Self Assessment & subsistence Question

[css_jay99]

Just doing my personal tax return (SA) and I remembered a couple of things

I forgot to charge my ltd company daily £5 subsistence for a period of 5months for a contract i did last year. All that 6months fell within the 06/07 tax year as well as within company 1 financial year(i.e jan-dec) for the company.

Questions:
1) From accounting point, do i just raise this subsistence amount and charge to this year's profits ?
2) Do people enter their expenses in the tax return despite it already beign claimed back from the ltd company? (i know it cancels out anyway in 1.23 & 1.32).
3) I presume if i need to include all my expenses then I also need to add the unpaid subsistence in tax return thereby ending up with a non zero balance on expenses.... is it better? or I should not complicate things by just claiming it ALL back from the ltd company ?
4) Is £5 subsistence away from home daily or nightly ?.
5) Unrelated - Is it best to change my company ARD to match the Tax/fiscal year (apr/mar) ?. I can see a lot of advantages here


cheers

css_jay99

[ASB]

Just doing my personal tax return (SA) and I remembered a couple of things

I forgot to charge my ltd company daily £5 subsistence for a period of 5months for a contract i did last year. All that 6months fell within the 06/07 tax year as well as within company 1 financial year(i.e jan-dec) for the company.

Questions:
1) From accounting point, do i just raise this subsistence amount and charge to this year's profits ?
2) Do people enter their expenses in the tax return despite it already beign claimed back from the ltd company? (i know it cancels out anyway in 1.23 & 1.32).
3) I presume if i need to include all my expenses then I also need to add the unpaid subsistence in tax return thereby ending up with a non zero balance on expenses.... is it better? or I should not complicate things by just claiming it ALL back from the ltd company ?
4) Is £5 subsistence away from home daily or nightly ?.
5) Unrelated - Is it best to change my company ARD to match the Tax/fiscal year (apr/mar) ?. I can see a lot of advantages here


cheers

css_jay99

1) Yes. But you need some sort of claim from yourself.
2) Yes, expenses are simply income. On the one hand side goes those paid and on the other other the amount claimed (usually equal). Anthing covered by a dispensation [duck and cover] is not entered
3) As a general point you are probably better NOT claiming expenses from the company at all and only claiming them via you tax return if you are a 40% taxpayer (the company taxable income goes up by the amount of the expenses which costs you 20%, but your taxable income drops by the amount of the expenses which save you 40%). However the subsistence allowance MUST be claimed from the company.
4) Nightly
5) Not sure I follow. Unless of course you are being creative with dates. If the company has incurred the expense - even if not billed for it - then it should be reflected in the accounts as a liability (same as work in progress not billed at year end etc).

[css_jay99]

1) "But you need some sort of claim from yourself" . what i normaly do is just record my expenses in my spreadsheet & sage payroll software i.e the double entry side of things. cant think of anything else that is missing
2) understood
3) baffling. I thought everyone claims expenses via ltd company OR is claiming via HMRC is a widely done thing which my accountant forgot to mention to me ?

I really dont see how this will work if I am paying myself via PAYE of £15K Gross, Expenses in region of £6k and then paying divs to take me over 40% tax rate. Surely HMRC aint going to be too pleased to see me drop my taxable income by £6k ?

comming to your comment about 'if 40% tax payer', is there something i dont know by which dudes here earning over £80k+ are dodging 40% rate of tax.. !
4) subsistence - so if away from from monday -friday night, thats 4 days ... right ?

[ASB]

You haven't quite understood what I was rambling about, also you may want to run it by your accountant.

The basic principle with expenses is that:-

- they are INCOME and taxable as such.
- HMRC allow relief on the amounts actually spent.

The affect of this is to reduce you taxable income. Now an example, you have mileage expenses of 10,000 per year. You have turnover of 100,000 per year. You are individually a 40% tax payer as a result of having income of 60,000 per year from other sources [figures are random to make it simple].

Option 1:-

Here you submit an expense claim for 10,000 to the company.

The company has taxable profit of 90,000. Pays 18,000 in tax.

Your personal income is now 70,000. You get relief of 10,000 for the business expenses and it is now 60,000 again so your personal tax position is unchanged.

Option 2:-

You don't submit a claim to the company.

The company has a taxable profit now of 100,000. Pays 20,000 tax (oh dear you might say).

Now, your personal income is 60,000. It hasn't gone up.

But you still have chargeable expenses of 10,000. Reducing your income to 50,000. A side effect of this is that you will get a tax rebate (or reduce any outstanding) by 4,000.

As a general principle if your are a 40% tax payer AND the companies tax position is of relevance to you (i.e. you own or control it all) then from an overall view you may well be better off NOT claiming expenses from the company. It all depends on individual circumstances.

If you are a basic rate tax payer it may still be beneficial under some circumstances.

[minstrel]

You haven't quite understood what I was rambling about, also you may want to run it by your accountant.

The basic principle with expenses is that:-

- they are INCOME and taxable as such.
- HMRC allow relief on the amounts actually spent.

The affect of this is to reduce you taxable income. Now an example, you have mileage expenses of 10,000 per year. You have turnover of 100,000 per year. You are individually a 40% tax payer as a result of having income of 60,000 per year from other sources [figures are random to make it simple].

Option 1:-

Here you submit an expense claim for 10,000 to the company.

The company has taxable profit of 90,000. Pays 18,000 in tax.

Your personal income is now 70,000. You get relief of 10,000 for the business expenses and it is now 60,000 again so your personal tax position is unchanged.

Option 2:-

You don't submit a claim to the company.

The company has a taxable profit now of 100,000. Pays 20,000 tax (oh dear you might say).

Now, your personal income is 60,000. It hasn't gone up.

But you still have chargeable expenses of 10,000. Reducing your income to 50,000. A side effect of this is that you will get a tax rebate (or reduce any outstanding) by 4,000.

As a general principle if your are a 40% tax payer AND the companies tax position is of relevance to you (i.e. you own or control it all) then from an overall view you may well be better off NOT claiming expenses from the company. It all depends on individual circumstances.

If you are a basic rate tax payer it may still be beneficial under some circumstances.

Not sure I agree ASB.

I think you have missed the fact that if you went for option 1 you personally have £10k extra in your pocket (as YourCo has reimbursed you the expenses) plus in option 2 YourCo has greater profits and therefore can make bigger dividend distributions. Fixing personal income to £60k is artificial as this leaves additional profits in the company.

This the way I see the calculations working assuming company has £100k turnover:

Option 1:-

£10k expense claim to company.

Company taxable profit of £90k. £18k in tax leaves £72k available to distribute.

Distribute the lot and I then have £82k in my personal back pocket.

From a tax perspective I have received £90k income (£72k + 10% tax credit, plus £10k expenses).

For simplicity lets say higher rate threshold is £40k. This leaves £50k, but I can also knock of the £10k expenses as tax deductable. This leaves £40k of higher rate income that I need to pay tax @ 22.5% = £9k.

So this leaves me with £82k - £9k = £73k.


Option 2:-

No company expense claim.

Company taxable profit of £100k. £20k in tax leaves £80k available to distribute.

Distribute the lot and I then have £80k in my personal back pocket.

From a tax perspective I have received £88,888 income (£80k + 10% tax credit).

For simplicity lets say higher rate threshold is £40k. This leaves £48,888, but I can also knock of the £10k expenses as tax deductable. This leaves £38,888 of higher rate income that I need to pay tax @ 22.5% = £8,750.

So this leaves me with £80k - £8,750 = £71,250.


By my calculations you are definitely better off putting expenses through the company.

Am I missing something?

[ASB]

Minstrel,

Surely the higher rate tax is wrong in your calcs - it's 25% of the next dividend. That makes no difference to the point you make though.

All I can say is that a couple of years ago when I gad substantial income from sources other than myCo I worked two sets of figures, one not claiming my expenses and one claiming them. The company was retaining most of its income.

In this set of circumstance I paid less higher rate income tax than myCo paid in extra CT as a result of its inflated profit. Less tax being paid = better net surely?

I am, however, beginning to think I may have made an error somewhere in the calcs (still the investigation window has passed now ).

[minstrel]

Surely the higher rate tax is wrong in your calcs - it's 25% of the next dividend.

Additional higher rate tax is 25% of net dividends (excluding 10% tax credit) but 22.5% of gross dividends. My calculations used gross.

E.g. if I distribute £90 that is £100 income (including 10% tax credit) and higher rate tax is 32.5% of gross dividend. 32.5% of £100 = £32.50. Minus the notional 10% tax credit is £22.50 tax due.

£22.50 is 22.5% of gross dividends (£100), 25% of net dividends (£90).

All I can say is that a couple of years ago when I gad substantial income from sources other than myCo I worked two sets of figures, one not claiming my expenses and one claiming them. The company was retaining most of its income.

In this set of circumstance I paid less higher rate income tax than myCo paid in extra CT as a result of its inflated profit. Less tax being paid = better net surely?

I think you are probably right that if you have substantial (non-dividend) 40% income from other sources you might pay less tax in that year if don't claim the expenses via the company, but I think you need to consider the deferred tax on the additional profit in the company too for a true comparison.

Having said that, the deferred tax might have been close to zero if you kept dividend distribution below higher rate threshold and then took all the money out of the company via a capital distribution/taper relief when you closed the company.

As you say it all depends on invdividual circumstances though. I'm sure it probably worked out best for you as you were retaining profit in the company. Not so sure that it is optimal if you are simply taking all the profits out as higher rate taxable dividends.

It's an interesting point you raised - even if I don't agree 100% with the calculations. I'd always assumed that it was always best to claim via the company and I can see now that there could be situations where it might be best not to.

[ASB]

You're right. If you are paying out pretty much everything it won't help.You are just saving higher rate tax on money that you then pay yourself and get hit for the higher rate on the increased dividend anyway.

Since expenses are only releived against PAYE income to benefit from this you need:-

- Income being taxed at the higher rate through PAYE equal to the expenses not being claimed from the company
- Retain at least this amount within the company

I think it leads to a useful saving under these (and only these) conditions. [Which is precisely the situation I was in before winding up MyCo].

[minstrel]

You're right. If you are paying out pretty much everything it won't help.You are just saving higher rate tax on money that you then pay yourself and get hit for the higher rate on the increased dividend anyway.

Since expenses are only releived against PAYE income to benefit from this you need:-

- Income being taxed at the higher rate through PAYE equal to the expenses not being claimed from the company
- Retain at least this amount within the company

I think it leads to a useful saving under these (and only these) conditions. [Which is precisely the situation I was in before winding up MyCo].

I agree

[ittony]

As a general principle if your are a 40% tax payer AND the companies tax position is of relevance to you (i.e. you own or control it all) then from an overall view you may well be better off NOT claiming expenses from the company. It all depends on individual circumstances.

What on earth are you talking about? If it's a company expense then there's no tax to be paid on it, if is a personal expense then it's paid after either corporation or income tax. That's all there is to it. It doesn't matter if your income tax band is 20%, 40% or 1%, it's always better to pay it out of pre-corporation tax company money. How could it possibly be otherwise?