Reply to: 2 year rule - help me count

[Contreras]

So here's a question for everyone:

1. You have been travelling 50 miles from home to London every day for 23 months with no expectation that you will work beyond then.
2. You then stop, and start with a new client in Birmingham, which is your base.
3. You then have a meeting six months later on behalf of that client in London, and as per client policy, the train ticket is booked via their system / provider.
4. Are you then caught under the 40% rule and a BIK arises even though your employer has not paid for the travel? Does your Ltd complete the P11D for the ticket bought by the client?

Who foots the bill, and how, won't make any difference to whether it's a BiK or not. It would be a nice little loop hole if our clients could pay for holiday's and such without these being classed as BiK.

If your Ltd had itself bought the ticket, or if you had bought the ticket and claimed it back from your Ltd, would you include it on the P11D? The answer to that is debatable but it is also the answer to your question above.

HM Revenue & Customs: Travel - general

Business travel: you provide, pay for or reimburse
Definitions or restrictions

You cover the costs of an employee's business travel costs in one of the following ways:

• by directly providing the transport
• by paying a supplier through which your employee has arranged transport
• by reimbursing no more than the necessary costs of business travel

Business travel only covers the following two types of journey which include - where necessary - travel abroad:

• journeys forming part of an employee's employment duties - such as journeys between appointments by a service engineer or to external meetings
• journeys related to an employee's attendance at a temporary workplace

As well as including transport costs, the 'necessary costs of business travel' also include:

• subsistence costs, such as meals
• accommodation if the travel requires an overnight stay

What to report, what to pay

For employees earning at a rate of less than £8,500 per year, you have:

• no reporting requirements
• no tax or NICs to pay

For company directors or employees earning at a rate of £8,500 or more per year:

• report on form P11D unless you have a dispensation covering this item
• you have no tax or NICs to pay

[speling bee]

Who foots the bill, and how, won't make any difference to whether it's a BiK or not.

It would potentially make a difference to VAT calculations.

TBH, I'd prefer a fixed rate increase rather than mess around claiming expenses from the client or have them preside upon the choice of travel class / accommodation.

So here's a question for everyone:

1. You have been travelling 50 miles from home to London every day for 23 months with no expectation that you will work beyond then.
2. You then stop, and start with a new client in Birmingham, which is your base.
3. You then have a meeting six months later on behalf of that client in London, and as per client policy, the train ticket is booked via their system / provider.
4. Are you then caught under the 40% rule and a BIK arises even though your employer has not paid for the travel? Does your Ltd complete the P11D for the ticket bought by the client?

[Contreras]

Any wise ones care to advise whether it makes a difference if the client changes the contract to make the supplier's base at the home office and then the client directly purchases all travel / accommodation via their own systems. I think we discussed this before but I forget the conclusion.

Who foots the bill, and how, won't make any difference to whether it's a BiK or not.

It would potentially make a difference to VAT calculations.

TBH, I'd prefer a fixed rate increase rather than mess around claiming expenses from the client or have them preside upon the choice of travel class / accommodation.

[speling bee]

While it's a good point, since when did a business not pass on any of their cost increases to their customers?

There is also a point when a contract stops being financially worthwhile. If it is the point at which expenses will incur BIK, then why not talk about rates with the client. Particularly if you've been there for (e.g.) 18 months with no increase and you now have more experience and skills.

[kingcook]

Asking your client for an uplift of £70+ quid is a lot bearing in mind these are your business costs and your issue, not theirs.

While it's a good point, since when did a business not pass on any of their cost increases to their customers?

[ContrataxLtd]

A much better example than mine.

I've worked out the following figures which might be correct.

Status Quo.

20k exes, allowable for ct. Company has 20 k liability, profit nill. Paid to op and allowable against personal tax.

In op's pocket. Therefore = 20k.

Claiming expenses.

Company has 2760 class 1a to pay. OP has 8,000 Income tax to pay.

So, additional corporate income required to allow an 8k net dividend is 8,000 / 0.75 / 0.8 + 2760 = 16,093.

Not claiming expenses.

The 20k will not be chargeable to CT. This yields 16k. Which become 12k NET when paid as a dividend. So again an 8k shortfall. But there is no class 1 NI, so this only requires 13,333.

Having come up with different figures to yourself I wonder where I've gone wrong.

Hi ASB

There are a few differences, the first mainly that I've assumed £24k in expenses where as you have used £20k?

You've assumed that 40% tax will be due on the BIK but it's more likely to be 20% but this also means that £20k more gross dividends will be subject to HR tax so an additional 22.5% taking the total tax to 42.2% on this £20k. The class 1a figure looks correct but the company will save CT on this amount too.

If you want an example of how paying the expenses as a BIK may work let me know and I'll post one up after lunch.

Cheers

Martin
Contratax Ltd

[ASB]

Hugely useful example

A much better example than mine.

I've worked out the following figures which might be correct.

Status Quo.

20k exes, allowable for ct. Company has 20 k liability, profit nill. Paid to op and allowable against personal tax.

In op's pocket. Therefore = 20k.

Claiming expenses.

Company has 2760 class 1a to pay. OP has 8,000 Income tax to pay.

So, additional corporate income required to allow an 8k net dividend is 8,000 / 0.75 / 0.8 + 2760 = 16,093.

Not claiming expenses.

The 20k will not be chargeable to CT. This yields 16k. Which become 12k NET when paid as a dividend. So again an 8k shortfall. But there is no class 1 NI, so this only requires 13,333.

Having come up with different figures to yourself I wonder where I've gone wrong.

Edit: D'oh, probably because I used 20k not 24k which puts the 13,333 @ 16,000. It seems better not to claim the expenses; this seem intuitive because the overall taxation is broadly the same on income whichever direction it comes from but ER's NI would be payable if it were expenses.

[northernladuk]

Respectfully I would disagree,

I have no intention of renewing my contract at this current point in time as it's not viable for me, hence the ongoing discussions.

If I do renew, one of the options that will be explored will be relocating me.

If you would class that as reasonable expectation then your understanding is different from mine.

I don't know about the 'know' or 'reasonably expect' but the fact that you know the role will exist should be enough. Whether you take it or not I don't think factors in to the rule else everyone would use the same argument. If you did use this one and you stayed you should technically backdate stopping expenses from the day you started to think about what to do I would have thought.

[tino]

I believe the point of no return has been passed.
It's not when you 'know', it's when you can 'reasonably expect' to exceed 24 months.

Respectfully I would disagree,

I have no intention of renewing my contract at this current point in time as it's not viable for me, hence the ongoing discussions.

If I do renew, one of the options that will be explored will be relocating me.

If you would class that as reasonable expectation then your understanding is different from mine.

[RSoles]

when I started out here there was no expectation that this would go over 2 years - it could be bloody 4 now looking at the schedule.

I believe the point of no return has been passed.
It's not when you 'know', it's when you can 'reasonably expect' to exceed 24 months.

[tino]

Hi Tino

Thought I'd give you a worked example of how the calculations may look, based on £2,000 per month of expenses you can no longer claim from your company tax free.

£2,000 per month is £24,000 per annum in expenses your Co can no longer reimburse to you, therefore, you need to take out a dividend to cover this. Assuming you would pay high rate tax on this you would need to declare a dividend of £32,000 so that after tax you are left with £24,000.

The company therefore needs additional reserves of £32,000. £19,200 of this would be made up from the expenses your Co is no longer paying (£24,000 more profit less 20% CT) so you need further additional profit of £12,800 (after tax) which equates to £16,000 in additional billing.

Assuming you work 230 days a year the £16,000 extra would mean an uplift needed of £70 per day to leave you no worse off from a personal point of view.

I have made a number of assumptions here thought i.e. doesn't taking into account any potential flat rate saving on the additional income, assumes you are just a high rate tax payer for dividends, doesn't look at potential for going over £100k and losing some personal allowance or over £50k and possibly paying back some child benefit or even the potential to still claim expenses and pay the BIK on them.

I hope it gives you a ball park figure that you may want to discuss with your (very accommodating) client. Run this by your accountant who should be able to give you a more personalised calculation based on your exact situation.

Also, if I was a very picky HMRC inspector I'd be arguing that you now expect to be there over 2 years because you are discussing all the implication of such but that's probably a whole different discussion.

Martin
Contratax Ltd

Martin, that's hugely useful - thanks a million

Two things to consider as well...

If you do a lot of mileage the rate will drop after 10k so your monthly loss will be lowered and would be fair to factor this in to your client...

Asking your client for an uplift of £70+ quid is a lot bearing in mind these are your business costs and your issue, not theirs. Be careful when considering how accommodating they are. There is a difference between them paying a little more to keep your skills and you having them paying your business costs outright. If they are willing to go for it then fill your boots. Just bear this in mind when negotiating.

NUK, I absolutely agree. It is a large increase when we consider it's not their problem at all. There is the fall back position of me being able to potentially move office locations which circumvents the issue.

Thanks mate,

[northernladuk]

Two things to consider as well...

If you do a lot of mileage the rate will drop after 10k so your monthly loss will be lowered and would be fair to factor this in to your client...

Asking your client for an uplift of £70+ quid is a lot bearing in mind these are your business costs and your issue, not theirs. Be careful when considering how accommodating they are. There is a difference between them paying a little more to keep your skills and you having them paying your business costs outright. If they are willing to go for it then fill your boots. Just bear this in mind when negotiating.

[ContrataxLtd]

Learned friends,

I'm aware of the 24 month rule and will shortly be approaching the "point of no return".

I do however happen to have an accommodating client who has asked me to calculate the real cost of keeping me at this location beyond this point (if that makes the FD baulk then they will look to relocate me to London from Southampton way).

I was asked roughly how much it would cost them and I responded by telling them how much I pay in expenses per month, which runs to around a £100 a day uplift (2k per month).

Am I on the right lines?

Additionally (and this might be a really stupid question) where is the tax paid? Would I need to pay corporation tax through taking this as a dividend or could I claim it as an expense from the limited and pay BIK tax against that amount?

Gracias senors

Hi Tino

Thought I'd give you a worked example of how the calculations may look, based on £2,000 per month of expenses you can no longer claim from your company tax free.

£2,000 per month is £24,000 per annum in expenses your Co can no longer reimburse to you, therefore, you need to take out a dividend to cover this. Assuming you would pay high rate tax on this you would need to declare a dividend of £32,000 so that after tax you are left with £24,000.

The company therefore needs additional reserves of £32,000. £19,200 of this would be made up from the expenses your Co is no longer paying (£24,000 more profit less 20% CT) so you need further additional profit of £12,800 (after tax) which equates to £16,000 in additional billing.

Assuming you work 230 days a year the £16,000 extra would mean an uplift needed of £70 per day to leave you no worse off from a personal point of view.

I have made a number of assumptions here thought i.e. doesn't taking into account any potential flat rate saving on the additional income, assumes you are just a high rate tax payer for dividends, doesn't look at potential for going over £100k and losing some personal allowance or over £50k and possibly paying back some child benefit or even the potential to still claim expenses and pay the BIK on them.

I hope it gives you a ball park figure that you may want to discuss with your (very accommodating) client. Run this by your accountant who should be able to give you a more personalised calculation based on your exact situation.

Also, if I was a very picky HMRC inspector I'd be arguing that you now expect to be there over 2 years because you are discussing all the implication of such but that's probably a whole different discussion.

Martin
Contratax Ltd

[speling bee]

Any wise ones care to advise whether it makes a difference if the client changes the contract to make the supplier's base at the home office and then the client directly purchases all travel / accommodation via their own systems. I think we discussed this before but I forget the conclusion.

Of course the daily rate would then be adjusted down.

[ASB]

Thanks both

Check the update!!