Read More

Capital Allowances on Fixtures

There are a number of capital allowance claims firms targeting businesses which have recently bought or sold commercial property. These ‘experts’ suggest the business needs to pay for a special survey to claim all the capital allowances they are entitled to, and this must be done quickly in order to claim all the allowances due. Read More