June questions and answers
Newsletter issue - June 2018.
Q. I use my own car for business. My employer reimburses me 20p per mile. In 2017/18 I travelled 15,000 on business. I am a basic rate taxpayer. Can I claim any tax relief for the use of my car?
A. There's a statutory tax exemption for Mileage Allowance Payments (MAPs), which if paid below a certain amount will not produce a liability to employees. Payments in excess of the exempt amount are taxable. The exemption does not apply to 'round sum' expense allowances. From 6 April 2011, the standard rate for cars and vans is 45p per mile, reducing to 25p per mile for mileage in excess of 10,000 miles per tax year.
Where the employee receives no mileage allowance payments, or the payments are less than the statutory limits, he may claim a deduction from his emoluments equal to the statutory mileage allowance, or, where appropriate, equal to the excess over the payments received.
As 20p per mile is less than the HMRC approved mileage rate of 45p for the first 10,000 miles and 25p per mile thereafter, you may claim tax relief as follows:
Allowable mileage payments:
10,000 miles at 45p per mile = £4,500
5,000 miles at 25p per mile = £1,250
Total allowable £5,750
Less:
mileage expenses received:
15,000 x 20p per mile (£3,000)
Tax relief due £2,750
Note that the amount of tax relief due is the amount on which you may claim tax relief at your marginal tax rate - it is not the amount of tax that may be reclaimed from HMRC.
Q. I am an employee and am liable to income tax at the higher rate. I also receive income from a rental property that I own. My wife does not work. If I instruct the tenants to pay the rent directly to my wife, will that absolve me from declaring it on my own self-assessment return and avoid paying higher rate tax on it?
A. Unfortunately this will not be possible. You cannot assign income to someone else - even to a spouse - to avoid paying tax on it. However, you could put the property into joint names, even if you have a declaration of trust behind the transfer restricting her beneficial ownership to a small amount (say 5%), she will be taxed on 50% of the rental income. If you want your wife to be taxed on a greater part of the rental income, you will have to transfer a greater part of the property ownership to her and make an election for tax using form 17.
Q. I am a VAT-registered sole trader. What is the VAT position if I buy a new car for £10,000 and part-exchange my used van for £4,000?
A. VAT is calculated as follows:
New car £10,000, plus VAT @ 20% = £12,000
Less:
Trade allowance on used van £4,000 plus VAT @ 20% (i.e. £800) = £4,800
Net payment is therefore £7,200
The net payment of £7,200 is the same as would have been arrived at by charging VAT on the value of the car less the trade-in allowance. However, the consequences of doing it the correct way are different. This is because the input tax on the new car of £2,000 will probably not be recoverable. In addition, the business must account for output tax of £800 on the van. The motor dealer will account for £1,200 (i.e. output tax less the input tax charged to him on the van). He will recover this input tax because he is buying a used commercial vehicle on which he will charge output tax when he subsequently sells it. The net effect is that VAT is charged on the gross value of the deal, not the net cash paid.