Tax Loopholes for Middle England

24th January 2017

Securing Entitlement to a State Pension ‘Credit’ without actually paying any NIC.

Entrepreneurs that trade through a limited company can set how and how much they are remunerated. It is possible to avoid paying any NIC, yet still obtain a ‘credit’ for that particular tax year for future state pension purposes, by paying a salary of between the lower earnings limit for employee’s NIC and the primary threshold for employee’s NIC. Technically, this structure works for state pension entitlement purposes as this level of salary is treated as being liable to NIC @ 0% (rather than being exempt from NIC). After paying a ‘minimum’ salary, any further remuneration required can then be topped up via dividend payments.

Tradesmen to replace Van to Reduce Tax and Increase Child Tax Credits

It is common place for those who work for themselves in the construction sector to operate as a sole trader. Since the introduction of the Annual Investment Allowance (AIA) in April 2008, such small businesses can obtain 100% tax relief on most capital purchases, such as a replacement works van. As well as reducing their tax bill for the year of purchase, if eligible, this taxable income figure (ie net of AIA) is also used to calculate eligibility for Child Tax Credits. This will typically result in a very generous entitlement to these credits in the year of van purchase and, by default, a similarly generous entitlement in the next tax year. Such second year ‘technical overpayments’ are only actually repayable if taxable income increased by more than £10,000, which, depending upon the cost of a replacement van, it usually will not have done. The total effect of these 3 ‘benefits’ is so generous that it can sometimes be enough to totally fund the cost of the van.

Reduce NIC by getting Paid Via a Personal Service Company

Instead of getting paid as an employee, it is much more tax (NIC) efficient to be taken on and paid through your own personal service company. So long as you structure your affairs outside of IR35 tax rules, you can claim tax relief on expenses that were ineligible for employee PAYE tax relief (inc first 2 years commuting costs, capital goods and home as office) and you can extract profits primarily by way of dividends, to minimise payment of NIC.

Claim R&D tax relief on Apparently Ineligible Costs

R&D tax relief for companies is arguably the most generous tax legislation currently on the statute book, potentially giving a £225 tax deduction for every £100 actual R&D spend. As you would expect for such generosity, the criteria for expense eligibility are very strict, only allowing a deduction for staffing costs, software, consumables and externally provided workers. Surprisingly, perhaps, staffing costs includes reimbursement of expenses initially borne by the employee. As there is no further restriction on what type of ‘expenses’ this includes, this gives scope to re-structure supplier contracts and payment paths, to ring-fence further company costs within the total R&D claim.

Switch Company Car to Double Cab Pick-up to reduce Benefit in Kind Tax

Those workers who are provided with a company car by their employer, for both work and private use, are familiar with the high personal tax costs assessed on the car and fuel benefits in kind. This tax cost, for a higher rate taxpayer, can easily be £5,000 per annum. An alternative arrangement to consider is to be provided with a van, which is treated a lot more generously for tax purposes. Perhaps surprisingly, HMRC treat double cab pick-ups, even those with rear hardtops, as a van, and this type of vehicle will probably be a lot more acceptable a substitute for the car given up than a conventional van. Tax wise, the annual cost will be nil, if the vehicle is just used for business use and commuting, with insignificant other private use. If it is also used for other private journeys, then the tax cost will be around £1,500 per annum.

Claim Tax Relief on Main Home Mortgage Interest against Rental Property Income

Several years ago, the basis for calculating taxable net income from rental properties changed, aligning these rules with the rules (including those relating to overdrawn capital accounts) used in calculating net profits from trading activities. An unusual opportunity that sometimes arises from this change is the ability, if structured correctly, to claim a tax deduction on interest suffered on a loan taken out for purposes other than as a mortgage on the property from which rent is received. This could very generously, therefore, result in tax relief being claimed on interest on a mortgage on your main residence.

Reclaim VAT on Self Build Professional Fees and Equipment Hire by Careful Structuring

For those individuals brave enough to build their own main home, the current self-build VAT rules put the home owner in the same VAT position as if they had bought a new home from a developer, on which no VAT would have been charged (zero rated supply). They achieve this by allowing for there to be a single VAT return prepared and submitted at the end of the project, to reclaim most of the VAT suffered on construction costs and by requiring all labour providers to not charge VAT in the first place. Not all of the VAT, however, can be reclaimed. The list of goods and services where VAT is irrecoverable is long and illogical, including architect fees, plant hire, fitted wardrobes and carpets. In order to legitimately side-step this blocking order, the home owner should structure the build contracts so that these items are supplied via the main building contractor, resulting in, either them being re-charged on at zero rate VAT or becoming reclaimable via the VAT return method. In addition, suppliers of blocked goods and services can be asked to price and present their invoices in a particular manner to assist with the overall VAT treatment.

Consultants can stay outside of IR35 tax rules by careful wording of Client Contracts

IR35is a set of tax rules introduced to collect more tax (typically around £12,000 pa) from certain limited companies that provide consultancy and other knowledge based services. If the provision of these services looks to the outside world (including HMRC) like ‘disguised employment’, which, in its extreme, would be one employee working full time for a single client at their premises, then IR35 is likely to be an issue. This IR35 ‘risk’ can be significantly reduced by making sure that the contract between the company and the client includes certain key clauses which past court cases have decided are decisive indicators that such an arrangement is not subject to IR35 tax treatment.

None of the above tax planning ideas should be undertaken without previously having consulted one of our tax advisers, to make sure that your circumstances and attitude to risk are appropriate.



 
Other items in Blogs
 
Lucy Bayliss
11th April 2019 £10 a day from the 1st May!

If you submitted your tax return after the filing deadline of 31 January, or you still have not submitted your tax return, then you will automatically be fined £100 for missing the deadline.   In February, HMRC announced that they would be delaying issuing the late filing penalty notices due to Brexit. They have now…

Read More »

Matilda Mawson
10th April 2019 Has your claim for marriage allowance transfer been refused?

  HMRC have recently attempted to remove a marriage allowance transfer for a couple, where the transferor had less than the 10% personal allowance unused. This treatment is incorrect as outlined below:   Background to the transfer The marriage allowance transfer was introduced from 5 April 2015 onwards and allows a person to transfer 10%…

Read More »

Lisa Smith
9th April 2019 Digital Records for VAT – HMRC Guidance published

  From 1 April 2019, most businesses with a taxable turnover above £85,000 are required to follow the rules for Making Tax Digital for VAT.  As a result, HMRC has published new guidance on record keeping, which  explains what records a business needs to keep digitally if it has signed up for Making Tax Digital…

Read More »

Ian Piper
9th April 2019 R&D Tax Relief: HMRC Try to Tackle Abuse

  Many companies, not just those in the tech industry, will have benefitted from the generosity of R&D tax relief. Eligible R&D expenditure can be inflated by a notional 230% uplift, and a refund of tax claimed on tax that was never paid in the first place. Perhaps not unsurprisingly, HMRC have identified abuses of…

Read More »

Adrian Mackenzie
25th March 2019 When doing nothing is best

From time to time, stock markets go through periods of uncertainty. This could be down to some poor economic news or perhaps due to a political crisis.  The sharp falls that can be experienced at such times are understandably unsettling for investors. They can even tempt some to change their long-term plan by selling their…

Read More »

Thomas Carter
21st March 2019 Preparing for Brexit – Do you trade within the EU?

Your UK business may need an Economic Operator Registration and Identification (EORI) number if we leave the EU with no deal.   What is an EORI number?   An EORI number is a unique identifying number assigned to individual importers and exporters to track trade between the EU and non-EU countries. It’s used during Customs…

Read More »