Beware of triggering hidden taxes
Company Cars and The NHS Fleet Scheme
Many doctors will have heard of company cars or the NHS fleet scheme. Both are very similar.
The difference is that company car costs are a deduction against your company profits, whereas the NHS fleet scheme costs are a deduction against your pensionable and taxable income from your NHS employment income.
To cover the personal use of the vehicles, the taxpayer with use of the vehicle is required to pay tax on the benefit-in-kind value of using the car.
This is calculated by taking the list price of the vehicle multiplied by a percentage which is based on the CO2 emissions of a vehicle and the fuel the vehicles use.
These schemes became popular when HM Revenue and Customs (HMRC) reduced the benefit-in-kind rates on fully electric vehicles to 0% in April 2020. They are currently 2% of the list price of the car.
This results in very minimal tax being due on the benefit in kind but significant tax savings for the deduction of the costs of the car.
If you use the NHS fleet scheme, as I previously highlighted, this comes as a deduction against your pensionable income.
Depending on how long you have been contributing to the NHS Pension Scheme, when you return the vehicle at the end of the lease, this can cause growth in your legacy pension pots (1995/2008 schemes) that is in excess of the annual pension savings allowance.
The annual pension savings allowance is currently £60,000.
If you have use of a company car provided from your personal company, there are a number of hidden tax liabilities that can arise if you do not take the correct steps.
While not technically a tax liability, if the company car is not purchased or leased in the company name, then the company cannot claim tax relief on costs of the vehicle or the associated running costs.
Therefore, these costs would be suffered by you personally rather than your company, thus losing the tax savings.
If you wish to use finance or a lease, these must also be in the company name.
Care must also be taken with your choice of car, as the tax treatment of a brand new electric car is different to a used one – including pre-registered vehicles – for the company.
Having a company car that is not fully electric, while tax deductible for the company, can lead to very significant personal tax liabilities for the employee using the car, because the benefit-in-kind percentage is much higher than an electric car.
If the company pays for petrol or diesel for company cars, it significantly increases the benefit-in-kind charge, so it is usually best practice to pay for petrol and diesel personally.
It is always best to discuss any company cars or NHS fleet schemes cars with a specialist medical accountant prior to ordering.
Personal Use of Company Assets
With inflation rates higher than they have been in the past, doctors with personal limited companies are often looking for ways of investing company funds rather than leaving funds in the company bank accounts.
Quite often this leads directors to consider investments such as high-value watches, jewellery, art-work or even classic vehicles. While these investments are allowable, provided they are in the company name, they are treated differently to other business costs. Instead of being deducted against your company profits, these costs form part of capital gains tax calculations when the asset is sold.
It is important to remember that a limited company is a separate legal entity and therefore the assets purchased belong to the company and not you.
Any assets must not be used personally because they belong to your limited company, not you.
If you use a company asset personally, you will be liable to personal tax and your company would be liable to employers’ National Insurance contribution. In most cases, the liabilities are calculated using 20% of the value of the asset.
This value is based on when you first started to use the asset personally. This is particularly important if you make use of an appreciating asset.
It has been known that HMRC will review public photographs including social media to evidence that business assets are being used personally.
Residential Properties
Residential properties owned in a limited company have been another way doctors have tried to keep pace with inflation.
Again, while this is allowable, should you or a person connected to yourself use the property, you will be subject to a benefit-in-kind tax.
Companies that own high-value residential properties should take care that an annual tax is not chargeable. This applies to any property valued at more than £500,000 and the tax starts at £4,400 a year rising to £287,500 for properties worth more than £20m.
There are certain reliefs and exemptions available if the property is rented or actively marketed for rent, but you are still required to file an annual declaration.
You should also be aware that holding a large number of residential properties in the company is likely to mean that Business Asset Disposal Relief will not be available when you wind the company up.
Private Health Cover
A common benefit given to employees in the private sector across all industries is to provide a form of medical insurance or pay for treatment for an employee. The arrangement works well for both employers and employees in that employers save tax on the payments made and the employee only pays tax on the cost of the policy. Most private practice limited companies are family-owned businesses. While paying for private health insurance or costs are tax-deductible in your limited company, they will give rise to a tax charge to you personally and a employers National Insurance contribution for your company. The net effect is that, after factoring in all the tax savings and charges, the overall tax savings are minimal and potentially adversely affected, but with the added administrative burden of operating a PAYE scheme and preparing P11d forms.
Overdrawn Directors Loan Account
Sometimes costs are inadvertently paid via a company that are deemed to be personal in nature.
In such cases, the cost needs to be attributed to the particular director and potentially paid back to the company. This is known as a director’s loan.
Overdrawn directors loan accounts will be subject to a bene-fit-in-kind charge on the individual director’s tax return unless interest was charged – at the official HMRC rate or more – on the loan for the period of time it remained outstanding.
There is an exception to this rule, meaning that you do not have to charge interest or declare a benefit in kind for any loan up to the value of £10,000.
Regardless of the value of the loan, if it remains outstanding after nine months of the end of your corporation tax accounting period, then additional tax is pay-able known as Section 455 tax at 33.75%.
This tax can be reclaimed after you permanently repay the loan but it can take some time to recover from HMRC.
Renting Home as Office
Many doctors work from home, whether it being virtual appointments or administrative duties for their business. Claiming the use of home as office is an allowable cost. HMRC has a fixed rate of £6 per week, which can be claimed in the absence of any other claim.
However, there is a calculation that can be worked through to evidence a higher claim. This claim factors in the rooms in your home, the annual costs and the time spent working in the room.
Some doctors may try to formally rent a room from them-selves to their business, effectively justifying 100% business use of a particular room in the household.
But care must be taken if considering this as a strategy of the business, as this can lead to a potential partial loss of principle private residence relief, which exempts any capital gains tax on the sale of your main place of residence.
And it can also lead to the property being subject to business council tax rates. The rental income would also be subject to income tax for the owners of the property.
Similar care should be taken if you chose to install a garden office in your home and pay for this via a limited company.
Self-Employed Assistants
A lot of doctors will make use of self-employed assistants and secretaries. Sometimes these individuals may work on a self-employed basis or trade via a limited company.
HMRC pays attention to these arrangements, as they attract lower National Insurance rates and have the benefit of trading as a business rather than as employee. There are special rules in place called ‘Off Payroll Working’.
Various factors are taken into account when HMRC determines a status. These include how many businesses are invoiced, can the services be provided by a suitable replacement, if required, and can the work be refused.
Most of your practices will be treated as a ‘small business’. This means that it is up to the contractor to determine their own status.
You should ensure that anybody who works regularly for you understands this and it may be a good idea to evidence that you have informed them you are a small business and tell them of their own responsibilities.
HMRC has a tool that can be used to help guide the status of a contractor which gives a result which can be used as evidence in the event of a HMRC inquiry.
It is also worth considering your own Off Payroll Working status if your business provides services to colleagues. This can be a complicated area and you should seek professional advice if you feel this applies to your business.
Tax-Free Childcare and Child Benefit
When an individual has adjusted net income of more than £60,000 a year, HMRC starts to limit the amount of Child Benefit payment you or your partner are entitled to.
This is on a sliding scale such that when you reach £80,000 you will lose all of the Child Benefit and if this has been claimed, it will need to be repaid to HMRC.
In addition, many people make use of the free nursery hours and the HMRC tax-free childcare system. Access to these schemes is limited if your adjusted income is in excess of £100,000.
Breaching £100,000 means that parents are not eligible to use the Government Tax-Free Childcare scheme.
The £100,000 limit is also a cliff edge, so if your income exceeds the £100,000 threshold, the bene-fits claimed in the tax year are repayable to HMRC in full.
Tax On Pension Growth
The problems surrounding tax on excess pension growth (annual allowance tax) have been well documented and most medics are now at least aware of the issues.
If you have had a charge in the past, some individuals opted to use a ‘scheme pays election’.
A common mistake is that individuals use this option and declare it on their personal tax return but either do not submit a ‘scheme pays’ form to NHS Pensions or the form is rejected for some reason.
This means that HMRC never receives the funds from NHS Pensions and there remains an unpaid liability to the Treasury.
Often it can take years for HMRC to realise this is the case and, by the time it does, will charge interest and penalties for late payment.
Care must always be taken to ensure you do not have a hidden tax liability. Discussing your circumstances with a specialist medical accountant can ensure you are fully aware of any liabilities you may have.
Written by Partner, Alec James, for the Independent Practitioner Today, April 2024 Issue.
