August 2nd, 2011
Many expenses and benefits must be reported to the Taxman on forms P11D and P9D at the end of the tax year which is the 5 April.
It’s important to choose correctly between forms P11D and P9D for each employee. The form to use depends on the employee’s earnings and on whether they’re a director of your company.
Employees earning £8,500 or more a year – form P11D
Use form P11D to report expenses and benefits provided to an employee earning £8,500 or more per year; but see below for what to include when looking at the £8,500 threshold.
Employees earning less than £8,500 – form P9D
Use form P9D to report expenses and benefits provided to employees earning at a rate of less than £8,500 per year again see below for what to include when looking at the £8,500 threshold.
What the £8,500 threshold includes
The £8,500 threshold doesn’t only include wages or salary that you pay the employee. You must also include the value of the expenses and benefits they receive from you. You will need to work out what benefits would have to be included if their earnings were above £8,500, then add this notional amount to see if the threshold is exceeded.
The £8,500 operates on a pro rata basis if the employee only works for part of the year. For example, if an employee only works for six months of the year then you’ll need to use a form P11D if their earnings in that period are £4,250 or more.
Company directors – usually form P11D
Use form P11D for almost all company directors. Only use form P9D if all of the following apply:
1. they earn at a rate of less than £8,500 per year, and
2. they do NOT own or can control more than five per cent of its ordinary share capital and
3. they are a full-time working director
July 28th, 2011
Use of home as an office
Many people find themselves working from home, either as an employee dividing their working life between their employer’s office and working from home or the self employed using their home as the principle place of business.
In either case working at home ultimately increases some of the household costs and it’s not unreasonable to consider that the increase is largely the result of the employment or the business.
HMRC recognize the legitimacy of making such a claim and provided that you have set aside a fixed area in the house for work based activities then you will be able to claim a tax deduction to reflect these additional costs.
You do not need to dedicate an entire room for business, but there ought to be at least some fixed area within one room that is set aside for business or work based activities.
There is a general principle that tax deductible expenses should only occur because of the business itself, the term wholly and exclusively for the purpose of the business is often quoted, but in practice this is often very difficult when looking at household expenditure.
HM Revenue and Customs also recognize this difficulty and have introduced a flat £3 per week (£156 per annum) that can be claimed; this is often a practical solution to apply in a majority of cases.
But, if you are running a business and your home in the principle place of business, then the additional costs can be much higher.
For example you may have set aside an entire room as an office, even built a room in the loft or use the garage to store materials.
HMRC don’t offer a higher flat rate to reflect these circumstances but do permit a more specific calculation based on the proportion of the home used for business purposes.
The calculation is not difficult but can be time consuming.
The starting point is to add up the variable costs incurred in the year, this would include gas, electricity, heating oil, mortgage interest or rent, council tax and buildings insurance.
If you identify any costs that are specifically business they should be claimed in full and therefore excluded from the calculation, as should any costs that are specifically domestic.
It is worth explaining that some costs are of a capital nature and you must be careful when trying to include capital costs such as loft conversions, building an office extension or converting the garage in the claim for tax relief.
Remember that normally any gain in the value of your main home is tax free; and you may jeopardize that exemption if you start including capital costs. You may also create a taxable benefit in kind if your employer (or own company) pays for the capital cost.
One other factor you may wish to consider – your local authority may consider your property partly as business premises where large areas are specifically set aside and assess the property partially to business rates – note that business rates are much higher than council tax!
Once you have established the costs to be included the next stage is to calculate the proportion of the house that is used for business purposes. The most obvious way to do this is calculate the total floor area and divide that by the floor area used by the business to establish a proportion for business use.
Once you have calculated the proportion it only needs to be reassessed when circumstances change.
Apply the proportion to the variable costs established above and add any specific business costs to determine the Use of Home.
July 28th, 2011
Work related training:
If an employer pays for staff training, or reimburses an employee training costs, any benefit to the employee is not subject to tax.
An employee is generally unable to claim training costs as deduction for their own tax if the employer does not reimburse his costs.
Recent case law indicates that training costs will be deductible in the employee’s hands if training is part and parcel of the employee’s job specification.
The term “work-related” is defined very widely; it can include anything from a first aid course to a motivational team building activity course.
Other (non work related) training costs:
Training not related to the employees’ duties are taxable as benefits in kind for higher paid employees or taxable as earnings if employer reimburses employee (all employees).
July 28th, 2011
Directors owe a duty of care to the company’s creditors. If a company continues to trade when it is insolvent, its directors can be held personally accountable if their actions cause financial loss to any of the company’s creditors.
You will also be liable under any personal guarantees.
What do I do if my company is in financial difficulty?
Directors must use their judgement and known facts to establish whether the company is, or is about to become or is insolvent
They must establish whether or not a problem is only on a short-term basis and will be rectified by trading on, or means terminal failure, or something in the middle ground. Directors must be cautious, they should not do anything (writing cheques, committing the company to any action, paying creditors, taking deposits etc) without seeking professional advice.
In many situations one of the direct or indirect causes of insolvency is management failure. This may be accompanied by a lack of control, poor record keeping and a lack of accurate financial information.
Accurate and up-to-date accounts are vital in determining a company’s solvency.
How do I tell if my company is insolvent?
A company is insolvent on a cash-flow basis if it is unable to pay its debts as they fall due, or fails to satisfy a judgment debt. There is a second balance sheet test for solvency which asks.
The cash-flow test
Many companies will fail the cash-flow test on a short-term basis at some time in their existence. Temporary cash flow problems may be caused by
- The failure of a customer to settle a debt on time.
- Overtrading (having too much cash tied up in stock and debtors).
- As a course of a delay in refinancing.
- Not making the required sales to break even.
- Having to make unscheduled payments.
Short-term cash flow problems can be corrected by trading on or after rearranging overdrafts or loan finance.
The balance-sheet test
Very simply do the business liabilities exceed the business assets, taking into account the value of assets with the company in a distressed financial position and providing for all contingent costs, losses and provisions.
If a company does fail its balance sheet test, the directors must act to protect the interests of its creditors to avoid any allegations being made of wrongful trading under the Insolvency Act.
If the company is insolvent directors should take the following steps:
- Obtain and document professional advice and their actions and responses.
- Ensure that the company’s accounts are up to date with a full list of assets, debtors and creditors
- Consider whether any part of the company is worth saving.
- Discuss whether it will be possible to make a formal or informal arrangement with creditors.
- If the company cannot be saved the directors should put it into liquidation.
The accounts should be prepared on a break-up basis which means the fixed and current assets are valued to their net-realisable value.
To avoid personal liability for their actions when a company is in financial difficulties its directors should be careful not to:
- Dispose of company assets at undervalue.
- Show one creditor preference to the detriment of another.
- Accept customer deposits or payments on account if completion is uncertain.
Most important of all if a company is insolvent directors need a licensed insolvency practitioner