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How are company cars taxed? 

Company cars can seem like a good buy for your business, but the individual is heavily taxed if they are available for personal use. You don’t even need to drive them, they just need to be available.  

Company cars are not really tax efficient and we often advise clients to buy the car privately and just charge the company for mileage. For one client with expensive taste in cars we even recommended staying as a sole trader rather than a limited company. (I know your mate at the pub probably told you that you could save a shedload of tax by being a limited company, but this isn’t always true! Ask your accountant to do the detailed calculations) 

This is because cars are treated as benefits in kind and taxed as if you have additional salary.  The value of this benefit is based on a percentage of list price (including accessories). The employee pays tax and national insurance, and the employer also pays national insurance. 

The percentage used for electric vehicles is much lower than for others although this is increasing each year. 

As well as the vehicle and fuel for personal use is taxed at a flat rate for the year so work out how much you use to see if it is tax efficient. 

If you’re still looking at a company car then you may be able to reduce your overall tax burden by many different means: 

  • If you lease a car, you may be able to reclaim half the VAT on the lease payments 
  • Consider electric vehicles or at least lower emission cars 
  • Consider a van if that would be suitable for your work as this is taxed differently 
  • If you don’t use the car personally then make sure that it is not insured for personal use and is not kept at your home overnight. 
  • If you have a taste for expensive cars it may even be worth you running your business as a sole trader or partnership rather than a limited company  
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How was your weekend? 

What did you get up to this weekend? 

Were you doing something exciting, visiting family, spending time on your hobbies?  

Or did you take the opportunity to switch off and relax after a busy week? Some weekends are all about the down time. 

Or were you working? If so was it by choice? I visited my daughter during the week so a bit of life in the middle of what is usually work time. But if you’re working full time AND weekends then perhaps you need to review your capacity? Do you have enough staff or do you need to learn to use them better or to manage your own time? Do you have the right sort of clients?  

Will one of your resolutions be to rest more? 

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Government help to improve your cashflow 

Yes, the government are on the side of the small business with the legal right to claim interest and debt collection charges on late payment. And there is more legislation on the way. 

So why isn’t it working? 

Because small businesses are too scared of losing clients to USE the legislation.  

But a customer who doesn’t pay is NOT a customer. Somebody takes goods from a small business without paying is a thief. So what do we call people who take services without paying? Customers! 

Use the law to help collect your own debts but also to help change how small businesses are treated. Late Payment of Commercial Debts (Interest) Act 1998 calculator are here.

And a big thank you to Emma Jones OBE, now Small Business Commissioner, who kindly wrote the foreword to my second book ‘Growing by Numbers: how to scale up your business with confidence’

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10 point tax review with year end 

When we complete year end accounts for our clients, we complete a 10-point tax review for each business as standard to ensure that they are making the most of their various allowances.  

1. Are the using the most appropriate trading vehicle eg sole trader or partnership vs limited company 

2. Should they register for VAT voluntarily or if they have exceeded the rolling 12 month limit (currently £90k including reverse charge income)? If already VAT registered are they on the most suitable scheme? 

3. Should their spouse be a partner, shareholder, or employee? 

4. Are they taking the most appropriate salary vs dividends? 

5. Are they approaching certain cliff edges such as 25% corporation tax, higher income child benefit charge, etc and are there legitimate ways to keep their income below these limits? 

6. Are they investing in pensions? 

7. Should they be paying/receiving interest on their DLA? 

8. Are they using part of their home for business and should they claim these costs? 

9. Are they eligible for Research and Development tax credits and is it worth claiming (as the fees can be quite high for legitimate experts)? 

10.Would they benefit from an EIS/SEIS scheme?

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Using your home for business (limited company) 

If you work from home because you have no other premises, then you can claim £6pw tax free use of home allowance as a contribution to your bills.  

If you use a substantial part of your home for business then it may be beneficial for the director to rent part of their home to the business. (As this is a commercial letting it is not applicable for the rent a room allowance) 

You should have a rental licence between the director and the company showing the agreed rent and the hours available. The rent may be set at the level of the costs. This rent will reduce corporation tax for the business. The director will then show the rental income and costs on their income tax return. If the rent = costs there will be no tax to pay. If income exceeds costs, then the director will pay income tax on the profit but there is no national insurance. 

Costs that can be included are: 

  • Rent 
  • Ground rent 
  • Council tax 
  • Service charges 
  • Maintenance 
  • Utilities 
  • Security 
  • Cleaning 

There may also be some relief for mortgage interest (but not repayments so do ensure that you split the monthly charge) 

The costs should be apportioned across the available space by floor area or number of rooms (excluding kitchens and bathrooms). You can choose the most beneficial method, but you cannot keep changing it. In practice it is often simplest to allocate the household costs by the number of rooms. 

If the room is used full time for business, then, when you come to sell your home, you may have to pay capital gains tax on this portion of the property. In practice you will probably only use the room part time. If your spare room doubles as your office 5 days per week then 5/7 of the costs can be claimed to offset the rent from the business. 

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Spotting vampire clients early 

Not every prospect should become a client. 

Some clients expect to pay a compliance fee to receive an advisory service. It’s not their fault. If a prospect starts the conversation with “How cheap can you do it?” they’re either a start up with no idea of value, or they need re-educating. Too many accountants pitch entirely on price so we need to overcome this focus and educate business owners that in accountancy, as elsewhere, they often get what they pay for. The same goes for many other service businesses where the owner is selling their professional expertise or a skilled service 

Sometimes they criticise every previous adviser but it’s easy to see the common factor. If they ignore deadlines and processes or hide information during the onboarding process you can be sure that they won’t improve once they’re a client. 

If they want urgent work immediately, especially if caused by their own delays, this is another red flag. 

Vampire clients suck the time, profit, energy, and joy out of your business.  

Trust your instincts. Stick to your boundaries. Say “no”. 

The latest UK Business Confidence Monitor from ICAEW 

https://www.icaew.com/technical/economy/business-confidence-monitor/business-confidence-monitor-national
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Pensions

You can pay into the pension of any of your directors/employees provided that it is proportionate to the work that they do. (See 9.pay your spouse a salary). This is useful as it reduces the amount of corporation tax that you pay. 

There are certain limits, and you should certainly speak to an IFA (independent financial adviser) about the detail. 

Each individual can only pay a maximum of £60kpa into ALL their pensions from ALL sources so do check what other contributions they are making/receiving. 

You can pay yourself up to £60k pension per tax year 6 April – 5 April.  
 
You can split this up and pay it throughout the tax year or in a lump sum just before we do your company accounts each year. For example, I pay a low amount into my pension each month then I top up just before my company year end (in July) when I know my profits, and again just before 5 April to maximise my annual payment.  
 
You will need management accounts to decide how much to pay. The tax saving for the company comes in the accounts year the pension is PAID so it actually needs to go out of the bank BEFORE your company year end (otherwise you claim it the following year). 

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A positive mindset will only get you so far 

A positive mindset and a healthy dose of optimism is essential for every entrepreneur otherwise we’d be better off as employees following somebody else’s dream. But a positive mindset will only get you so far.

Spoiler alert: you still have to put in the hard work. Work smarter rather than harder where you can but you still have to work.

You still need the discipline to keep yourself going on tough days and to be able to motivate yourself (and your team)to keep working towards your dream.

You will need to be able to keep your head and think clearly in a crisis because, rest assured, there will be many crises along the way and you are the leader who will need to deal with it. That’s the counter side to the freedom that your business gives you.

You will need to be a visionary who can see what direction your business needs to take, and a pilot to get it there.

Initially you will be the captain guiding the ship from the bridge whilst also stoking coal in the engine room. At some point you will take on a team, at which point you will need leadership skills (and probably a healthy helping of patience)

Ideally you will have a team whose strengths complement yours and a board or a business coach to hold you accountable for all those actions as well as to help you along the way.

I’ve learnt over the years that business is a lot easier when you don’t have to figure everything out on your own. If you’d value an experienced sounding board, I’m always happy to help through leadership coaching, mentoring and the occasional useful introduction.

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Interest on directors’ loan account (DLA)

If you have put money into your limited company that has not yet been repaid then you can pay yourself interest on this loan. This can be a tax efficient way to take money out of the company BUT you would need a CT61 form completed for HMRC each quarter.

If, on the other hand, you have borrowed money from your company then you may face a higher tax charge and even a personal tax charge.

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I wish my accountant was more proactive 

I’ve lost track of the number of accountants who describe themselves as “proactive” on their websites.

According to Cambridge English Dictionary:
Proactive = taking action by causing change and not only reacting to change when it happens

For an accountant to ‘cause change’ they would need to be actively advising a business on how to change their numbers. This is a very different offering from completing tax returns once a year. It’s not even the same as completing management accounts once a month.

In order to ‘cause change’ you need a starting point:
Up to date bookkeeping, management accountants, KPIs, etc

You also need to understand those numbers:
Analysis, commentary, a management review

Then the real work can begin. The expertise of knowing how to change those numbers. And the action plan and accountability to ensure that it happens.

Most accountants don’t deliver on their proactive promise because their clients do not pay enough for this premium service, or because the basic numbers aren’t available in time to take action. With technology to speed up processes this is easily changed so that more business owners can benefit from truly proactive accountants.

If you would like to find out more then you can book a Clarity review with us to drive your business forwards, get in touch to find out more.

We want accountants to make a real difference to business owners, so let’s do better business together.