Tax Code Changes – are you aware?

Shareholders should be aware that since April 2016 they have had to pay tax on their dividends. Previously they only paid tax on dividends if they were a higher rate taxpayer.

What they may not know is that HMRC is amending their tax codes in order to collect the anticipated tax due through the PAYE system in the current year. This adjustment is based upon the assumption that the dividends receivable will be the same as in the previous tax year.

As dividends can only be paid where there are sufficient distributable reserves there is no certainty as to how much will be available. So if there is likely to be a reduction in the dividends or if the taxpayer has made payments on account they may need to contact HMRC to get the tax code changed.

Even if the tax code is correct taxpayers need to be aware that it is likely to have a material impact on cash-flow as the dividend tax will be paid much sooner than if it was paid through the self-assessment system.

Should I buy a car through my business?

Questions we are regularly asked are whether it’s better to purchase a car personally or through the business and whether it’s better to lease/rent a car or buy it outright. Other factors such as access to finance may affect the decision, but the tax situation can be summarised as follows.

For a sole trader the options are fairly straight forward. They can either claim HMRC’s recommended rates for business mileage or alternatively put all the costs through the business and then make a deduction for personal usage. Obviously the higher the proportion of business mileage the greater the tax saving.

However for the owners of small limited companies it is more complicated. Corporation tax can be saved by putting the costs through the company but there is little point if these savings are outweighed by the additional tax and national insurance payable on the car benefit in kind charge. This benefit in kind is calculated as a percentage of the list price of the vehicle. The percentage is dependent upon the CO2 emissions of the vehicle.

Where the vehicle is purchased outright, either on HP or a finance lease, then the business can claim capital allowances and any interest paid on any loan. However capital allowances on all but the most green vehicles have been reduced in recent years so in most cases the tax on the car benefit in kind will be more than the capital allowance.

Where the vehicle is on a contract hire or operating lease agreement then the business can claim the full amount of the rental payments, although there are restrictions for cars with high CO2 emissions.

There are definite tax benefits of having an electric vehicle but for most people this is not yet a practical option. We therefore advise that for most people they should record their business mileage and claim HMRC’s mileage rate of 45p per mile. It should be remembered that this rate covers all vehicle running costs, not just the fuel.

Why do I need a business plan?

A detailed business plan is not just for raising funding; it’s also a useful tool for helping the business owner identify and decide what they want to achieve. Is it to make enough money to live on or do they have grander plans?

A plan should involve more than just monetary targets, it should have an overview of the business, what it does, the key personnel, plus strengths and weaknesses. By defining the target the plan provides a useful stepping stone to making it happen. It helps identify the obstacles to success and makes the business owner think about how they will overcome them.

  • Define what success looks like.
  • Put in writing how you intend to develop/improve your product or service, how it will be marketed and who is responsible for making these things happen.
  • Quantify your base line and what the optimistic sales and expenses are likely to be. Try to be realistic. The plan will be of more use if it is stretching but still achievable.
  • Have a backup up plan. What will you do if circumstances mean that sales and profits are lower than you hoped?