Beneficial Loan Interest - Interest Paid to Avoid A BIK

Q: I have a loan of over £5,000 from my employer, on which interest is charged at the current HMRC official rate (6.25%). However, the interest is not payable until the end of the loan period. In the interim it is rolled up and carried forward. Does this give rise to a reportable benefit in kind?

A: Initially, yes. A benefit on such a loan arises unless interest is paid on it for that year.

Clearly you will be paying interest for the year, but as yet it is not actually paid and therefore cannot be taken into account. If the interest is paid prior to the P11D return date, then it can be accounted for and the benefit will be negated but if it does not become payable until after that date, then the benefit should be reported on form P11D.

When the interest is subsequently paid, a retrospective claim for relief may be made. Such a claim should be admitted, though it is important to note that in order for interest to be allowed, it must be demonstrable that a legal obligation to pay the interest existed during the income tax year concerned. It is not sufficient to simply volunteer to pay interest in order to try and avoid a benefit

Sale of Goods By Employees

Q: I run a small retail shop and have recently discovered that two employees were selling goods out of sight of the security cameras and have been pocketing the cash. As the money has never gone into the till, do I have to account for VAT on it?

A: The liability to account for VAT depends on whether a supply has been made. When goods are stolen, no supply is made by the business, and so no output tax is due.

In the situation you have, where goods have been sold by employees from business premises, and cash is stolen, the goods are deemed to have been supplied and so output tax remains due on the sales. If the employee sold the goods at a lower price and put that amount in the till, that would be the consideration on which VAT is due.

One exception is that if you can satisfy the HMRC that there has been an agreement between the employee and the customer with the intention of depriving the business of the money then they will usually accept that there has been a theft of goods.

Energy Efficiency & Capital Allowances

Q: Last year we installed some new handwashing facilities along with water heaters to supply hot water to them.  At the time the supplier said I would be entitled to get some extra tax relief as the heaters were new efficient ones.  Can you shed any light on what the supplier meant?

A: In 2001, the government introduced a scheme which allows businesses investing in qualifying energy saving plant and machinery investments to reclaim 100% Capital allowances on the expenditure incurred.

Various types of expenditure qualify for the 100% allowance, providing they meet the required energy-saving standards as outlined by the Enhanced Capital Allowances scheme. To see if your item qualifies for the increased allowance visit www.eca.gov.uk .

Each year the government adds further items to this list in their annual budget update so it’s worth checking whether any plant and machinery items you are purchasing qualify. Your accountant will be able to advise you further.

Employees Under 16 Years of Age

Q: In the run up to Christmas, I am looking to employ some part-time teenagers to help with the increase in business. One of the girls I am hoping to employ is 15 years old. Does she have to pay National Insurance and should she have a National Insurance Number?

A: Only persons aged between sixteen to retirement age are liable for National Insurance. Children aged fifteen are automatically sent a number shortly before their sixteenth birthday provided that they live in the UK and their parents/guardian receives child benefit. Deductions will be made from the date of her 16th birthday.

Employees Who Use Their Own Vehicle For Business

Q: My company has a small fleet of company cars available to our sales representives. One of the new employees is wanting to use his own car and claim mileage from the company. Do you have any advice on what records the company should be keeping for PAYE and National Insurance purposes?

A: Your company is now more likely than ever to be subject to a full review of their compliance systems and procedures by HM Revenue & Customs.

You should ensure the employee who is claiming mileage keeps full mileage logs as the HMRC are likely to challenge all doubtful claims on the business mileage limit.

If you were to receive an inspection they would ask for evidence of business mileage and also ensure you keep separate figures for each car where there is a change during the year, or where more than one vehicle is available to a an employee.

With regard to the company car and fuel provided to the exisiting employees, there is a benefit in kind due on provision of these if they are used for private use other than home to work travel.

The fuel benefit is an 'all or nothing' benefit, so if the business pays for any private fuel and is not fully reimbursed by the director, the employees must accept the corresponding private fuel benefit and you must report it on a P11D.

It may be worth looking at the tax implications of this, and other ways of the employee owning the vehicles, as it may be more tax efficient for them to supply their own cars like the new employee.

Part time employment and State pension

Q: One of my full-time employees has recently switched to a lower paid part-time job due to family commitments. She is concerned that this change may affect her entitlement to the basic state pension and other state benefits. Is this the case?

A: For each week that your employee earns between £90 (the lower earnings limit) and £105 (the primary threshold) in 2008/09, they will be treated as paying National Insurance contributions even though no contributions are deducted from her pay.

This means that she will continue to build up entitlement to contributory benefits such as the basic State Pension and Incapacity Benefit, even though she is not paying standard rate National Insurance contributions.

However, if she earns less than the lower earnings limit of £90 per week, she will not pay National Insurance contributions and will not receive credit for state pension and benefit purposes. She may still be able to protect her entitlement to the basic State Pension if she pays NI class 3 voluntary contributions, gets certain benefits or if she is a carer who receives Home Responsibilities Protection.

Tax Relief For Bad Paying Customers

Q: I have a particular customer who has a history of bad payments with me. I am considering taking legal action against this customer to try and recover this debt. Can my solicitor’s fees and other legal costs be regarded as a legitimate business expenses for tax purposes and are there different procedures depending on the size of the debt?

A: Legal and professional costs that a business incurs are allowable when they directly relate to trading. Therefore the legal fees incurred in attempting to recover trade debt owed by this customer are therefore allowable for tax purposes when establishing your business profit for the year.

In addition, as it is a specific customer against which the bad debt has arisen this will be also be allowable as a deduction when establishing your business profits for the period concerned.

Digitised Publishing - VAT treatment

Q: I own a small digital printing business and will shortly exceed the VAT regsitration. Some of the products I sell would qualify for zero rating if they were printed so does this still apply if I sell digitised versions?

A: First of all it is important to remember that digitised products are regarded as services – and while the zero-rating applies for printed supplies, which are categorised as goods, it does not apply for services.

As well as being classified as a service, the supply of a digitised product often provides greater functionality and is not necessarily the same as the traditional or non-electronic product .

This is quite a complex area of VAT ruling, and you may find HM Revenue & Customs VAT info sheet 01/03 a useful source of more detailed information about the VAT treatment of digitised publications, including e-books – or speak to your local TaxAssist Accountant for further guidance.

Holiday entitlement for part time workers

Q: I run a small café and I would like to employ a couple of part-time workers for between 10 and 20 hours per week to help me during busy periods. They both have pre-booked holidays during the Christmas season for which I have agreed to honour. How do I calculate their total holiday entitlement for the year?

A: Every worker – whether part-time or full-time – covered by the working time regulations 1998 is entitled to four weeks’ paid annual leave, and for part-time workers this is calculated on a pro-rata basis. For example, an employee who works three days a week is entitled to twelve days paid holiday - their normal working week multiplied by four. This is because a week’s leave should allow workers to be away from work for a week. It should be the same amount of time as the working week.

With regard to Christmas Day and Boxing Day public holidays, these can be counted as part of the statutory four weeks holiday entitlement. There is no statutory right to take bank holidays off, so unless the employees contract of employment states there is a right to paid time off for bank holidays, you are not obliged to pay your staff for these unless they take them as part of their annual leave entitlement.

Disclaimer – advice shared in this column is intended to inform rather than advise. Taxpayer’s circumstances do vary and if you feel that the information provided is beneficial it is important that you contact us before implementation.  If you take, or do not take action as a result of reading this column, before receiving our written endorsement, we will accept no responsibility for any financial loss incurred.