Category: Finance & Accounting

For grandparents wanting to help out their children or grandchildren, habitual gifts can be made free of inheritance tax. Read more on our blog post.

Give from income to save inheritance tax

Within a family scenario, there are many situations in which one family member may make a gift to other family members. However, the way in which gifts are funded and made can make a significant difference to the way in which they are treated for inheritance tax purposes.

Not all gifts are equal

There is no inheritance tax to pay on gifts between spouses and civil partners. A person can make as many lifetime gifts to their spouse or civil partner as they wish (as long as they live in the UK permanently). There is no cap on the value of the gifts either.

Other gifts may escape inheritance tax if they are covered by an exemption. This may be the annual exemption (set at £3,000 per tax year), or a specific exemption such as that for gifts on the occasion of a marriage or civil partnership or the exemption for ‘gifts out of income’.

Gifts that are not covered by an exemption will counts towards the estate for inheritance tax purposes and, if the donor fails to survive for at least seven years from the date on which the gift was made, may suffer an inheritance tax bill if the nil rate band (currently £325,000) has been used up.

Gifts from income

The exemption for ‘normal expenditure out of income’ is a useful exemption. The exemption applies where the gift:

  • formed part of the taxpayer’s normal expenditure;
  • was made out of income; and
  • left the transferor with enough income for them to maintain their normal standard of living.

All of the conditions must be met for the exemption to apply. Where it does, there is no requirement for the donor to survive seven years to take the gift out the IHT net.

What counts as ‘normal’ expenditure?

For the purposes of the exemption, HMRC interpret ‘normal’ as being normal for the transferor, rather than normal for the ‘average person’.

To meet this condition it is sensible to establish a regular pattern of giving –for example, by setting up a standing order to give a regular monthly sum to the recipient. It is also possible that a single gift may qualify for the exemption if the intention is for it to be the first of a series of gifts, and this can be demonstrated. Likewise, regular gifts may not qualify if they are not made from income.

In deciding whether a gift constitutes normal expenditure from income, HMRC will consider a number of factors, including:

  • the frequency of the gift;
  • the amount;
  • the identity of the recipient; and
  • the reason for the gift.

The amount of the gift is an important factor – to meet the test the gifts must be similar in amount, although they do not have to be identical. Where the gift is made by reference to a source of income that is variable, such as dividends from shares, the amount of the gift may vary without jeopardising the exemption.

Gifts will normally be in the form of money to the recipient, or a payment on the recipient’s behalf, such as school fees or a mortgage. The reason for making a gift may indicate whether it is made habitually – for example, a grandparent may makes a gift to a grandchild at the start of each university term to help with living costs. It is also important that having made the gift, the donor has sufficient income left to maintain his or her lifestyle.

When making gifts from income, check that they may meet the conditions to ensure that the exemption is available.

Partner note: IHTA 1984, s. 21.

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Do you visit other offices or are you seconded to a different workplace? Make sure you’re getting the tax benefits

Travel expenses and the 24-month rule

As a general rule, employees are denied a tax deduction for the cost of travel between home and work. Likewise, subject to a few limited exceptions, if the employer meets the cost of home to work travel, the employee is taxed on it.

One of the main exceptions to this rule is where an employee attends a ‘temporary workplace’. This is a workplace that the employee goes to in order to perform a task of limited duration or one that he attends for a temporary purposes, even if the attendance is on a regular basis.

Example 1

Polly is based in the Milton Keynes office. She is seconded to the Bedford office for 12 months to cover an employee’s maternity leave. At the end of the secondment, she will return to the Bedford office.

The Bedford office is a temporary workplace.

Consequently, Polly is allowed a deduction for travel from her home to the Bedford office.

Example 2

James is a health and safety officer. He is based in the Liverpool head office. Each week he visits factories in Manchester and Bury to carry out safety checks. The factories are temporary workplaces as each visit is self-contained.

Consequently, James is allowed a deduction for travel expenses incurred in visiting the factories, even if he travels there from home.

24-month rule

A workplace does not count as a temporary workplace if the employee attends it in a period of continuous work which lasts, or is expected to last more than 24 months. A ‘period of continuous work’ is one where the duties are performed at the location in question to a ‘significant extent’. HMRC regard duties being performed to a ‘significant extent’ at a particular location if an employee spends 40% or more of their working time there.

The upshot of this rule is that where the employee has spent, or is likely to spend, 40% of their working time at the location in question over a period of more than 24 months, that location will be a permanent location rather than a temporary location. Consequently, home to work travel is ‘ordinary commuting’ (travel between home and a permanent workplace), which is not deductible.

It is important to appreciate that both parts of the test must be met for the workplace to be a permanent workplace – more than 40% of time spent there and over a period of more than 24 months.

Example 3

George is employed full-time at a care home in Southampton, a role which he has held for four years. He is sent to full-timework at a new care home in Bournemouth for three years, after which time he will return to the Southampton care home.

Although the move to the Bournemouth posting is not permanent, the posting lasts more than 24 months and, as such, the Bournemouth home does not qualify as a temporary workplace. 

Consequently, George is not allowed a deduction for the cost of travelling from home to the Bournemouth care home.

Change of circumstances

Circumstances can and do change. If at the outset a posting is expected to last 24 months, the workplace will be treated as a temporary workplace. If later the posting is extended so that it will last more than 24 months, the workplace ceases to be a temporary workplace from the date that it becomes apparent the posting will exceed 24 months.

Fixed term appointments rule

An employee undertaking a fixed-term appointment is not entitled to relief for home to work travel, even where it lasts less than 24 months, if the employee attends the workplace for all, or almost all of the period which they are likely to hold the appointment.

Example

Imogen takes on a 12-month contract at an office in Marlow. Although the appointment is less than 24 months, the Marlow office is not a temporary workplace as Imogen works there for duration of the contract.

Tax exemption

If the employer pays or reimburses travel expenses which would be deductible if met by the employee, the payment or reimbursement is exempt from tax.

Partner note: ITEPA 2003, ss. 289A, 338, 339;

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If you might want to sell a property cheaply to a family member make sure you read this first.

At first sight, the calculation of a capital gain or loss on the disposal of an asset is relatively straightforward – simply the difference between the amount received for the sale of that asset and the cost of acquiring (and, where relevant) enhancing it, allowing for the incidental costs of acquisition and disposal. However, as with all rules there are exceptions, and particular care needs to be taken when disposing of an asset to other family members.

Spouses and civil partners

The actual consideration, if any, is ignored for transfers of assets between spouses and civil partners. Instead, the consideration is deemed to be that which gives rise to neither a gain nor a loss. The effect of this rule, which is very useful for tax planning purposes, is that the transferee simply assumes the transferors base cost – and the transferor has no capital gain to worry about.

Other connected persons

While the no gain/no loss rules for transfers between spouses and civil partners is useful from a tax perspective, the same cannot be said to be true for market value rule that applies to transfers between connected persons. Where two persons are connected, the actual consideration, if any, is ignored and instead the market value of the asset at the time of the transfer is used to work out any capital gain or loss.

The market value of an asset is the value that asset might reasonably be expected to fetch on sale in the open market.

Who are connected persons?

A person is connected with an individual if that person is:

  • the person’s spouse or civil partner;
  • a relative of the individual;
  • the spouse of civil partner of a relative of the individual;
  • the relative of the individual’s spouse or civil partner;
  • the spouse or civil partner of a relative of the individual’s spouse or civil partner.

For these purposes, a relative is a brother, sister or ancestor or lineal descendant. Fortunately, the term ‘relative’ in this context does not embrace all family relationships and excludes, for example, nephews, nieces, aunts, uncles and cousins (and thus the actual consideration is used in calculating any capital gain).

As noted above, the deemed market value rule does not apply to transfers between spouses and civil partners (to which the no gain/no loss rules applies), but it catches those to children, grandchildren, parents, grandparents, siblings – and also to their spouses and civil partners.

Example 1

Barbara has had a flat for many years which she has let out, while living in the family home. Her granddaughter Sophie has recently graduated and started work and is struggling to get on the property ladder. To help Sophie, Barbara sells the flat to her for £150,000. At the time of the sale it is worth £200,000.

As Barbara and Sophie are connected persons, the market value of £200,000 is used to work out Barbara’s capital gain rather than the actual consideration of £150,000. If she is unaware of this, the gain will be higher than expected (by £14,000 if Barbara basic rate band has been utilised), and Barbara may find that she is short of funds to pay the tax.

This problem may be exacerbated where the asset is gifted – the gain will be calculated by reference to market value, but there will be no actual consideration from which to pay the tax.

Partner note: TCGA 1992, ss. 17, 18, 272, 286.

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There are loads of ways to give to charities tax-free. What are your favourite charities?

Individuals who donate to charity can do so tax-free. There are various ways of making tax-relieved gifts to charity – the way in which the relief works depends on whether the donation is made via Gift Aid, as a deduction from wages or a pension via the Payroll Giving Scheme, in a will or whether it is a gift of land or property.

Gift Aid

A donation through Gift Aid is treated as having been made net of the basic rate of tax, allowing the charity to reclaim the tax element from HMRC. Thus, the amount given equates to 80% of the donation and the charity benefits from the remaining 20%. This results in every £1 given through Gift Aid being worth £1.25 to the charity.

To enable the charity to reclaim the tax, the donor must complete a Gift Aid declaration, in which the donor must confirm that they are a UK taxpayer. This is important – the tax that is paid to the charity comes from the tax paid by the individual, and if the individual has not paid sufficient tax to cover tax claimed by the charity on the donation, HMRC may ask the donor to pay the equivalent amount in tax. Taxpayers who make regular donations and who have a Gift Aid declaration in place should check that they have paid enough tax. This may be important for pensioners who, following an increase in the personal allowance, find that they are no longer taxpayers.

Donors who pay tax at the higher or additional rate of tax are able to claim relief of the difference between the higher or additional rate and the basic rate through their self-assessment returns. It is important that this is not overlooked and that records of donations are kept so the additional relief can be claimed.

Payroll giving

Payroll giving schemes enable employees to make donations to charity as a deduction from their pay and to receive tax relief at source for those donations. Employers wishing to operate a scheme must appoint a payroll giving agency. A list of approved payroll giving agencies is available on the Gov.uk website. The employer deducts the donation from the employee’s gross pay for PAYE purposes and pays it over to the payroll giving agency. The payroll giving agency passes the donation on to the employee’s chosen charity.

As the deduction is made from gross pay, no tax is paid on it. However, the employee will still pay National Insurance on the amount donated (as will the employer).

Gifts in a will

Where a donation to charity is made in a will, the donation will either reduce the value of the estate before inheritance tax is calculated, or, if 10% or more of the estate is left to charity, reduce the rate of inheritance tax by 10% from 40% to 36%.

Giving land, property or shares to charity

Income tax or capital gains tax relief may be available for donations of land, property or shares to charity. Income tax relief is given by deducting the value of the donation from total taxable income for the tax year in which the gift was made to the charity. Relief is claimed in the self-assessment return.

Where land, property or shares are sold to a charity for more than the cost, but less than their market value, no capital gains tax is payable.

Partner note: ITA 2007, Pt. 8, Ch. 2, 3; ITEPA 2003, Pt. 12; IHTA 1984, s. 23.

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If you’re an employer, make sure you’re up to date on the latest Employer Bulletin on diesel supplements.

Employees with a company car are taxed – often quite heavily – for the privilege. The charge is on the benefit which the employee derives from being able to use their company car for private journeys.

The amount charged to tax is a percentage of the ‘list price’ of the car – known as the ‘appropriate percentage’. The percentage depends on the level of the car’s CO2 emissions. A supplement applies to diesel cars. For 2019/20, as for 2018/19, the supplement is set at 4%. However, the application of the diesel supplement cannot take the percentage of the price charged to tax above the maximum charge of 37%. Consequently, the diesel supplement has no practical effect where emissions are 170g/km or above as the maximum charge already applies.

The nature of the diesel supplement was reformed from 6 April 2018. From that date it applies to cars propelled solely by diesel (not hybrids) which do not meet the Real Driving Emissions 2 (RDE2) standard. The supplement is levied both on diesel cars which are registered on or after 1 January 1998 which do not have a registered Nitrogen Oxide (NOx) emissions value, and also on diesel cars registered on or after that date which have a NOx level that exceeds that permitted by the RDE2 standard.

Checking whether the supplement applies

So, how can employers tell whether the diesel supplement applies?

Diesel cars which meet the level of NOx emissions permitted by Euro standard 6d meet the RDE2 standard. Consequently, they are exempt from the entire diesel supplement. For cars that are manufactured after September 2018, employers can use the Vehicle Enquiry Service (see https://vehicleenquiry.service.gov.uk/) to identify whether a particular car meets the Euro 6d standard – the employer simply needs to enter the registration number of the car into the tool to find information on the vehicle, including its Euro status. Cars that are shown as meeting Euro status 6AJ, 6AL, 6AM, 6AN, 6AO, 6AP, 6AQ or 6AR meet Euro standard 6d and are therefore exempt from the diesel supplement. Where the car was registered on or after 1 September 2018, this information is also shown on the vehicle registration document, V5C.

From 6 April 2019 onwards, employers should use fuel type F (rather than A as previously) when reporting the allocation of a diesel car meeting the Euro 6d standard to HMRC on Form P46(Car) or when payrolling the benefit.

Cars that do not meet the Euro 6d standard are subject to the diesel supplement. HMRC advise that very few, if any, diesel cars were exempt from the diesel supplement in 2018/19.

Example 1

Alan is allocated a company car registered in 2015. The car has CO2 emissions of 120g/km. It does not meet the Euro 6d standard. The diesel supplement applies and the appropriate percentage is increased by 4% from 28% (the percentage applying for 2019/20 to petrol cars with CO2 emissions of 120g/km) to 32%.

Example 2 Louise is allocated a new diesel company car on 6 April 2019. The V5C shows that the car has CO2 emissions of 120g/km and that it meets Euro Status 6d. The diesel supplement does not apply and the tax charge for 2019/20 is based on the appropriate percentage of 28% for cars with CO2 emissions of 120g/km.

Partner note: ITEPA 2003, s. 141; Employer Bulletin, April 2019.

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Do you run a business? Should you register for VAT? What are the conditions? We answer all these questions here

All traders – whether sole traders, partnerships, or limited companies – are obliged to register to charge and pay VAT once annual sales reach a pre-set annual threshold. This threshold remains at £85,000 for the year commencing 1 April 2019.

The annual VAT threshold is determined by total sales and is not the same as total profits (which is generally sales minus expenses). A business can make a loss and still need to register for VAT!

In summary, a business must register if:

  • its taxable outputs, including zero-rates sales (but not exempt, non-business, or ‘outside the scope’ supplies),have exceeded the registration threshold in the previous 12 calendar months – unless the business can satisfy HMRC that its taxable supplies in the next 12 months will not exceed a figure £2,000 below the registration threshold (so currently £83,000); or
  • there are reasonable grounds for believing that the business’s taxable outputs in the next 30 days will exceed the registration threshold; or
  • the business takes over another business as a going concern, to which the two bullet points above apply.

The threshold operates on a month-by-month basis, so a check should be made at the end of each month to make sure the business hasn’t gone over the limit in the previous twelve months.

The month-by-month basis also works by looking forward, so it is equally important at the end of each month to consider whether the limit will be exceeded in the following twelve months. If it is anticipated that total sales may exceed the VAT threshold, the business needs to register.

Where registration is required, HMRC must be notified:

  • within 30 days of the end of the relevant month (past sales condition); or
  • by the end of the 30-day period (expected sales condition).

If the business does not register with HMRC within the specified time limit, a penalty will be charged, which can eventually be up to 15% of the VAT owed – in addition to the actual VAT due.

Voluntarily registration

A business can register for VAT even if its turnover (total sales) is below the threshold and it may actually save tax by doing so, particularly if its main clients or customers are organisations that can reclaim VAT themselves.

Example

A non-VAT registered sole-trader buys a new office photocopier for the business. The copier costs £100 plus VAT, so a total of £120 is paid (£100 plus VAT at 20%). £120 is set against business profits for income tax purposes. If the trader is a basic rate (20%) taxpayer, there will be a tax saving of £24 (20% of £120), so the copier actually costs the trader £96. However, if the business is VAT-registered, the £20 VAT paid on the item (the input tax) can be reclaimed and £100 is set against business profits for income tax. The tax reduction is therefore £20 (20% of £100) and the copier costs the business just £80 – £16 is saved by being registered for VAT.

The business must not charge or show VAT on its invoices until the VAT number is received from HMRC. However, the VAT for this period must still be paid to HMRC. Therefore the business will need to increase its prices to allow for this and tell its customers why. Once the VAT number is received, the business can reissue the invoices showing the VAT separately.

Once registration has taken effect, there are a series of administrative obligations which must be complied with, and, importantly, a severe penalty regime exists for getting it wrong.

Partner Note: VATA 1994, Sch 1; HMRC VAT Notice 700/1

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Today’s blog covers the things you need to know about entrepreneur’s relief to reduce capital gains tax.

Entrepreneurs’ relief is intended to reduce the rate of capital gains tax to a flat rate of 10% on certain qualifying business disposals. Certain aspects of the relief have recently changed, and this may affect any subsequent tax liability.

A qualifying business disposal must include a material disposal of business assets. For these purposes, a disposal of business assets is a disposal of:

  1. the whole or part of a business;
  2.  of (or of interests in) one or more assets in use, at the time at which the business ceases to be carried on, for the purposes of the business; or
  3. one or more assets consisting of (or of interests in) shares or securities of a company.

Formerly, to qualify for relief, the assets or shares had to be held by the individual for at least 12 months to the date of disposal. However, the length of ownership condition has recently been increased such that, for disposals made on and after 6 April 2019, the taxpayer will have to have held the assets or shares for at least 24 months for the relief to apply.

Shareholders

In order for a shareholder to claim on the disposal of shares, the following conditions generally need to be met:

  1. the company in which those shares are held must be the individual’s personal company;
  2. the shareholder must be an employee or officer of the company, or of a company in the same trading group; and
  3. the company must be a trading company or a holding company of a trading group.

All three of these conditions must be met for the whole of a 24-month period (for disposals from 6 April 2019) that ends with the disposal of the shares, cessation of the trade, or the company leaving the trading group and not becoming a member of another trading group.

Personal company

A company is the personal company of the individual at any time when all of the following conditions apply:

  1. the individual holds at least 5% of the ordinary share capital of the company;
  2. the individual can exercise at least 5% of the voting rights of the company which are associated with ordinary share capital;
  3. the individual is entitled to at least 5% of the profits available for distribution to the equity holders; and
  4. the individual would be entitled to at least 5% of the assets available on a winding up of the company.

Conditions numbered 3, and 4 were added for disposals made on and after 29 October 2018. However, the way the law was drafted would have made it difficult for some taxpayers to determine whether those conditions had been met for the full qualifying period. Therefore, the original draft legislation was modified before enactment to include an alternative test to both those, namely that in the event of a disposal of the whole of the ordinary share capital of the company, the individual would be beneficially entitled to at least 5% of the proceeds.

Shareholding threshold

Where an individual’s shareholding has fallen below 5%, as a result of a fundraising event involving the issue of additional shares which takes place on or after 6 April 2019. The equity funding share issue must be made wholly for cash and be made for commercial reasons, and not as part of arrangements driven by tax avoidance.

In these circumstances the shareholder will be entitled to the relief which would otherwise be lost, by making one or both of the following elections:

  • claim the relief on a deemed sale and reacquisition at market value at the point immediately before the additional shares are issued which removes the personal company qualification; or
  • defer taxation of the gain made on this deemed sale until the actual disposal of the shares.

The second election will generally be required as the taxpayer will make a deemed sale with no sale proceeds with which to pay the CGT due.

If neither of the elections is made the taxpayer will pay the CGT on the gain with no entrepreneurs’ relief at the time it arises.

Partner Note: FA 2011 s 9; FA 2019, s 39 and Sch 16; TCGA 1992, s 169ff

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Here are some tax planning tips for workplace pensions if you have employees.

An increase in the minimum contributions employers and their staff must pay into their automatic enrolment workplace pension scheme took effect from 6 April 2019.

From that date, the employer minimum contribution has risen from 2% to 3%, while the staff contribution also increased from 3% to 5%. As part of the ‘phasing’ process, the increases mean that total contributions for employees have gone up from 5% to 8%. It is the employer’s responsibility to ensure that these increases are properly implemented.

The increases do not apply to employers using defined benefits pension schemes.

The amount that the employer and the employee pay into the pension scheme will vary depending on the type of scheme chosen and its associated rules. The employee contribution may also vary depending on the type of tax relief applied by the scheme. The majority of employers use pension schemes that from April 2019 require a total minimum of 8% contribution to be paid. The calculation for this type of scheme is based on a specific range of earnings. For the 2019/20 tax year this range is between £6,136 and £50,000 a year (£512 and £4,167 a month, or £118 and £962 a week).

For calculating the minimum contributions payable for this type of scheme the following amounts are included:

  • salary
  • wages
  • commission
  • bonuses
  • overtime
  • statutory sick pay (SSP)
  • statutory maternity pay (SMP)
  • ordinary or additional statutory paternity pay
  • statutory adoption pay

Although most pension schemes use these elements for calculating contributions, it might be a good time to recheck the scheme documents to make sure everything is in order.

All employers with staff in a pension scheme for automatic enrolment must ensure that they implement the changes and ensure that at least the new minimum amounts are being paid into their pension scheme. This applies whether the employer set up a pension scheme for automatic enrolment or they are using an existing scheme.

The Pensions Regulator provides an online contributions calculator to help employers work out costs for each member of staff. The calculator can be found at https://www.thepensionsregulator.gov.uk/en/employers/work-out-your-automatic-enrolment-costs.

No action is required where an employer does not have any staff in a pension scheme for automatic enrolment, or if amounts above the statutory minimum are already being paid. However, employers still need to assess anyone who works for them each time they are paid, and put them into a pension scheme if they meet the criteria for automatic enrolment. The employer must contribute at least the right minimum amount at the time and any further increases required.

As well as the obligation to continue paying into the pension scheme, manage requests to join or leave the scheme, and keep records, employers are also obliged to carry out a re-enrolment check every three years to put back in any staff who have left their pension scheme.

Tax planning points

Remember that people other than the holder can invest in the holder’s pension. For example, an individual could contribute to a spouse or partner’s personal pension, or even to a child’s personal pension to allow them to start building up retirement benefits from an early age.

The number of different pension schemes that a person can belong to is not restricted, although there are limits on the total amounts that can be contributed across all schemes each year.

It is also worth remembering that non-earners can pay £2,880 a year into a pension and receive an automatic 20% boost to their contribution in tax relief. This means that on a contribution of £240 per month, the actual amount invested in the pension scheme will be £300.

Partner Note: Pensions Act 2008; Finance Act 2004, s 188

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Employing family members

It is permissible for a business to claim a tax deduction for the cost of a reasonable wage paid to a family member who helps in the business. Their duties could, for example, include answering the phone, going to the bank, bookkeeping and other administrative tasks.

The tax legislation specifies that ‘in calculating the profits of a trade, no deduction is allowed for expenses not incurred wholly and exclusively for the purposes of the trade’, which indicates that as long as the work is undertaken, the payments are realistic and actually made, there should not be a problem with claiming tax relief.

The benefits of spreading income around family members where possible include maximising the use of annual personal tax allowances (£12,500 per individual (children and adults) in 2019/20), and potentially taking advantage of nil and lower rate tax thresholds.

‘Family’ could include anyone who depends on the owners of the family business for their financial well-being (for example, elderly relatives and/or long-standing domestic staff members), but care must be taken not to fall foul of the ‘settlements’ legislation and other anti-avoidance measures in force at the time.

Keeping records

The tax deductibility of wages paid through a business has recently been examined by the Tax Tribunal. The business owner claimed that wages paid to his son had been paid partly through the ‘provision of goods’. He managed to substantiate some cash payments and a monthly direct debit (for insurance costs) by reference to his son’s bank statements. However, the bulk of the claim was based on buying food and drink to help support his son at university. Unfortunately, the tribunal concluded that the payments were made out of ‘natural parental love and affection’. There was a duality of purpose as the ‘wages’ had a major underlying ‘private and personal’ motive, and thus not for the purposes of the trade. The tribunal subsequently dismissed the appeal on the grounds that the business owner was doing nothing more than supporting his son at university.

The outcome of this case could have been very different if the business owner had used an alternative methodology for paying his son’s wages. In particular, the judge noted that had payment been made on a time recorded basis or using some other approach to calculate the amount payable, and had an accurate record been maintained of the hours worked and the amount paid, it is unlikely that the deduction would have been denied.

In particular, this case highlights the importance of maintaining proper records regarding the basis on which payments are to be made to children. A direct link between the business account and the recipient’s account would clearly be advisable.  For example, if the business owner had paid the wages directly into his son’s bank account, leaving the son to purchase his own food and drink from the money he earned from his father, bank statements could subsequently have been used to provide evidence of what had been paid and this could be linked to the record of hours worked. Maintaining the link is the key issue here.

Rate of pay

It is also worth noting that HMRC examine whether a commercial rate is being paid to family members. The concept of ‘equal pay for equal value’ should help prevent a suggestion of dual purpose and thus, in turn, should also help refute allegations of excessive payments to family members as a means of extracting monies from the business.

Finally, wherever payments are made to family member, legal issues such as the national minimum wage should also be borne in mind.

Partner Note: ITTOIA 2005, s 34; Nicholson v HMRC [2018] TC06293

Tax aspects of using a work’s van

If an employee is able to use a work’s van for private use, which generally includes home-to-work travel, there will be a taxable benefit and a subsequent tax charge.

From 6 April 2019, the flat-rate van benefit charge has risen from £3,350 to £3,430, representing a small increase in real terms to a basic rate taxpayer of £16 a year.

If an employer also provides the employee with fuel for private use, then a tax charge on the provision of fuel will also arise based on an annual fixed rate. For 2019/20 the flat-rate van fuel benefit charge has been increased from £633 to £655, so there is an increase in real terms to a basic rate taxpayer of just £4.40.

What is a van?

To qualify as a van, a vehicle must be:

  • a mechanically propelled road vehicle; and
  • of a construction primarily suited for the conveyance of goods or burden of any description; and
  • of a ‘design weight’ which does not exceed 3,500kg; but
  • not a motorcycle as defined in the Road Traffic Act 1988, s. 185(1). Broadly, this means that it must have at least four wheels.

The design weight of a vehicle, also known as the ‘manufacturer’s plated weight’, is normally shown on a plate attached to the vehicle. What it means is the maximum weight which the vehicle is designed or adapted not to exceed when in normal use and travelling on the road laden.

Human beings are not ‘goods or burden of any description’ so a vehicle designed to carry people (such as a minibus) will not be a van for these purposes.

Private use

A charge to income tax will generally arise if a company van is made available, by reason of the employment, to an employee or to a member of his or her family or household for private non-business-related use. It must be made available without a transfer of ownership from the employer to the employee.

There are three types of journeys that are classed as non-taxable business use:

  • business journeys – journeys the employee makes in the course of carrying out the duties of their employment
  • ordinary commuting – travel to and from home to a place of work
  • insignificant private use beyond ordinary commuting – for example making a slight detour to purchase a sandwich for lunch

Pool vans

Broadly, vans used as pool vans that meet the following criteria will not attract a benefit-in-kind tax charge:

  • the van is used by more than one employee
  • the van is not ordinarily used by one employee to the exclusion of others
  • the van is not normally kept at or near employees’ homes
  • it is used only for business journeys (A limited amount of incidental private use is allowed. For example, commuting home with the van to allow an early start to a business journey the next morning)

Given that these rules provide a total exemption from any tax charge, it is not surprising that HMRC apply them very strictly.

Tax charge

The benefit charge applies regardless of the employee’s earnings rate but may be proportionately reduced if the van is only available for part of a tax year, and/or by any payments made by the employee for private use.

For 2019/20, a basic rate taxpayer will pay £686 for the use of a work’s van (£3,430 x 20%). For a higher rate taxpayer, the cost will be £1,372.

If fuel is also provided for private use, for 2019/20, a basic rate taxpayer will additional tax of £131 (£655 x 20%), and a higher rate taxpayer will pay £262.

Tax is normally collected through the employee’s Pay As You Earn (PAYE) tax code.

Partner Note: ITEPA 203, ss 154-159; FA 2016, s 11; EIM22701ff