Benefit in Kind - for my father

Bloblik

Hi, I have been self employed for many years.
My father used to work with me (both self employed), but has since retired, since that point he still does some running around for me, answers and makes some calls.

To allow him to answer and receive business calls I installed cable and a VOIP phone system at his house.

When I used to have an accountant - he advised that the cost of the cable line at my fathers place, and calls he makes for business could be claimed by me as a Benefit in Kind. During this time I have claimed 100% of this as a cost to my business, including the VAT portion on my VAT return.
I have also claimed any petrol receipts he has presented for the running around he does.
I have recently read though that for a Benefit in Kind to be claimed as an expense on my tax return it must be 'exclusively' for business, some of the calls my father makes will obviously not be so. Will this present me with any issues if the HMRC were to come knocking (not that they have in 28 years !)
My father earns no money from me, and so is under the personal allowances limit.
I am also to start trading as a limited company in April, what impact will this have on this situation, ie claiming.
Many thanks.

jimmo

I think you may have misunderstood your accountant.

It appears that you, the trader, are claiming the costs of the phone system as a cost of running your business and you would argue that the whole cost is a business cost.

Because the phone system is provided to your father it is a benefit in kind to him, not you.

As your father is not an employee earning at a rate of £8,500 per year he is not liable to Income Tax on the benefit in kind. So there is no practical purpose in working out exactly how much the benefit in kind is. If there was any practical purpose in determining your father’s benefit in kind there would then be a question of apportionment between his use for the purposes of your business and his private use but in the current situation there is no need to go there.

Once you incorporate your business you will become a director of your company and will become potentially liable to tax on any benefits in kind that your employer, the limited company provides to you but you may also become liable to tax on any benefits in kind provided, by your employer, to any members of your family or household.

http://www.hmrc.gov.uk/manuals/eimanual/EIM20504.htm

Bloblik

Thanks for clarifying that.

So at present ie on Self Assessment, the benefits in kind my father receives can be claimed by myself as a business expense, and he pays no tax on them as he is retired and under the personal allowances threshold.

Do these benefits need to be exclusively for business, ie you can apportion and for personal and business, as in the phone calls ?

I read the HMRC document on the Benefits Code - heavy reading, that tells me I need to pay tax on the benefit in kind my father receives, whilst claiming it as an expense on my limited company
That seems like an anomaly, as a claimable expense against tax (my company .. with one employee - ie me), but then tax being charged against me as an individual.
I have read through the P11D guidelines (I assume this is what I complete as a director) regarding expenses - I am looking to pay myself just under the personal allowances threshold, does a P11D still need to be completed, and therefore the taxes on Benefits in Kind would be applicable ?
To clarify, any direct expense I incur as the employee is a fully claimable as an expense on the Corporation Tax Return (ie the P&L). For example I travel abroad for work - so ferry tickets, accommodation and fuel would be an expense (mostly all used exclusively), the benefits my father receives can still be claimed on the P&L, but I must pay tax on them - and complete a P11D ?
Thanks

jimmo

Two separate, and technically very different situations.

At the present time you, a self employed person, are your father’s employer. He does work for you and, whilst you don’t pay him a wage, you provide him with an asset, the VOIP phone system, and a service, the cable connection. They are benefits in kind and, as such, form a part of his remuneration package for acting as your employee.

For you, the self-employed person, the costs you incur employing people is a legitimate business expense and fully claimable.

For your father his remuneration package for his employment with you does not, I assume, exceed £8,500 pa and they are not taxable.

As it happens, you say your father’s taxable income is below the personal allowance threshold so even if the benefits were taxable he would still have no tax to pay.

For the time being that is enough.

Now, if your father was taxable on his benefits in kind there would be a reason to apportion his use of the equipment and service between use for his employment in your business and his private use. He would only be taxable on his private use.

As he is not taxable anyway there is no point in going there just yet but it may become important for you to understand those principles before you move on.

If you do actually incorporate your business I would suggest it is vitally important to clearly understand that the company and you will become 2 separate legal entities.

You will become an employee of your company, so will your father.

Your father’s tax situation will not change. He will still be an employee of your business and his benefits in kind will still be not taxable in his hands.

You however, as a director, will become taxable on your own benefits in kind and could well become taxable on benefits in kind provided by your employer to members of your family including your father. If that happens you will need to pay more attention to the apportionment between business use and private use of the cable, VOIP system in your father’s home.

On non income tax matters I am no expert on VAT and have studiously avoided answering your questions about that. I am also no expert on National Minimum Wage but my gut feeling is that you, personally as a self employed person, employing your father for a pittance, can get away with that but your company might not.

Bloblik

Thanks for the explanation.

So at present, on my SA Tax return (as a self employed person) I apportion 10% of motoring expenses as private - and declare that as private use, which is entered in the 'disallowable' section of the return.
I assume as a director of a limited co, on my Corporation Tax Return do I then claim 100% of the expense, but myself as an employee put through a P11D expenses form - where I assume the 10% private use is dealt with. So no tax will be payable to my father.
As am employee of my own Ltd co. I will pay my self just under the personal allowances limit, I guess if I receive any benefits in kind they will take me just over and so tax will apply.
I think I need to understand how 'expenses' are claimed and dealt with regarding a limited co. (I assume via a P11D).

Bloblik

Thanks for the explanation.

So at present, on my SA Tax return (as a self employed person) I apportion 10% of motoring expenses as private - and declare that as private use.
I assume as a director of a limited co, on my Corporation Tax Return do I then claim 100% of the expense, but myself as an employee put through a P11D expenses form - where I assume the 10% private use is dealt with.
No tax will be payable by my father regarding his benefits in kind.
As an employee of my own Ltd co. I will pay my self just under the personal allowances limit, but as a director earning less than £8500 do I need to pay tax on any benefits in kind ? I read that that is not the case, I fill out a P9D, not a P11D or P46.
Is it just Class 1A NIC payable on expenses ? I cannot see any comments to say Tax is also payable.

cotswoldaccountant

A form P11D is used for almost all company directors. A form P9D would be required if you earned under £8500 and had no material interest in the company (controlled < 5% of the shares) but presumably you will have a larger shareholding than this, so you will need to use a form P11D.

Motor expenses are dealt with differently in the limited company, and the benefit in kind implications often make them not worth claiming. For example, if the company makes a company car available to you, then the full cost of this can be put through the company - but the tax and NI payable on the Benefit in Kind outweigh the corporation tax saving of putting the car through the company.

It is usually better to claim a tax-free mileage allowance from the company for use of your own vehicle (current rates are 45p per mile for the first 10,000 miles in a tax year and 25p per mile for each subsequent mile).

You could pay yourself just under the personal allowance limit (which for 2012-13 will actually be £9,440), but it is more tax efficient to pay yourself salary at the Secondary Threshold for NI (which for 2012-13 will be equivalent to £641.33 per month). At this level, you retain your entitlement to state benefits but do not need to pay any NI. If you paid the higher level (nearer to the personal allowance) then some NI will be payable.

The rules regarding expenses, how they are treated, and what tax is payable are quite complex and you would be best to seek the advice of an accountant in this respect. Class 1A NIC is paid by the company on some benefits in kind. These then appear on the P11D and will be included in the individual's self assessment tax return, where tax will be charged. But it's not a "one size fits all" approach - it completely depends on the expense in question.

Edited to add: there are many expenses which need to be reported on a P11D, and included in the self assessment tax return. Tax is not charged if an equal amount is claimed as a business expenses in the tax return. The whole rigmarole of reporting legitimate business expenses on the P11D can be avoided by applying for a dispensation from HMRC. Again, this is something an accountant can advise upon.

nomunnofun

PA now 9440 fro 2013/14 following November statement.

cotswoldaccountant

nomunnofun wrote: »

PA now 9440 fro 2013/14 following November statement.

Oops, of course! Thanks for noting my error. I will edit my post accordingly so it reads correctly.

CA