Can We Employ The Kids In Our Family Business?

Some 60% of UK businesses are family owned, and, in an earlier post, I looked at the possibility of employing a spouse or partner in our family business, in order to reduce our year end tax bill with some extra wage costs.

That’s all very well, but what about the kids? Can we pay them a salary too? Everyone, including our children, has a tax / NI free personal allowance of around £5,500, so can we use this to our advantage?

The simple answer is; “Yes”, so here are a few of the basics:

The Children And Young Person’s Act states that no person under 13 years of age may be employed, other than in very specific areas, such as acting, modelling and sporting activities, so employing your 8 year old as head of marketing could just raise a few questions.

Under current legislation, the National Minimum Wage doesn’t need to be paid to workers in the family business, provided they are members of the employer’s family, and share the family home. That said, the more we can pay them, within reason the greater the expense, for tax purposes.

As with most things, common sense is the watch word here. We need to be able argue that our kids are performing tasks that are well within their capabilities. Many, these days, are highly computer literate, and may have done work for us on our web sites, spread sheets etc. Others may have helped us with despatching goods, filling mail shot envelopes etc.

So, as long as our kids are over 13, and they perform appropriate tasks, within our business, for a sensible salary, there is nothing to stop us paying them for work done, in order to reduce our business tax liability.

There is a wealth of legislation governing this, but, for most of us, it’s definitely worth some serious consideration.

Another Look At Claiming Home Expenses

In an earlier blog entry (taken from an article I produced for Enterprise Nation) I covered the very basics of this subject. In a more recent article, for BHP Publishing, I was asked to explain the subject in a little more detail. This article is reproduced below:

One thing that any small, home based business owner will need to know is; “What expenses can I claim for running my business from home?"

Surprisingly, there are no ‘standard’ or recognised methods of calculating these allowable expenses, although there are a number of conventions and guidelines which we, in the profession, tend to adhere to.

In the ‘good old days’ we accountants would simply claim a global ‘round sum’ amount (often about £20 - £30 per month) to cover these costs, which was never challenged by HMRC, as it was not significant or worth amending.

However, since 2004, the limit of these round sum amounts has been capped at £2 per week (or £104 per year). Anything above this rate is increasingly likely to trigger an investigation.

If we feel that the £2 is insufficient, we can claim specific costs, based on actual expenditure.

Main Criteria

• We must actually work from home, and have a dedicated area for this work (doing the books on the kitchen table once a week simply won’t cut it)
• Expenses must be ‘wholly and exclusively’ for the business. If mixed usage (part business, part personal) the business part must be separately identifiable.
• Where an area of the house is used partly for business, and partly for personal, the expenses will be apportioned by time used, as well as floor area utilised.

What Can We Claim

The following property expenses can be claimed:

• Light and Heat
• Rent / Mortgage Interest
• Council Tax
• Water Rates
• Property Insurance
• Cleaning
• Re decoration and repairs (internal and external)

Calculating ‘Business’ Element

As a general rule, we tend to apportion all of the above costs on the basis of floor area utilised. In reality, this may be difficult to calculate, so it is perfectly acceptable to work on the basis of numbers of rooms in the house. If, for example, we use one room for business purposes, and there are four further rooms, the business element will be 1/5, or 20% of the total running costs of the home. If we further estimate that this room is used 50% for business, and 50% personal, the percentage claimed will be halved to 10%.


Other Claimable Costs

In addition to our home, we can claim any expenses utilised ‘wholly and exclusively’ for the purposes of the business, including:

• Telephone (including line rental) apportioned by call time (incoming and outgoing). A dedicated business line can be claimed in full.
• Broadband (as telephone costs)
• Business insurance
• Repairs to business equipment
• Capital allowances (wear and tear) on business equipment. (including computers and peripherals, office furniture and fixtures such as shelving etc).
• Printing, stationery, postage and advertising
• Computer software used for business
• Travelling and subsistence costs (a whole topic in it’s own right). Subsistence relates to the ourselves only. Any entertaining of suppliers, business associates and, even, customers is totally disallowable.
• Motor expenses of running business vehicles (less any personal element).

Examples of expenses claims we can make in certain circumstances are given in the HMRC guidance manual; http://www.hmrc.gov.uk/manuals/bimmanual/BIM47825.htm

Pitfalls

When claiming expenses relating to our home business, we need to be aware of some potential issues:

• We can claim any costs directly attributable to the business working area of our home (such as decorating the home office, installation of specialist equipment, additional utility supplies, insulation etc) However, if we treat a room as being 100% for business, then, on the sale of our house, the percentage of the sale relating to the ‘business’ area will, potentially be subject to Capital Gains Tax. This will only be an issue where a significant profit is made, as smaller gains will be covered by our annual exemption. **UPDATE** From June 2008, HMRC have announced that this will no longer be an issue, and that capital gains tax will no longer be charged where home business expenses, such as mortgage interest etc are claimed against profits.
• Most mortgage companies ask us to stipulate whether or not there is a business element to our occupation. We may need to be able to prove to them that we have separate business insurance to cover us for this.
• Running a business from home may attract the attention of the Valuation Office Agency who will determine whether or not a property will attract business rates. Guidelines for this can be found at: http://www.voa.gov.uk/council_tax/working_from_home.htm

Legislation is constantly being updated, and the only piece of advice that never changes is; Always check with your accountant, when looking to claim or calculate these expenses.

**UPDATE**

For the 2008/09 tax year, the flat rate allowance has been increased from £2 to £3 per week.

2006 Companies Act Further Simplifies Limited Company Structure

In a number of features and articles, I have made reference to the fact that, for most of us, it will be preferable to run our business as a limited company, rather than as a self employed person or partnership, and in my last feature, I touched on some of the reasons why this might be the case, but what does it involve? Is it more work or more expensive? Will you have to have an audit, register for VAT or find a company secretary?

The latest Companies Act has now completed the task of simplifying the limited company process, by, amongst other things, removing the requirement to have a company secretary, from 1 April this year.

Other recent simplifications include:

• The audit requirement for small companies has been removed for companies whose turnover is below £5.6 Million.
• The requirement to have two directors has now also been removed.
• Limited companies were previously required to have at least two shareholders. This was, in reality, a bit of a pointless exercise, anyway, as business owners would simply issue 100 shares, 99 to themselves and 1 to their partner.

The net effect of all of this is that, from April this year, it is now possible to form and run a limited company with just one person, without the need to involve anyone else. The structure of the business, therefore, becomes as simple as that of a sole trader.

The other benefit of this is in the costs involved. The fact that most of us will never require an audit, will significantly reduce accountancy costs, and the simplified company structure means that you can now form a brand new limited company online from as little as £25.

Should I Run My Business As A Partnership / Sole Trader Or Limited Company?

One of the fundamental questions when starting a new business is; “Should I run my business as a sole trader, partnership or limited company”?

In the majority of cases, it will be preferable to run your business as a limited company. Some of the benefits of doing so include:

Limited Liability.

If your business fails, your house and other assets are not at risk (unless you have guaranteed any debts personally).

Taxation savings.

Over the last few years, legislation has changed almost yearly. For some of that period, the first £10,000 of a limited company’s profits were tax free. Although this provision is not currently in force, the Small Companies Corporation Tax Rate presently stands at 21%, from 1 April 2008, for profits up to £300,000.
Although the Chancellor has now back peddled somewhat on the 10% tax band, a self employed person will pay a basic rate of Income Tax of 20% (rising to 40% from £36,000 of income) plus 8% Class 4 National Insurance. This, obviously, represents a minimum saving of 7% on every penny earned for a limited company..

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The perception held by most people is that limited companies are larger entities, and this automatically gives increased credibility.

As long as you actually pay tax (in other words, you earn more than the tax free threshold, currently £5,430 per annum) then the tax benefits of being a limited company will normally be significant, and one of the biggest misconceptions amongst new business owners is; “I’m too small to be a limited company.”

To all of you I would say; “You’re never too small to save tax!”

Should I Be Claiming Tax Credits?

Everyone has heard of Tax Credits.

We’ve all seen the Inland Revenue publicity, but the usual reaction is; “That won’t apply to me. I earn too much” or “It’s not worth applying. The Government never give anything to people like me.”

Many people, though, particularly those with young families, are surprised to learn that they are, in fact, entitled to some form of Tax Credits.

There are two main types available; Working Tax Credits and Child Tax Credits. The former is only available to families with a household income below £15,000, but the latter can be available up to a household income of £66,000.

When starting out on a new business venture, money can often be a major issue, and any extra help is always welcome. It is important to remember, also, that, for the self employed, Working Tax Credits are paid, based on NET income. Just because you have total income of, for the sake of argument, £18,000, does not mean you’re not eligible. By the time you have deducted allowable expenses, such as travelling, telephone, insurance, etc, it is quite likely your net income will fall into the qualifying bracket, and this is where a good accountant will be able to help.

Also, people who are aware that they can claim Tax Credits, often fail to do so, as they feel it’s ‘not worth it’. In this situation though, we need to look at the bigger picture. Whilst the amount of the Tax Credits received may be small, there are a number of further benefits that will make a claim worthwhile, such as free dental treatment, assistance with childcare arrangements etc.

Still not sure? Why not check it out for yourself? The Government have a Tax Credits calculator available online. Simply by entering a few basic details, it will not only calculate whether you are eligible, but also give an indication as to how much you can expect to receive. This calculator is available at
http://www.taxcredits.inlandrevenue.gov.uk/Qualify/DIQHousehold.aspx

Can I Pay My Partner Through The Business?

It used to be common practice to pay a spouse or partner a small wage, in order to utilise their tax free personal allowances, or lower rate tax banding (particularly if they have no other employment).

This loophole has been partially closed in recent years, as any such salary must now be ‘earned’ by the person concerned, which can be difficult to prove when they have a full time job elsewhere.

One way around this, if you run your business as a limited company (and it is likely that you should be) is to issue a number of shares to your partner, so that they are able to receive part of the dividend paid for the year.

Under current legislation, a dividend is classed as investment income, rather than earned income, and, as such, there is no requirement to prove any involvement on the part of the partner. (Also, as investment income, it won’t be subject to National Insurance).

Alternatively, if they do actually play a part in the business (such as bookkeeping, administration or company secretary) then a salary is permitted, as long as it is at a commercial rate. One of the best ways to prove this is to ensure that they sign the odd document, from time to time, such as letters, cheques, etc.

What Expenses Can We Claim For Working From Home?

Something we are often asked is; “What expenses can I claim for running my business from home?”

Briefly, we can claim household running costs as follows:

Telephone

Firstly, we need to calculate the business element of the calls. The Revenue will now only accept a figure that has been calculated from at least two telephone bills from each line / mobile used over the year. In practice, this means going through the itemised bills to identify business / personal usage.

You don’t need to identify every call, but will need to calculate the business percentage of those you can.

Whilst this may seem a lot of effort, bear in mind that, without adequate evidence, the Revenue will not allow ANY costs against the business. Also, you only need to do this for a couple of bills, just to establish a pattern.

Use of Home As Office

This is a global allowance, designed to cover us for the element of the home used for business purposes.

The simplest way to carry out the calculation is to add up the annual costs (as applicable) of:

· Gas / electric / solid fuel
· Council Tax
· Contents / buildings insurance
· Water rates

Remember to keep all the bills to support these amounts.

Next, we simply count up the number of principal rooms in the house (kitchen, reception rooms, bedrooms, bathroom etc). If there are seven, and one is used for half for business, and half personal (eg spare bedroom / office) then we would allow half of one seventh.

We should remember that this ‘allowance’ is a Revenue concession, and is not supported as business expenditure in Tax Law.

Sticking to the Revenue guidance will avoid any suggestion of liability to Capital Gains Tax on the part or parts of your home you use for business.

You may have exceptional circumstances depending on your business, in which case, the calculation can be adapted. The more information you can provide, the easier it is for your accountant, and the greater the protection in the event of Revenue Enquiries.

When Do We have To Register For VAT?

There are many misconceptions, amongst new business owners, as to when we should register for VAT. There is, however, no legal requirement to do so, until the business turnover exceeds the registration threshold (currently £67,000) though this is applied on a pro rata basis.

In other words, if turnover in a three month period exceeds £17,000, and it is likely that it will continue to do so, then registration is required immediately.

It is possible to register for VAT voluntarily, even if you are below the Registration Threshold.
Reasons we might want to would include:

* In order to reclaim the VAT incurred on large initial capital outlays at business start up. (Equipment, vans etc).

* To reclaim VAT on ongoing purchases and expenses, thereby making them 17.5% cheaper. (although we should be wary if we are mainly selling to the public).

* To improve company image. If a company is not registered for VAT, then any potential large customers will realise that its turnover is below £67,000, and may refuse to deal with such a small company, on the grounds that its continuity cannot be assured. This will be a potential issue for any of us working from home.

When considering voluntary registration, you need to be aware of who your customers are. If we are dealing mostly with business customers, then they will, in the main, be able to reclaim any VAT that we charge on our products and services.

If, on the other hand, we mainly deal with the public, they are unable to make such a reclaim and our goods and services immediately become 17.5% more expensive. Alternatively, we can make our current prices VAT inclusive, and lose out on the extra profit. Either way, this will be a major factor in choosing whether or not to register for VAT before we actually need to.

How Do I Run My Vehicle Through The Business?

One area that most new business owners need to know about is how to run a vehicle (including, where applicable, their own car) through their business.

The answer to this will mainly depend upon whether you are running the business as a sole trader or a limited company, as follows:

Sole Trader

As a sole trader, YOU are the business, and your car automatically becomes part of the business, for tax purposes. In this scenario, you are simply required to keep a record of your business mileage, which can then be compared against the vehicle’s total mileage for the year, to give a ‘business’ percentage. If, for the sake of argument, this works out as 60%, you can then claim 60% of the entire running costs of that vehicle, including fuel, tax, insurance, repairs etc.

Limited Company

This is a totally different scenario, as the limited company is a separate legal entity in its own right. This means that, if you simply pay for the car through the business, then the company is, effectively, providing you with a company car, which will be subject to tax like any other employee. The last thing any of us want is to be taxed for using our own vehicle.

The way around this is to use what is know as the Fixed Profits Car Scheme, whereby we can claim a set mileage rate from the business, which we then use to finance the running of the vehicle. This way, the company indirectly pays the motoring costs, but there is no tax implication, and the vehicle remains your own property.

The FPCS rates are 40p per mile for the first 10,000 miles a year, and 25p per mile thereafter.

What Do We Do About PAYE / NI, Once We Are Self Employed?

From commencement as a self employed person, you will be required to pay Class 2 National Insurance, which can be paid weekly, monthly or quarterly.

This is paid at the rate of £2.30 per week, and covers the taxpayer for profits of up to £5,435. Anything over and above this is subject to Class 4 National Insurance, at 8% (up to a maximum profit of £40,040 per year, after which the rate drops to 1%).
For limited companies, it is possible to pay yourself a salary of approximately £105 per week, without paying PAYE or NI, with the majority of remuneration being taken by way of a dividend, which, as investment income, is not subject to National Insurance.

However, to ensure a minimum contribution is paid, thereby ensuring future pension and other benefits, we recommend the payment of a slightly larger salary to each director (usually around £5,500 - £6,000 per annum).

In order to minimise work (and therefore cost) recent changes in NI legislation mean that this salary can now be paid annually, as long as the recipients are also directors.