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We are an accountancy practice dealing mainly with owner managed businesses. It is our usual practice to invoice a company for the preparation of the accounts, carrying out an audit, dealing with the company's tax affairs and dealing with the director's tax affairs. A small benefit in kind, say £200, is entered on the form P11D to reflect the private element of our invoice.
We are an accountancy practice dealing mainly with owner managed businesses. It is our usual practice to invoice a company for the preparation of the accounts, carrying out an audit, dealing with the company's tax affairs and dealing with the director's tax affairs. A small benefit in kind, say £200, is entered on the form P11D to reflect the private element of our invoice.
It would appear this type of invoice could fall foul of the 'mixed use' rule for Class 1A National Insurance and accordingly the whole of our fee should be charged to Class 1A National Insurance. This seems quite unfair, as in many cases the Class 1A liability will exceed the private element of the fee.
Do readers know of any guidance which has been issued by the Inland Revenue on this matter? We are particularly interested to know whether or not the private tax work could fall under the 'insignificant private use' rule, although one would expect the Inland Revenue's answer to be that 'it depends on the particular case'.
If the whole of the invoice is subject to Class 1A National Insurance, then would reimbursement of the private element (say, through a directors loan account) extinguish the whole liability?
We appreciate that a Class 1 liability may be at point if our engagement letter places the obligation to pay with the director, but for this query it can be assumed that the liability falls to the company.
(Query T15,814) – Abbey.
Other than the general leaflet CWG5, nothing of any real interest has been published by the Inland Revenue on Class 1A contributions. This query shows the confusion that surrounds Class 1A National Insurance contributions, and demonstrates that perhaps further guidance is needed.
Going back to basics, Class 1A liabilities will arise on an amount which is or falls to be treated as an emolument derived from employment (section 10(1), Social Security Contributions and Benefits Act 1992). When you relate that back to this particular query, surely there is no question of the services being provided to the company being regarded as an emolument of any director or employee. Put simply, only the £200 entered on the P11D gives rise to any Class 1A considerations.
The mixed use rule is confusing but can only come into play where there is an emolument in the first place. Take, for example, a business trip where the costs are met directly by the employer and which involve a flight, a couple of taxis and two nights in an hotel where only one of the nights could be regarded as a business trip. Assuming some form of dispensation is held covering business travel, the only item which would then constitute an emolument would be the extra night in the hotel. Where no dispensation is held, nothing really changes – each item can be looked at separately and the business cost excluded on the basis that it is not an emolument.
On the question of insignificant private use, each case would have to be considered on its own merits – so there is unlikely to be any joy there. Clearly, however, where the director reimburses the private element either through a debit against his loan account or otherwise, no Class 1A liabilities could arise because again there are no emoluments on which to base the liability.
The Class 1 position should not be overlooked. Where there is real doubt as to whether Class 1A liabilities arise on more than the actual benefit, it may be beneficial for the debt to be that of the employee. When it is met by the employer the business element falls away by virtue of Regulation 9 of Part VIII to Schedule 3 of the Social Security (Contributions) Regulations 2001 (SI 2001 No 1004) leaving only a Class 1 liability on the balance, i.e. the private element. The slight downside is that Class 1 falls to be paid earlier than Class 1A and there could also be a primary liability. – Fatman.
Let us examine the meaning of 'mixed use', which is similar to, though not the same as, 'duality of purpose'. One example that has often been debated concerns traders who use cars both for business purposes and privately, and must apportion running expenses. If one of them takes a (genuinely) business trip by car, and pauses en route to buy groceries, it can be said that the mileage between the shops and home was mixed use, because both ends were served in the same time frame. The trip as a whole was business, but part of the time taken was used for dual purposes.
A security company employee, escorting a client's child to and from school by car, would thus give the client mixed use of himself, as chauffeur and bodyguard simultaneously. Someone advised by his doctor to take regular exercise, and who discussed a contract with a customer during a round of golf, would at one and the same time be having a business meeting, enjoying his hobby, and taking his prescription. That is mixed use (of time) par excellence.
However, no such mixture appears in this case. The bill is for discrete actions, needing separate time slots. One cannot prepare a tax return while vouching a cash book, or complete income schedules while casting an analysed trial balance. Any attempt to split concentration in that way would bring disaster. The fact that they feature in the same invoice makes no difference. Only the £200 specified could attract National Insurance contributions. It is the service that is the use, not the billing method. As the querist remarks, the problem would be removed by billing the different categories separately, or causing the client to reimburse his company.
The latter is a good idea anyway, as it saves National Insurance contributions. – Man of Kent.
Extract from reply by 'Jim':
Perhaps the best advice to 'Abbey' might be to reconsider the terms of engagement letters with his clients and value billing principles. From an extreme point of view, 'Abbey' should be aware of the case of Simon James Ernest Easton (No 6834, 1995 – Solicitor's Disciplinary Tribunal); manipulative invoice splitting was deemed false accounting, contrary to the Theft Act resulting in a stretch by the sea in Ford Open Prison for the solicitor concerned.
