Simple Guide to VAT and Xero

Following Brexit, the VAT rules for supplying goods and services between the UK and EU member states will become the same as the current rules for supplying from the UK to outside the EU.

Before Brexit there was VAT charged between the UK and the other 27 EU countries.  Because we were all part of the same market, if a business was VAT registered, they could reverse charge the transaction with no VAT due.  Now that the UK is outside of this single market UK VAT is zero rated but VAT has to be paid locally, as well as customs duty.

If you run a business which imports and exports goods or services then we suggest that you familiarise yourself with the new rules, the Enterprise Nation Brexit Hub is a good reference point, as well as the Gov.uk online pages.

In the meantime, this VAT guide is intended to support you with your Xero reconciliations, which will feed into your quarterly VAT returns.

VAT Summary

All VAT-registered businesses must charge VAT on their goods or services and may reclaim any VAT they’ve paid on business-related goods or services.

If you’re a VAT-registered business you must report to HMRC the amount of VAT you’ve charged and the amount of VAT you’ve paid. This is done through your VAT Return, which is usually due every 3 months.

If you’ve charged more VAT than you’ve paid, you have to pay the difference to HMRC. If you’ve paid more VAT than you’ve charged, you can reclaim the difference from HMRC.

SALES

There are 3 main different rates of VAT and you must make sure you charge the right amount.

Standard Rate 20%

Most goods and services are standard rate. You should charge 20% VAT as the default, unless the goods or services are classed as reduced or zero-rated.

Reduced Rate 5%

This includes children’s car seats, domestic fuel and certain building projects (i.e. installing energy saving products or converting a building from one residential use to another.)

Zero Rate      0%

Zero-rated means that the goods are VAT-taxable but the rate of VAT you must charge your customers is 0%.  You still must report them on your VAT Return.  Examples include books and newspapers or children’s clothes and shoes, certain food & drink (although this is a complex area).

Most goods you export from the UK to another country are Zero-Rated.

Sales Invoices in Xero

In most cases the invoices you create in Xero should be coded as follows:

    • Sales to customers in the UK                                 20% (VAT on Income)
    • Sales to customers in the EU                                 Zero Rated Income
    • Sales to customers in the rest of the world Zero Rated Income

This does not mean that the customer has no VAT to pay.  Instead they may be charged VAT and customs duty when the goods arrive, this will depend on the country in which they are located.

VAT MOSS

VAT MOSS is only used where supplies are of digital services to consumers in the EU; it doesn’t apply where the supply is B2B and is instead subject to reverse charge in the business customer hands.

If you sell digital services to consumers in the EU then you will no longer be able to access VAT MOSS via HMRC in the UK and instead you will need to register for VAT in the EU Member State of delivery and then register through that portal for ‘Non-Union MOSS’.

If you supply digital services to consumers via a third-party platform or marketplace, the digital platform is responsible for accounting for VAT on the supply instead of you.  For more information visit – https://www.gov.uk/guidance/the-vat-rules-if-you-supply-digital-services-to-private-consumers

EC Sales List

UK businesses are no longer required to complete an EC Sales List when supplying services to businesses located in the EU.

Exempt goods and services

Exempt goods or services are supplies that you cannot charge VAT on.

If you buy or sell an exempt item you should still record the transaction in your general business accounts. Examples of exempt items include:

  • insurance
  • postage stamps
  • health services provided by doctors

Out of scope

Some goods and services are outside the VAT tax system so you cannot charge or reclaim the VAT on them. For example, out of scope items include:

  • statutory fees – like the London Congestion Charge or DVLA costs
  • donations to a charity – if given without receiving anything in return
  • staff wages & HMRC tax payments

PURCHASES

You can usually reclaim the VAT paid on goods and services purchased for use in your business.  You must keep records to support your claim, such as a valid VAT invoice or VAT receipt.  You cannot reclaim VAT for:

  • anything that’s not purely for business (i.e. private use)
  • business entertainment costs
  • purchases if you use the VAT Flat Rate Scheme (except some capital assets > 2k)

Purchase VAT tax rates in Xero

Xero VAT Rate

Description and Example Purchases

20% (VAT on Expenses)Goods & services from UK VAT registered businesses where VAT has been charged at 20%, supported by a VAT receipt

·         Materials

·         Fuel

·         Telephone Costs

·         Accountancy Fees

·         Computer equipment

No VATCosts which fall outside the scope for VAT

·         Wages / Salaries

·         Subcontractors (if not VAT registered)

·         Director’s Loan transactions

·         Bank transfers

·         PAYE & National Insurance payments

·         Other purchases from businesses which are not VAT registered (i.e. window cleaner)

Exempt Expenses·         Insurance

·         MOTs

·         Postage

·         Medical insurance

·         Education (although some staff training may be charged at standard rate)

Zero Rated Expenses·         Food & drink (unless standard rate VAT rules apply – check the VAT receipt)

·         Books

·         Goods shipped into the UK from suppliers outside the UK will usually be Zero Rated *

Reverse Charge Expenses (20%)Purchases from suppliers outside the UK where you pay and reclaim VAT.  In most cases the 2 amounts will cancel each other out.

·         Mailchimp

·         LinkedIn

·         Facebook

·         Google

* Import statements with VAT and Customs Duty will need to be dealt with separately using a VAT only invoice.

Postponed VAT Accounting

In broad terms, VAT will be payable upon the goods you import, although the UK government has introduced the postponed VAT payment system to avoid cash flow issues.  This lets you account for the VAT on your next VAT return, and means the goods can be released from customs without the need for VAT payment at the border.

You will need to register for and download a monthly customs statement from HMRC, which summaries your imports from the month before, in order to reclaim the VAT.  Currently an agent cannot do this for you and therefore you should log in and download this report each month and email a copy to a4c for inclusion in your accounts.

How Xero calculates VAT amounts

The VAT return in Xero uses the detail from the reconciled transactions to calculate the VAT return box amounts.  This could be taken from sales invoices, purchase bills or bank reconciled transactions.

Xero uses the VAT tax rate selected for each transaction, this then feeds into the relevant boxes on the VAT return.

Quick VAT return summary:

  • Box 1 – VAT due this period on sales
  • Box 4 – VAT reclaimed in this period on purchases
  • Box 5 – The VAT amount payable to HMRC or due as a refund
  • Box 6 – Total value of sales excluding VAT
  • Box 7 – Total value of purchases excluding VAT

Conclusion

VAT can be a very complex area and will vary from client to client, depending on your industry sector and business model.

At a4c we will support you in the preparation of your VAT returns and are on hand to answer any questions you have in relation to VAT or other areas of your accounts.

01737 652 852 | www.a4cgroup.co.uk

 

Keep it simple to avoid tax

The cycle-to-work tax break seems to come with a mountain of literature to plough through, but is there a simple option?

Cycle-to-work basics

The legislation for the cycle-to-work tax break is unusually straightforward. It allows employers to provide a bicycle, with or without safety equipment, as a tax and NI-free benefit in kind.

Three simple conditions must be met:

  • the employee can’t own the bike etc.,
  • it is used mainly for qualifying journeys and
  • you offer the benefit to all your employees.

Complications

The trouble is the scheme is widely marketed through employee benefits specialist companies adding layers of complication to the simple tax break.

The government also upped the stakes by making it one of the benefits which still saves tax when used as part of a salary sacrifice arrangement. This gives employers a lot to pick through.

No cycle-to-work scheme required!

At its simplest all you need to do is offer your employees use of a bike and buy  as many as you need.

The bikes don’t all have to be the same value; you can give the employees a budget (perhaps linked to their seniority in the business) and let them choose. There’s no limit on the value of bikes that you’re allowed to provide.

After a while the bikes can be offered for sale to the employees at a modest price. HMRC suggests acceptable values: 18% to 25% of cost after a one year, and just between £1 and 2% of cost after five years.

That seems like a pretty cheap way to buy a bike tax efficiently!

Remember that providing the bikes is an extra cost to the business, however it can claim tax relief on their cost.

For further information please don’t hesitate to get in touch .

IR35 | April 2021

Balancing your books and tax records

If, because of the new off-payroll rules, your client will deduct PAYE tax and NI when settling your invoices, you will need to make important changes to your admin and how you draw income from your business.

What steps do you need to take?


New rules

The signs are that the new off-payroll ( IR35 ) rules, which apply from April 2021, will result in many more workers having PAYE tax and NI deducted from income. If you’re affected you’ll need to consider how you should deal with this in your business and tax records.

Tip. The new off-payroll rules only apply to contracts where your client is a medium-sized or large business or other organisation (including all public bodies). You can continue to process income from other contracts in the usual way.

VAT – no change

Even where you know your client will deduct tax and NI from payments – in effect treating you as if you were an employee – if you are registered for VAT you must continue to add it to your invoices and account to HMRC for it on your VAT returns in the usual way.

Is essence, as far as VAT is concerned you can ignore the new off-payroll rules.

Recording income

There are various ways to correctly record income from which tax and NI has been deducted in your business’s books.

Our advice, which we believe more accurately follows generally accepted accounting principles, is to record the full amount that you invoice your client as sales income. You can then record the PAYE tax and NI deducted as an expense, say as a salaries and wages cost.

How much tax and NI?

Where your client decides that the new off-payroll rules apply, they should ask you to complete a “starter checklist”. This allows them to operate the correct tax code.

Paying yourself

Having included the sales invoices as income and the PAYE tax and NI as expenses in your business records, the net amount is income for your company. You can either pay this out or retain it in your company.

Our recommendation is that you pay it as salary and credit the amount to your director’s loan account or draw the funds immediately.

HMRC says that the salary payment from your company does not need PAYE tax or NI deducting from it as this has already been done by your client.

In Summary

  • Your VAT records and returns are unaffected.
  • Record invoices for off-payroll work as sales and the PAYE tax and NI deducted as an expense.
  • The net amount your company receives can be paid to you without accounting for further tax or NI.

To discuss how the IR35 changes will impact you and your business give Esther a call on 01737 652 852.

 

The tax return filing deadline is 31 January each year where the return is filed electronically. Use this self-assessment tax return checklist to avoid problems with HMRC, or not paying the right amount of tax.

Points to checkPractical matters
Include all income sourcesIt’s easy to miss off a bank account or dividends from shares etc. on your return, especially if you’re up against the deadline and have several sources of income. Income tends to stay at a similar level year on year, so check the figures against the previous year’s. If there is a difference in any particular area, do some investigating to make sure you’ve picked everything up.
Check capital gainsIf you dispose of assets for more than you paid for them, you may need to report the details on the capital gains supplementary pages. However, you can ignore this if your total gains don’t exceed the annual exemption for the tax year, and the proceeds don’t exceed four times the annual exemption. If you are selling a property that has been your only or main residence, check the occupancy history. If it was your main residence for only part of the ownership period, the private residence relief exemption might only apply to part of the gain.
Report lossesIf you dispose of assets for less than you sold them a loss arises and no tax is due. You might be tempted to ignore these and not report them. However, if you don’t then you won’t be able to use them to reduce future gains, so always report losses.
Pension contributionsYou need to report any pension contributions other than those deducted by an employer from your gross pay. Doing so will ensure you receive the full tax relief but watch out! If your total contributions exceed £40,000 in a tax year, you might be liable to the annual allowance charge. If your contributions do exceed £40,000, check your contributions for the previous three years, as you can carry any unused allowance forward.
Charitable donationsDonations made to registered charities mean tax relief for higher and additional rate taxpayers. Check your bank statements to ensure you pick everything up. Memberships to organisations like the National Trust or English Heritage count as donations if you’ve gift aided them, as well as one-off entry fees into various zoos, museums and exhibitions around the country.
State pensionA common misconception is that the state pension is exempt from tax. This is false, though it isn’t taxed at source. Don’t forget to include the amount you receive if applicable.
Higher income child benefit chargeIf you (or your partner) are in receipt of child benefit and either of your incomes exceeds £50,000, you will be subject to the charge. Don’t forget to include the relevant details.
Marriage allowanceIf you are a basic rate taxpayer, and your partner does not fully use their personal allowance, they can elect to transfer up to 10% of it to you. This can reduce your tax bill.
Payments on accountBy default, you will be required to make payments on account for the next year’s tax liability. These are calculated at 50% of the previous year’s tax bill and the first of them is payable on 31 January before the tax year starts, i.e. on the same date as the balancing payment for the return you are filing. Payments on account are only due if your tax not collected at source exceeds both £1,000 and 20% of your total tax liability for the year. However, you can claim to reduce them if you know your income will reduce, or if your tax owing at the end of the year will be less next time. Use caution though, if you reduce them too far you will be charged late payment interest. Read more here
FilingCheck that the return files successfully. You should receive a confirmation reference.
Coding outIf you want HMRC to collect your tax due via a future PAYE code, you need to have your return filed by 30 December. The amount owing cannot exceed £3,000.
Other tax reliefsEnsure you have claimed any trading or capital losses available from earlier years. If you have made investments under the EIS, VCT or SEIS then you can claim the income tax relief as long as you have been issued with the certificate saying you can do so.

For help with your self-assessment tax return get in touch today.

A business plan is a vital document for any small business owner as it outlines the future of your company, plans for growth and the strategy for how you will get there. If your plans to scale up include hopes for funding from an investor or a loan, it’s imperative that you have a sound business plan in place to show how investing in your company will provide a strong return.

Whether you’re an existing businessowner or just about to start a new venture in self-employment, we’ve put together some of the key reasons why you need a business plan and some top tips on how to create one.

Within this article, you will learn about:

  • How to set your business objectives
  • Analysing the market
  • Creating a basic marketing plan
  • Putting together a financial plan and budget

 
How to create a solid business plan

What should my business plan include?

What are your business objectives?

It may sound obvious, but the first key section of your business plan should outline your business, its core product or service and an overview of your objectives. Your objectives must be realistic and measurable (we’ve all seen The Apprentice) in order to be achievable and help you understand what you need to do to get there. If you’re struggling to objectify these goals, remember the SMART framework:

  • Specific

A clear objective. What do you want your business to achieve and what will this accomplishment mean?

  • Measurable

How will you know when you have reached this milestone? How will you track progress whilst working towards it?

  • Achievable

Is the objective attainable? If you cannot outline how the objective will be reached or what you need to do to achieve it, you might need to rethink it.

  • Realistic

For an objective to be realistic, you must consider the resources needed to achieve it and whether they are available, as well as who will be involved, whether individuals, teams or additional stakeholders.

  • Time

Importantly – when do you hope to meet your objective? Having a timeline in place ensures the objective can be measured and tracked against. Additionally, if you’re hoping to attract an investor, it’s no good saying your business will make x amount of money if there is no timeframe in place.

Who is your target market?

How do you know there is interest or demand in your product or service? Now is a good time to demonstrate your understanding of the market in which your organisation sits, where the gaps are and how it has (or will) developed, highlighting any market research that you have carried out or existing market data you have found.

In highlighting your knowledge of the market, here you should provide a competitor analysis. This doesn’t have to be incredibly in-depth but should identify the competitors that you are aware of in your field, the threats they pose to you as a competing business, their strengths and weaknesses and, from this, the opportunities for you as a new entrant to the market.

Next, you should identify your target audience, how you plan to identify them and what you know about them i.e. demographics, behavioural factors (what motivates them to purchase?).

a4c | Defining your target audience

Your sales and marketing plan

You don’t need to be a marketing expert to have a basic marketing plan in place. It’s essentially a plan within a plan in that, using the objectives and market analysis you’ve already outlined, this section details the business’ positioning within the market and how you plan to get your message in front of your target audience to trigger a response.

  • State your company’s positioning – how will you have a competitive edge over other businesses in the market?

i.e. The Shoe Emporium will be the first-choice shoe retailer for young people in their early – mid-twenties in the UK by offering the best price in the market.

  • How will you reach the target audience and communicate your message?

i.e. Based on existing data on our target market’s usage of the channel, we will target our audience through organic and paid Instagram posts.

Day-to-day business operations

The operational section of a business plan concerns details relating to the day to day running of your company, such as trading location(s), employees or forecasted/future staffing requirements and any equipment or materials required to operate effectively. This would be a good place to list any details for suppliers you may be working with.

An important part of your operations should include a general risk assessment and a contingency for unexpected challenges and how you plan to overcome them.

a4c | Always have a contingency in place within your business plan

Outlining your financial plan

Finally, the part that many businessowners find themselves fretting over. If your business is a start-up, the plan should include an idea of your start-up costs, acknowledging that you understand the initial requirements and where additional capital may need to be raised.

Your financial plan should include a cash flow forecast, detailing where any borrowed capital is coming from, predicted revenue and projected expenditure. If your business is already in operation, you should find this simpler to put together as you can forecast based on previous revenue and expenditure.

A balance sheet provides a snapshot of your business accounts for a specific period of time, encompassing the business’ current assets and liabilities, assets or liabilities over a longer period of time and shareholder capital. If you plan to pitch your existing business plan to investors or to secure a loan, you will often be asked to provide around six consecutive months of balance sheets.

How a budget can help with business planning

A lot of small business owners make the oversight of neglecting to budget when business planning due as it takes time. So why should you include one?

Having a realistic budget in place and sticking to it allows you to keep an eye on the bigger picture of your company’s growth and future, particularly in the earlier stages of business, whilst managing your cashflow efficiently. It allows better control over areas of the business where money is spent and will help identify which areas you may need to reallocate resources to or if additional funds are needed.

You may find that, as your business grows, you need to create budgets for multiple departments or areas. These can also be incredibly useful for measuring overall business or individual department performance and assist with attributing revenue back to particular activity.

If you’re reading this and still feeling stuck about financial plans and budgets, or how they work together, get in touch to see how we can help. At accounting4contractors we regularly work with small business owners, self-employed people and contractors to help simplify the process of budgeting and accounting.

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So, you’ve decided you’re going to take the plunge and go self-employed. But how do you know what National Insurance you’ll need to pay? When you become self-employed, you become responsible for paying your NI and tax on your income, so you’ll need to be organised and maintain all of your records to ensure you know what you will need to pay. Unfortunately, this isn’t always straightforward as it can vary based on the industry of your employment and whether you are both employed and self-employed. So, we’ve outlined some of the key considerations for working out your National Insurance.

What National Insurance do I pay?

National Insurance Classes explained

When you are self-employed, there are two Classes of National Insurance that may apply to you.

Class 2 NICS

If your profits are £6,205 or more in the 2018/19 tax year, you will be required to pay Class 2 NICS of £2.95 a week.

Class 4 NICS

If your profits exceed £8,424 (up to £46,350), you will need to pay Class 4 NCIS which is 9% of your profits in the 2018/19 tax year.

For profits exceeding £46,350, you will be required to pay an additional 2% on the excess.

Paying voluntary National Insurance for state benefits

Exemptions and gaps within your National Insurance record

Some people within specific jobs may not be required to pay Class 2 NICS – notably those who run businesses in the land or property sectors. Alternatively, you may have what are known as gaps within your record of paying National Insurance – meaning you will not have made enough contributions over your working lifetime to qualify for a full State Pension. This could be for several reasons, such as having received low earnings from previous employment, made a small profit whilst self-employed or if you were unemployed without claiming benefits for a time.

If this is the case, all is not lost and you may still qualify for a State Pension by paying voluntary National Insurance. However, it’s best to seek professional advice as not everyone will benefit from voluntary contributions; we can provide you with the advice you need around the benefits of paying voluntary contributions.

How do I pay National Insurance?

The key difference in paying National Insurance when you’re self-employed is that you are now responsible for paying this yourself, rather than paying it automatically every month. To do this, you’ll need to complete a tax return (Self Assessment) at the end of the financial year.

We know that this can be daunting for many and deadlines aren’t everyone’s strong point – but don’t worry! That’s why we’re here; we can provide tax and accounting services to help see you through the whole year, not just around tax year end.

If you still feel confused after reading this, don’t worry. At accounting4contractors, we’re here to simplify these processes for you and allow you to focus on the everyday running of your business. If you’d like to discuss taxes or National Insurance with experts who understand the challenges of small businesses, get in touch with us today.

So you’re thinking of giving up the day job to become self-employed?

It’s a big and scary decision, but one that will have you buzzing with excitement.  You’ll be planning your logo and business stationery, mapping your website and dreaming up entertaining social media posts, but you also need to spend time on the structure of your business and knowing where to start in relation to accounts and tax can be daunting.

We’ve put together a step-by-step guide for those starting out as self-employed.

A guide to starting out self-employed

Step 1: What kind of business are you starting?

You are likely to be familiar with the terms ‘limited company’ and ‘sole trader’, but it’s important to know the difference and how it will affect your business structure.

Quite simply, a sole trader is a self-employed business owner who is the sole owner of the company.  It’s a simpler way to start in business.  You need to keep a record of your income and expenditure and at year-end you declare your profits and pay tax and NI to HMRC under self-assessment.

A limited company will be registered with its own legal identity, that is separate to you, the owner, and any other stakeholders. You can be the sole owner of a business and still register as a limited company, this offers advantages such as protecting your personal assets, but does require greater compliance in relation to your accounting and tax affairs.

Are you going self-employed, but still working for a company part-time?

It’s important to note that if you are registering as self-employed, but still working part-time for an employer, you will need to pay tax through both PAYE (the standard when in employment) and self-assessment.

Step 2: Registering your business

Registering as a sole trader

If you’re setting up as a sole trader, you will need to register for Self Assessment with HMRC and file your tax return. It’s best to do this as soon as you can, as fines can apply if you fail to register your business within its second tax year. You can register yourself online, or appoint an agent, such as a4c, to register on your behalf.

Registering as a limited company

Setting up a private limited company will require you to have the following:

  • Your company name
  • An address for the company
  • At least one director
  • Details of the company’s shares, shareholders and any people with significant control over your company
  • A SIC code (determining what your business does)
  • A dedicated business bank account

 

During the registration process, you will also need a legal statement, signed by all shareholders, that agrees to the formation of the business, as well as written rules of the company that have been agreed.

Step 3: Starting up your business

Once you’ve informed HMRC that you’re self-employed, we would recommend that you set up a business bank account to ensure you manage business assets separately from personal affairs. You’ll also need to start keeping a record of your business expenses, income, outgoings and therefore your profits.

Whilst some business owners are confident in managing this themselves, some do not feel they can manage this independently, whilst others simply may not have the time. We can help! We provide a range of accountancy services to help you focus on running your business, from the day to day accounting support to supporting you with tax.

Step 4: Growth and compliance

You might need to pay VAT

Depending on your annual turnover, you will also need to determine whether you need to register for VAT. The threshold for VAT is £85,000 so, if you think your turnover will exceed this you must register.

There can be benefits to registering for VAT before you reach the registration threshold, such as the ability to reclaim VAT you’ve paid on your purchases, it can also help your new business to appear more established and perhaps more professional.

Get it covered!

You may be required by law to have certain insurance policies in place as a business owner, but having insurance policies in place will also provide you with peace of mind that you and your business are protected against unexpected issues such as damage or accidents.

The ins and outs of going self-employed can be difficult to get to grips with.  At accounting4contractors, we help a variety of business owners just like you.  From starting out, to tax planning and helping with the recording of income and expenses.

If you’d like to speak with experts in all things accounting, tax and expenses, contact us today to see how we can help you establish your business.

A company car is considered a taxable perk by HMRC.

Officially a company car is known as a Benefit In Kind (BIK), because there is a monetary value attached to your ability to use it privately. As a result, the value of the car is added to your taxable salary, you pay additional tax and the company pays Employer’s NIC.

The easiest way of calculating how much tax you will have to pay on a company car is to visit the HMRC website – https://www.gov.uk/calculate-tax-on-company-cars .

HMRC works out the amount of BIK tax you pay based on the amount of CO2 emissions a car emits. There are several emissions bands and each is allocated a percentage value which is multiplied by the car’s list price, HMRC refers to this as the P11D value. Additional percentage points are also added if the vehicle has a diesel engine.

How much company car tax will I pay?

The amount of company car tax you pay is dependent on your annual salary. For example, if you fall into the Basic Rate Income tax bracket, you’ll pay 20% tax on the car’s P11D value. Those in the High Rate Income tax bracket pay 40%.

Company car tax calculator example

Here’s how to calculate your company car tax in three simple steps:

  1. Take your company car’s P11D value (for example £35,000)

 

  1. Multiply this value by the car’s company car tax rate which is dependent on CO2 emissions (for example 19%) to get your BIK amount (£6,650)

 

  1. Multiply this BIK value by your personal tax rate – 20% or 40%. This will be the amount of company car tax payable.  So:

£35,000 x 19% = £6,550 (BIK amount) x 20% = £1,330 per year in additional tax

 

Remember that the company also has to pay Employer’s NIC.  Therefore:

£35,000 x 19% = £6,650 (BIK amount) x 13.8% = £917.70 per year in additional NIC

If the company pays for fuel there’s additional tax to pay on this benefit.  We normally assume that you will be paying for the fuel personally and reclaiming a mileage allowance on actual work journeys undertaken.  Note, the mileage allowance for company cars is at a reduced rate, depending on the engine size and fuel type.

Corporation Tax Savings

The company will own the car and therefore can claim capital allowances which would reduce Corporation Tax (the car would be eligible for writing down allowance of 8% of the cost price on reducing balance basis over a number of years).

Leased Vehicles

If you lease a ‘qualifying car’ for business purposes the company will normally be unable to recover 50% of the VAT charged.

A leased vehicle will also not be ‘owned’ by the business and therefore cannot be sold if the company needs to raise capital.

However, the company can claim the monthly lease payments as a business expense.

In short, when it comes to company cars, it makes sense for SMEs to choose leasing over ownership, because of the benefits of tax relief and VAT-reclamation.  However the monthly costs may be higher so it’s worth running comparison calculations to see which figures work the best for you.

Commercial Vehicles have different rules!

If you drive a van or pick-up truck then you may not have any additional tax to pay.  We have a different blog post on this topic here: https://a4cgroup.co.uk/news/van/

Get in Touch

When it comes to company cars, there is no ‘one size fits all’ and so we aim to give you as much information as possible so that you can make an informed decision based on your circumstances.

Of course, if you wish to discuss any of the information contained within this guide then don’t hesitate to get in touch.

You may have recently received a reminder from HMRC to make your second self-assessment payment on account for the 2017-18 tax year.  Every year at a4c we are asked what this means by very confused clients (who said tax doesn’t have to be taxing?).

Payments on account are advance payments made towards your personal tax for each tax year.  These are made on 31st January and 31st July.

How much you have to pay is based on your previous year’s tax return, with 50% being paid at each deadline.  So if your tax bill in 2016/17 was £8,000 then you will be required to make the following payments on account:

  • First payment on account 31st January 2018 £4,000
  • Second payment on account 31st July 2018 £4,000
  • Balancing payment (any extra tax due for 2017/18) due 31st January 2019

 

Everyone is required to make payments on account unless:

  • your previous tax return tax bill was less than £1,000; or
  • more than 80% of the tax you pay is deducted through PAYE

Can you reduce your payments on account?

Yes, if you predict that your tax bill in the next tax year is likely to be lower then you can apply for reduced or removed payments on account.

Beware though if your tax bill is not lower and payments on account should have been made then HMRC will charge you late payment interest.

How do you know what to pay?

The SA302 tax summary calculation for 2016/17 will show the first and second payments on account, payable 31st January 2018 and 31st July 2018. If a4c prepared your tax return then you would have been given a copy of this document along with your full tax return.

HMRC may also send a statement of your account in early July as a reminder of forthcoming tax owed.