If a limited company incurs costs or provides assets for the private use of its directors or employees they are classed as a Benefit in Kind.
This means additional Income Tax is payable on the individuals, and Class 1A National Insurance contributions are payable by the limited company at a rate of 13.8%.
Duality of Purpose In order to establish whether an expense will attract a Benefit in Kind charge, you must consider if there is a duality of purpose. Duality of purpose occurs where an item purchased your company has both personal and business use.
HMRC does not regard any expenditure that has a ‘dual purpose’ to be allowable for tax relief. For example, a suit or dress purchased to wear at work has a dual purpose in that you need to wear clothes for work anyway, therefore tax relief would not be available on this expense.
Examples of Benefits CAR & FUEL BENEFIT If your limited company purchases or leases a car and pays for associated expenses, including the finance and running costs, you are treated as having the personal benefit of using a company car and there will be a taxable benefit on you as an individual.
This is calculated as a percentage of the market list price of the car, based on the CO2 emissions. The less CO2 emissions, the lower the percentage applicable. It is also important to remember the market list price of the car when new, not the price you pay for the car, together with any extras added to the car.
Even if the car is solely used for business use there may still be a Benefit in Kind chargeable, as you theoretically have the ability to use the car personally. The only type of company car where Benefit in Kind taxes do not apply is pool cars, where more than one person uses the company car and it is kept locked on the works premises.
There will also be an additional Benefit in Kind if the company pays fuel costs. This is calculated as £24,500 x a percentage applicable to the car based on its CO2 emissions for 2020/21.
ASSETS TRANSFERRED AT LESS THAN THE MARKET VALUE If your limited company transfers ownership of an asset to you for less than its stated market value, a Benefit in Kind will be calculated on the actual value of the asset less the value that you paid at the time the transaction took place.
PAYMENTS MADE ON YOUR BEHALF Should your limited company settle a liability on your behalf such as your personal tax liability, or a mobile phone bill where the contract was held in your name, a Benefit in Kind charge should be calculated on the value of the settlement.
DIRECTORS’ LOANS If your director loan account exceeds £10,000, interest free, it is classed as a beneficial loan and subject to Income Tax and National Insurance. The amount chargeable is calculated by averaging the amount of loan, by reference to the opening and closing balances in the year, and multiplying this amount by the appropriate official rate of interest for the tax year (from April 2020 this is 2.25%).
Other Common Examples:
Private Medical Insurance
Suits and professional clothing
Home telephone rental and Internet costs
Mileage paid where the sum exceeds the HMRC guidelines
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