Tax planning in a pandemic

We have set out below some areas of tax planning that may be of interest to you during this pandemic.  Please get in contact with your engagement partner to discuss any of these in more detail or how they could apply to your specific circumstances.

 

Claiming tax deduction for working from home 

With increased working from home at the moment and possibly for the longer term we would encourage all clients to ensure that they are making a claim for this where possible.  The amount that you will be eligible to claim will depend on whether you are an employee, self employed or run your own limited company.

Self employed or run your own limited company

You are able to claim for a proportion of your costs of running the home for business.  There are several methods of calculating this but the information we will need to calculate this for you can be summarised as follows:

  1. The floor area of your property (excluding bathrooms and kitchen)
  2. The floor area used for your business
  3. Approximately how many hours you work from home (on average)
  4. Whether you have any other space used to store records, equipment, etc
  5. Details of the costs you incur in running the home such as:
    • Mortgage interest costs/or rent
    • Council tax
    • Electricity/water/gas costs
    • Home insurance
    • Any other household running costs

Employee

HMRC guidance notes that they will accept an employee is working at home regularly where it is frequent, or follows a pattern, such as working at home for two days of every week. It is good practice for this to be in writing.   The government have confirmed that employees who have been working from due to the pandemic will be eligible to claim this from the date the government announced the restrictions in late March even if you did not previously have a home working arrangement.

Your employer can reimburse you an amount of up to £26 per month, or if not paid to you by your employer you can claim tax relief on this amount without keeping records.

You can be reimbursed/claim relief for more than this but you can only claim for incidental costs that you incur as a result of working from home and only for things such as light and heat of your working area plus business phone calls.  If you have needed to purchase equipment such as desks or furniture to work from home due to the pandemic these can also be reimbursed or tax relief claimed on them.

 

Adjusting a company accounting period

For some companies there could be a benefit to considering shortening or extending your accounting period to accelerate relief for losses incurred during this period.

As an example, a company with a 31 March year end reports taxable profits of £100k for that year, tax of £19,000 (19%) will be due on 1 January 2021.  The losses incurred from April to July 2020 will be relieved against any other income in the year to 31 March 21, the tax due date for this period is 1 January 2022.

By either extending the company accounting period to July 2020, or filing a short accounting period from April to July 2020, the company would immediately be able to realise the losses they have made and offset them against the tax to be paid on 1 January 2021, thus obtaining the tax relief 12 months earlier.

 

R&D tax relief

If your limited company has needed to develop a new product or business line or even changed an existing product due to the pandemic and there has been technical problems that you have had to overcome, the time and costs incurred by you and your staff on how to overcome the issues may mean the company is eligible to make a claim for the generous R&D tax relief scheme. 

This scheme entitles companies to claim an additional 130% Corporation Tax relief (230% in total) on qualifying costs (primarily staff and contractor costs, but can also include building of prototypes, design, etc) and can be worth up to 33p in tax relief for every £1 spent on the R&D.

 

Incentivising staff tax efficiently

If your company has key employees, you should consider the most tax efficient ways of incentivising and retaining them.  Instead of or in addition to payrises/bonuses, an employee share option scheme can be extremely tax efficient and cost effective for both your company and your employees. 

There are several different HMRC approved share schemes but the most beneficial is the Enterprise Management Incentive (EMI) scheme which offers generous tax deduction for the company and no income tax on the employee on either the grant of the options or when they eventually earn the right to exercise them and convert them to shares.  

Each scheme can be designed bespoke to your particular requirements and the conditions the employee needs to satisfy to be able to exercise the shares can be different for each employee.   For example you could have some employees that need to hit certain sales targets for one or more years to be able to convert their options in to shares or you could have targets about the length of service to qualify for them.

Due to the current decline in economic activity, HMRC are also accepting lower valuations of company shares and this further helps to maximise the incentive for the employee and tax advantages to the company.

 

Transferring assets

If you have been considering transferring an asset such as a property or shares to another family member, now is a good time to actively look at this as HMRC are accepting lower valuations on these at the moment and this will reduce any associated tax charges on actioning your plans.

As an example, Mrs Smith who is usually a higher rate taxpayer had been planning to transfer one of her properties to her son for a number of years but not actioned this yet.  She had bought this property for £450k 10 years ago and prior to the pandemic it had an estimated value of £525k, so if she transferred it then she would have made been deemed to make a taxable gain of £75k which would have left her with tax to pay on the transfer of £17,556.  However due to the pandemic the house price value has now dropped by 10% and the net result is that she can transfer it to her son for a reduced tax cost of £2,856.

 

Utilise tax efficient investments

If you are looking to either raise further investment in your business or considering starting a new business, please check with us whether the business will qualify for enterprise investment scheme (EIS) or seed enterprise investment scheme (SEIS) relief as these schemes offer investors between 30-50% tax relief on their investment as well as exemption from capital gains tax after 3 years or further tax relief if the investment produces a loss.

 

For owner managed companies – make the most of available deductions/planning 

  • Ensure your mobile phone contract is in the company name as this is a tax free benefit in kind.
  • Consider making pension contributions through your company instead of personally as this saves both employer’s and employee’s national insurance, and is subject to the same annual allowances as if made personally
  • If you have a spouse who is subject to lower rates of tax than you, consider adding them as a company director and/or shareholder to utilise lower tax bands.
  • If you have a spouse who is subject to lower rates of tax than you, consider whether to hold any income producing assets in their name (e.g. property)
  • If you are a basic rate taxpayer and have a spouse who earns less than £12,500 per annum, consider transferring part of their personal allowance to you to offset against your taxed income. This claim can be backdated to include any tax year since 2015/16 provided you are both eligible in each year
  • If you are considering changing your car, consider taking a low emission vehicle through your company, for the 2020/21 tax year fully-electric vehicles attract no benefit in kind which means that the company can pay for the car, the maintenance and the fuel with no tax charge to the employee. The employee will be taxed on 1% of the electric vehicle list price in 2021/22 and 2% in 2022/23, so whilst not tax free, it is still extremely cheap from a tax perspective.
  • The company can pay/reimburse up to £150 per employee/director for a staff party. For an owner managed business, if your spouse is an employee or director the amount therefore increases by a further £150 so that you both could go out for a celebration up to a value of £300 without attracting a benefit in kind.
  • You can make trivial gifts to yourself and any employees up to £50 per occasion and up to a maximum of £300 per year.  The gifts cannot be cash or cash vouchers but could for example be the company paying for a post-COVID haircut or treatment!

 

We recommend that you shoudl seek professional advice as to how the above my apply to your own circumstances. We would be happy to help with this advice, please get in touch to discuss further.

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