I will be adding to this from time to time. If there is a topic you
would like me to address then e-mail me.
Where is my place of work?
How does this impact upon my ability to pay myself travel expenses?
Can I claim any costs of running a home office from my company?
What costs can I claim from my company as tax deductible expenses?
Can I avoid ir35 by using an offshore company for work outside of the UK
Can I work in the UK through an offshore company and escape IR35?
When can I pay a dividend and how much?
How much salary should I take?
Should I consider switching to the flat rate VAT scheme?
Should I have a company car?
Where is my place of work?
To establish what is a place of work, an employee has to show that he
performs substantive duties at the place in question.
Directors of small companies operating in service industries such as
computer consultancy frequently contend that their home is a place of
work. The Inland Revenue think that it will be very rare for an employee
to be able to establish that his home is his place of work and
consequently that journeys between his home and his normal place of work
are between two places of work. Briefly they say that "it is
unlikely that an employee can establish that his home is, in a real
sense, a place of work", and "even if he could, he would have
to establish that the location of his home was determined by his duties
rather than by personal choice".
The Inland Revenue will examine claims that a home is a place of work
critically. They have heard the argument many times that the company
must have a fixed place of business, from which administration is
carried out and where the business records are kept, and that the
director's home serves these functions. The Inland Revenue will consider
only where the substantive duties of the office or employment are
carried out. Although a director may do some preparation or paperwork at
home, it is generally the case that the work from which the company
earns its income is performed mainly or entirely at the premises of
clients. If you want to make such a claim that your home is a place of
work then be prepared to provide the Inland Revenue with details of your
work patterns (including copies of contracts). It will not help your
case if you are required to spend fixed working hours at the client's
premises or there are restrictions on taking documents etc from your
client's premises.
Where an employee has no normal place of work but works at a
succession of places, a payment in respect of the expenses incurred in
travelling between home and any of those places and on accommodation etc
normally constitutes taxable income.
The main exception to this is where the frequency of changes in
work-place and the nature of the duties are such that the Inland Revenue
accepts that the employee holds a travelling appointment. In this case
the Inland Revenue will accept that travelling and associated
subsistence expenses are not taxable. However each case depends upon the
exact nature of the employee's duties, the terms of his engagement, and
the extent and frequency of the travelling undertaken.
How does this impact upon my ability to pay myself
travel expenses?
No charge to tax arises in respect of reimbursement of expenditure
actually incurred by an employee in travelling between two or more
places of work.
If you work at a temporary workplace then you can claim the costs of
travelling from home to and from that temporary workplace.
However where an employer reimburses the cost of an employee's travel
from home to his permanent workplace, the reimbursement is taxable
income except in three circumstances (i) where the employee's home is a
place of work (but see above); or (ii) where there is an emergency
call-out of the employee in such circumstances that his duties begin as
soon as he is called, or (iii) where the employee is severely and
permanently disabled.
A permanent workplace is usually obvious. The Inland Revenue guide is
not very clear on what a permanent workplace is beyond this but if you
have been working at Ford's in Dagenham for the last 20 years you should
have no problem recognising your permanent workplace. The Revenue do
however say what is not a permanent workplace. It is not a permanent
workplace if it is somewhere you will be working for a limited duration
or for a temporary purpose. If it is not a permanent workplace then it
is a temporary workplace. The first place of work can be temporary.
Limited duration means less than 24 months. More precisely it means
that you expect to work there for less than 24 months at the time you
start work there. If you initially expect to work at a place for 25
months then it is not temporary even if you actually only work there for
2 months.
On the other hand if you initially expect to work at a place for 23
months and then after 22 months your expectation changes, for example by
signing an extension to your contract, so that you expect to work there
for 25 months then you can still claim travel expenses to and from it as
a temporary place for the first 22 months but not for the last 3 months.
You don't have to have a permanent place of work to return to while
you are at the temporary place.
As a further complication, if you work at a place for more than 24
months but for less than 40% of the time, as you have another place of
work, then it is still a temporary place of work. But beware each of
those places becoming a permanent place of work such as by working at a
different place every day but having a regular routine every week. If
you work in one place on Monday, another on Tuesday etc then they might
all be permanent places of work and you can't claim travel costs to any
of them.
Finally you might move to a different location but your journey does
not change significantly. For example if you relocate to different
offices within the same London Underground zone and you pay the same
fare and get off a few stations along the line then you will not be
considered to have a change of workplace. Similarly if you move to a
different building on the same estate or visit a client or customer for
a day and that journey is not significantly different to your usual
journey. Generally speaking the Revenue will not accept that travel to a
new location which is less than 10 miles from the permanent location is
a significant change, unless of course the trip to the new location is
significantly more than the previous commute.
Single contract contractors should beware that if they start
contracting, have a single contract for, say, 18 months and then go back
to a permanent job, then the 18 months is not counted as a temporary
workplace. You have to work in at least two different locations in each
Limited company you are employed by.
If you work at a location for just less than 24 months, move to a new
location and then return to the first location then you can't claim that
the first location is a new temporary workplace the second time you work
there because the Revenue will aggregate the original time at this first
location, the time at the second location, and the second time at the
first location and then look and see if it is more than 24 months in
total.
Can I claim any costs of running a home office from my company?
Self employed
If you work from home a proportion of the heating and lighting,
telephone or fax costs etc can form a legitimate part of an expenses
claim.
In the past the Inland Revenue have often accepted rough percentages
but they are less likely to do so in the future and they will
increasingly require accurate calculations which can be substantiated.
Fixed costs such as council tax, insurance (especially extensions to
cover business assets) and mortgage interest can also be claimed if you
use part of the house solely for business. Be warned however that when
you sell the house you may be liable to pay capital gains tax on the
proportion of the house that has been used exclusively for business
purposes. In extreme cases it may be that the capital gains tax can be
more than the previous income or corporation tax saved (you should be so
lucky).
If you are employed by own company
Strictly speaking you charge your company a rent if it uses your home
to run its business even if you are its only employee. You should really
have a proper lease drawn up because if you don't the Inland Revenue
could argue that the payments are not rent but something else. They may
even try to argue that the payments are salary and so demand tax and
national insurance from your company.
The rent you receive as landlord is taxable income in your hands. You
can deduct your costs involved in allowing your tenant company to use
your home but you are subject to the same general restrictions outlined
above for employees.
What costs can I claim from my company as tax deductible expenses?
There are many expenses that are tax deductible but the general rules you should consider are:
what expenses would you not have incurred if you were not in business?
what expenses would be less if you were not in business?
But meeting these tests does not always mean that the item is tax deductible. For example the
cost of incorporating your limited company is not deductible in calculating the
corporation tax liability. Some capital costs are also allowed only in instalments each year called
capital allowances.
Can I avoid ir35 by using an offshore company for work outside of the UK?
If any combination of (a) the worker being resident, ordinarily resident or domiciled outside the
United Kingdom, (b) the client being resident or ordinarily resident outside the United Kingdom,
or (c) the services in question being provided outside the United Kingdom, the worker would not be
chargeable to tax under Schedule E anyway.
Therefore you can do this using a UK company and there is no need for an
offshore company to escape IR35.
Can I work in the UK through an offshore company and escape IR35?
Probably not because where (a) the worker is resident in the United Kingdom, (b) the services
in question are provided in the United Kingdom, and (c) the client or employer carries on
business in the United Kingdom, the intermediary (offshore company) is treated as having a place of business
in the United Kingdom, whether or not in fact it does so and so must operate PAYE on the deemed payments.
When can I pay a dividend and how much?
The basic rule is that only accumulated realised profits less
accumulated realised losses are distributable as dividends. Realised
means when the conversion into cash is reasonably certain but is also
after deducting depreciation and provisions such as for bad debts or costs
incurred.
You can pay a dividend as soon as you have distributable reserves.
This can be on any day after the company starts trading although you
will have to have received cash from sales in order to have any cash
with which to pay a dividend.
Strictly speaking the amount distributable as dividend is shown in
the annual accounts and is usually the balance on the profit and loss
account shown near the bottom of the balance sheet. However if this does
not show sufficient distributable profits for the dividend you have in
mind then interim accounts can be prepared. There is no specific
requirement that these be in any particular form but there should at
least be a measurement of the profit since the last balance sheet date
and an allowance for the corporation tax payable on that profit as
dividends are paid net of tax.
Dividends should be paid in accordance with the shareholders rights.
This means that if, for example, you have two shareholders one with 75%
of the shares and the other with 25% then dividends must be paid in the
proportion 75:25. It is possible for one shareholder to waive there
right to a dividend but the procedure for doing this must be followed
correctly and even then it is open to attack by the Revenue.
How much salary should I take?
The amount of salary is a personal choice but should be at least
equal to the annual personal allowance and take into account any
obligations under ir35. Non directors and directors with a written
contract of employment are also subject to minimum wage. You should at
least take sufficient salary to pay any pension contributions you might
wish to take.
You should keep in mind that the Inland Revenue could challenge
you that your dividends are actually salary if your salary is
unreasonably low and charge you for National insurance on your dividends
as though they were salary. My personal view is that if the Inland
Revenue had any reasonable hope of doing this they would not have
bothered with IR35. However if legal dividends have been paid in
accordance with the shareholders rights then they will struggle to
enforce this. A legal dividend is one which is paid out of distributable
reserves after allowing for any other liabilities payable and any tax
payable on the company's profits to the date of the dividend.
Should I consider switching to the flat rate VAT scheme?
The percentages on offer are now quite good. It's worth considering
unless you have lots of input VAT or zero rated sales. It's promoted as
a simplifications scheme. It does make VAT returns a tiny bit simpler
but you still have to do all the recording for annual accounts so there
is no saving in bookkeeping. The reason it's no good if you have lots of
zero rated sales is that you have to pay the flat rate on all your
sales, even the zero rated ones.
Should I have a company car?
If your company provides you with a company car then you will be
taxed on the benefit of this. The benefit is a percentage of the list
price of the car based on its CO2 emissions. This can be a good deal if
you have a car with low emissions, particularly diesels, as you will
only be taxed on 15% of the list price and this is likely to be a lot
less than the running costs.
