Employer Providing Cash Loans to Staff
Q: My employers have offered me a temporary loan at a discounted rate to help me buy a new car to get to work. Are there any tax implications that I should be aware of if I choose to accept this rather generous offer?
A: Where an employee is given an interest free or reduced interest rate loan from their employer, a benefit in kind charge will arise. The charge is calculated based on the difference between any interest paid by the employee and the 'official rate' of interest used by HM Revenue & Customs. The current 'official rate' is 4.75% and this usually reviewed each year in the Chancellor's Budget statement.
If you are given a loan of £8,000 at a reduced rate of interest of 2%, you will pay interest of £160 per year. Using the 'official rate' a loan of £8,000 should attract an annual interest charge of £380. You would then be taxed on a benefit in kind value of £220, being the difference between the amount actually paid and the amount that would be charged at the 'official rate'.
Tax will be charged on the benefit in kind at your marginal rate of tax, so if you are a higher rate taxpayer at 50%, you will have to pay tax of £110, a 40% taxpayer will have a liability of £88 and a basic rate taxpayer will have a liability of £44. The benefit in kind will be reported to HM Revenue & Customs on the employer year end form P11D, a copy of which will be given to you. In addition, your employer will also need to pay Class 1A National Insurance at 12.8% on the value of the benefit.
Bad Paying Customers
Q: I have a particular customer who has a history of bad payments with me. I am considering taking legal action against this customer to try and recover this debt. Can my solicitor’s fees and other legal costs be regarded as a legitimate business expenses for tax purposes and are there different procedures depending on the size of the debt?
A: Legal and professional costs that a business incurs are allowable when they are incurred wholly and exclusively for the purposes of the trade.
Legal fees incurred in attempting to recover bad debts are deemed to be incurred for the purpose of the trade and are therefore considered to be allowable expenditure in establishing your business profit for the year.
In addition to being an allowable deduction in the accounts, as the debt relates to a specific customer, the legal fees incurred in respect of that debt recovery will be also be allowable as a deduction for tax purposes.
It should also be noted that where a bad debt relating to ordinary trade transactions with a specific customer is written off, that amount is also an allowable deduction. This contrasts with the rules for a general bad debt provision, which is not an allowable deduction for tax purposes.
Staff Suggestion Scheme
Q: We have a staff suggestion scheme in place and one of the staff has come up with a really good idea to save us about £14,000 over the next twelve months and about £10,000 a year in the future. What is the maximum that I can pay him without having to deduct tax?
A: It is important to note that there are some qualifying criteria that must be met in order that rewards paid to employees as a result of a staff suggestion scheme benefit from a tax free amount. The main requirements are that there must be a formally constituted scheme open to all employees on equal terms; any suggestion that is awarded by the employer must be outside the employee's normal duties; the suggestion must be implemented and the payment must be awarded to the employee who made the suggestion.
Providing that the payment meets the qualifying criteria, there are two ways that you can deal with this type of award.
One option available to you is to pay 50% of the expected savings for the first 12 month period. The first £5,000 of such a lump sum can be paid gross to your employee, with any excess then being subject to PAYE.
Alternatively, the second option available to you is to make a payment to the employee of ten percent of the expected savings that are likely to be achieved over the next five years. Again there is a limit of £5,000 that can be paid tax free.
Lloyd Stubbs specialises in managing tax and accountancy affairs for small business owners and can be contacted by phone or email
Disclaimer – advice shared in this column is intended to inform rather than advise and is based on legislation and practice at the time. Taxpayer’s circumstances do vary and if you feel that the information provided is beneficial it is important that you contact us before implementation. If you take, or do not take action as a result of reading this column, before receiving our written endorsement, we will accept no responsibility for any financial loss incurred.