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  • #Tax Myth 12 – Tax is only due on money received

    Now or later….For example, you’re probably aware that when an invoice is raised it’s usual to include it in Turnover. If the invoice is not paid by your year end, it will increase your Profits for tax purposes. Hopefully by the time the tax is due, normally 9 or 10 months after the year end, you’ve been paid so you’re not losing out on cash flow.

    However, you may not be aware that if as a shareholder in your SME company you rearrange your shareholdings by giving away shares to family non-spouse members or employees, tax can be due on you.

    That doesn’t make sense!

    No it doesn’t, unless you’re the Treasury and you want to make sure taxable value doesn’t disappear offshore or remains unrecorded.

    How am I supposed to pay tax without receiving anything for the shares?

    It’s something to address before you give the shares away.

    Is there a solution?

    Happily, there’s a solution.

    If the shares are held in;

    1. An unquoted company or a company quoted on AIM, or
    2. A quoted company and you own at least 5% of the shares,

    you and the recipient can sign a ‘Holdover Election’.

    What does a Holdover Election do?

    This enables the recipient to pay the tax due on the shares, instead of you. Usually, when he has received some money on a later sale.

    Here’s an example

    If you give shares in your company to your brother which cost you an initial nominal amount, but have a value of £50k, without the Election there would be a tax charge on you of about £4k which you’d need to find out of your own funds.

    If, instead, you both sign a Holdover Election, your brother pays the £4k due when he sells the shares later on.

    If your brother isn’t resident in the UK, you can’t enter this Election. You’d still need to pay the £4k through the tax return system, even though you didn’t receive any money from him to help you pay the tax due!

  • Become A Limited Company – Should You, Shouldn’t You? Top 5 Questions To Answer

    Here are the main questions we ask our clients before making a recommendation:

    1. ARE YOU MAKING TAX LOSSES?

    Yes – If you are a Sole Trader in your first 4 tax years of trading you can offset these losses against other taxable income from the previous 3 tax years.

    For example, you might have given up a well paid employment to follow your self employed dream. Let the tax system help you fund that dream by getting a tax refund.

    You can start as a sole trader, and when profitable incorporate your business into a Limited Company.

    Remember that tax losses are different to accounting losses. For example, you might have made a trading profit and invested in some equipment or a van. The capital allowances available are very generous and your trading profit might become a tax loss.

    2. DO YOU NEED LIMITED LIABILITY FOR COMMERCIAL REASONS?

    Or are you a particularly risk-averse person?

    If a sole trader enjoys credit from suppliers, or HMRC, you’re personally liable for these debts. If you don’t settle these debts your personal assets, including your home, are at risk. Many people know they can easily pay their debts and are comfortable with being a sole trader. You should also check that your insurance covers you adequately for other claims.

    With a Limited Company, most trading debts and legal claims stay within the company, so your home is usually protected.

    3. ARE YOU MAKING TAXABLE PROFITS OF CIRCA £25K?

    At this level of profit, you’re paying £1,552 of Class 4 National Insurance, so it becomes more worthwhile to consider paying an accountant to incorporate your business because this is the tax you’re likely to save.

    Running a Limited Company requires more discipline because its cash and assets aren’t yours, so it doesn’t suit everyone.

    4. ARE YOU PLANNING TO EXPAND?

    Expansion is possible through bank funding for a sole trader business, but you will be taken more seriously and have more options available to you through a Limited Company.

    You can grant very tax efficient ‘EMI’ share options to incentivise your staff for no up front costs, or allocate some of your shares to Private Equity funding.

    5. ARE YOU HAPPY FOR THE PUBLIC TO SEE SUMMARY FINANCIALS?

    The Limited Liability of a Limited Company comes with the price of allowing anyone to see the summary numbers you’re obliged to file at companies house. This allows suppliers to get an idea of whether to trade with your company.

    The summary financials don’t show turnover or profit, but they do show your total bank balance and the accumulated profits after you’ve paid tax and dividends.

  • Sole Traders – Six #Tax Numbers You Must Know

    1. 4 Years – If you are in the first 4 years of your business and make a loss, you can use this loss to reduce your tax bill in the previous 3 years, such as from the job you had before you set up your business. You will receive a tax refund.

    2. £5,725 – If your profits are lower than £5,725, you don’t have to pay the annual £140 Class 2 NI, unless you need a credit towards your state pension. Ask for a repayment for earlier years.

    3. £7,755 – If your profits are higher than £7,755, you will pay 9% Class 4 NI. This gets you no state benefits and effectively increases your tax rate from the 20% income tax rate to a total 29% tax rate.

    4. £25,000 – Because of the Class 4 NI mentioned in 3. above, this is roughly the level of profits you need where it is likely you should consider becoming a limited company. This is penalty wonderland and more complicated than a sole trader, so use a good accountant. At this profit level, their fees shouldn’t outweigh the Class 4 NI saving.

    5. £79,000 – If your TURNOVER in the last 12 MONTHS, reaches £79,000, most businesses must register for VAT. You might be making a loss but it’s irrelevant.

    6. £150,000 – If your turnover has exceeded £79,000, but lower than £150,000, you might benefit from being in the VAT Flat Rate Scheme. This saves administration but can also be very profitable. Even if your turnover is £Nil, you can register for VAT voluntarily and enter the Flat Rate Scheme.

  • How does George affect his parents’ after-tax income?

    Meaning the baby, not the Chancellor!

    If his father’s only income was his RAF’s officer income, with a salary under £50k, and with a non-earning mother, they would receive the full child benefit of £20.30 per week, or £1,055.60 per year until as late as 31 August 2033 if he is in qualifying education or in the armed forces by then.

    If his father receives a pay rise in the next 16 to 20 years, taking his income over £50k, child benefit is reduced or if it reaches £60k, becomes £NIL. This assumes the thresholds aren’t increased with wage inflation which is probably the intention.

    If his mother works for her parents’ company for a modest salary below the tax free personal allowance of £9,440 and the company runs a childcare voucher scheme for all its employees paying up to £243 pcm or £2,916 per annum until 1 September 2028, corporation tax of £2,471 (£1,888 + £583) per year is saved with no tax charge on George’s mother. And no loss or reduction in child benefit.

    This childcare can be paid despite a private education if it’s an out-of-hours school club such as rugby practice.

    Before starting school, his father may take George to a workplace nursery paid for by the RAF with no tax cost to him, and with no income limits, this can be very valuable. It could be paid at the same time as George’s mother’s childcare vouchers with no effect on the level of childcare vouchers paid to her.

    In addition, if his mother had shares in her parent’s company and received dividends, they wouldn’t affect the level of childcare vouchers paid, but might affect child benefit if the gross dividends plus salary totalled £50k or more.

    Potentially, child tax credits are available if their combined income, including gross dividends, dropped to £25,798 or less before 1 September 2029. Or if they need to spend spend £175 per week on childcare and their combined income is under £40k, they might receive the childcare element of working tax credits, but only if both of them worked 16 hours per week somewhere.

    Simple enough? Not really. With all the different dates, different income definitions and different thresholds, it’s certainly not child’s play!

  • Why it might pay to furnish your buy-to-let property

    When you spend money on your buy-to-let property, you expect to get a tax deduction against the rents received to help keep your tax bill down.

    For those with children, this is even more important if your rented property might take you into the ‘no-go’ £50,000 – £60,000 income level where child benefit might be reduced or taken away completely.

    With residential properties, costs like agent’s fees and gas certificates are easily deductible. But what about the costs of white goods and furniture?

    The usual (now very valuable) capital allowances for trades, aren’t available for residential properties. Therefore, instead, before April 2013, there was a useful ‘non-statutory’ relief that allowed you to claim the cost of say replacing a cooker (the original cost can’t be claimed). This relief has now been taken away.

    What remains is, instead, claiming a 10% Wear & Tear allowance based on 10% of the rent due on your property. However, this only applies to furnished properties. Furnished means the sort of things you’d expect to see in a home such as a bed, sofa, dining table and chairs.

    With the availability of cheap furniture, you might find this is an investment worth making. You’d get tax relief for replacing white goods in the future. Of course, if the furniture itself gets damaged, you’d need to include its replacement cost within the 10% claim.

    As the Wear & Tear allowance is based on rent due, you can see that this is more of a possibility in higher rent areas.

  • #Tax Myth 3 – Tax Avoidance Is Illegal

    When there was a window tax paid according to the number of windows in a building, property owners blocked out some windows with the sole purpose of paying less tax.

    Was this tax avoidance? Yes

    Was this illegal? No

    Some property owners may have lied about the numbers of windows on their property with the sole purpose of paying less tax.

    Was this tax evasion? Yes

    Was this illegal? Yes

    If you apply this analogy to today’s discussions on tax avoidance you can see why it is perfectly legal to organise your business and personal life in a way that means you pay no more tax than you should do.

    When windows were blocked out there was a real event and a real consequence to that action; less light, more wall, rooms reconfigured. There was a practical limit as to how far you could go. A property with no windows wouldn’t have been attractive for any tenant to rent or for resale.

    What is not legal is to lie. This includes not declaring income in your accounts or on your tax return and hiding income in overseas territories.

    Under declaration of income has been the subject of numerous HMRC cases over the years some of them deliberately concerned high profile people.

    We may not like Google, Amazon, Vodafone et al paying low rates of corporation tax, but they are simply following the rules.

    Are we suggesting they aren’t allowed to ‘block up some windows’?

    Of course there are grey areas, such as, for Google et al, what is the amount of profit applicable to each part of the supply chain and therefore which part is the UK’s taxable profit or, say, Ireland’s?

    These figures are documented and reviewed at great length by HMRC and there are probably about 100 correct answers. Perhaps this still needs more scrutiny. But let’s be clear what we are talking about.

  • #Tax Myth 11 – The Tax System Doesn’t Support Marriage

    Marriage and civil partnerships are provided with many reliefs within the tax system and I’m surprised why people claim otherwise.

    Business Partnerships

    Where one spouse is a partner, it’s very often the case that their spouse gets involved in the business later on, for example, a wife decides to stay at home when the children are young and instead of working for a third party, helps out in her husband’s business.

    If the other partners agree, his wife could be admitted to the partnership by taking half of her husband’s share.

    As each spouse enjoys two tax free personal allowances, for a higher rate taxpayer this saves £3,776 of income tax within the personal allowance, and 20% of tax on income above £9,440 and less than £32,010, a maximum of £8,290. Plus a maximum saving of Class 4 National Insurance @ 9% of £3,730.

    Ordinarily, the disposal of the husband’s partnership share would create a capital gain.

    However, where this asset is gifted to his wife, there is no capital gain, so there is no tax downside to the change in partnership share.

    Limited Companies

    A not dissimilar arrangement might be suitable for your limited company. In this case, the sale of some or all of your shares to your spouse will not trigger a tax charge on you.

    Whereas, if you’d given your shares to your non-married partner, a capital gain might arise. You could both defer this capital gain if you sign a ‘holdover’ election, but you’d need to understand it and complete it within the deadline.

    Similarly giving shares to a spouse for no tax effect, enables you both to own the minimum 5% required to receive entrepreneurs relief on the sale of your unquoted company,  doubling up the maximum relief on lifetime gains from £10m to gains of £20m, potentially saving capital gains tax of £1.8m being £10m @ (28% – 10%)!

    Other Assets eg Quoted Shares

    Where you have built up a portfolio of shares which, we hope!, eventually make a profit, this is subject to capital gains tax. If your gain is more than the tax free annual exemption of £10,900, you’ll pay either 18% or 28% of capital gains tax.

    Before you sell these shares, you can give some to your spouse who can sell them later on and use a second tax free annual exemption, saving up to £3,052 of capital gains tax. And if your spouse is a basic rate taxpayer, you may save an additional 10% (28% – 18%) capital gains tax worth up to £3,201.

    Inheritance Tax

    I suspect this affects more people than any other measure. If you own a home as a single person or within an unmarried couple worth £650,000, your estate may suffer £130,000 of inheritance tax on your death. If, however, you are married, there is no inheritance tax due when either, or both, of you die.

    Follow us on Twitter and LinkedIn for more up to date practical tax information.

  • Budget 2013

    Necessarily a muted Budget, as the Chancellor had little room for manoeuvre, but there were a couple of surprises to keep us interested!

    National Insurance £2,000 Credit – from April 2014

    Giving a £2,000 credit from April 2014 against employer’s national insurance is a welcome initiative which may encourage small businesses to take on some staff.

    Using the 2013/14 national insurance thresholds, one employee could be taken on next year earning a salary of £22,000 and the employer’s national insurance bill will remain at £Nil.

    Director-Shareholder Loan Accounts

    Any temptations to take a director-shareholder loan, repay it before corporation tax is charged on it, and then borrow another amount soon afterwards, so that not too much has in reality changed, will no longer be tolerated under a new anti avoidance rule effective from today. This is very important for forthcoming March 2013 year ends.

    On the other hand, loans can be made from April 2014 to employees and directors up to £10,000 (was £5,000) without an income tax cost. Even if the loan is under £10,000 it will still need to be repaid by director-shareholders before 9 months after the year end and not repeated to save a corporation tax charge.

    If you have staff who would benefit from a loan (and you have the cash and are willing to lend it to them!) this might be worth looking at as a way of giving some tax free value to your employees.

    Personal Tax Allowance – £10,000 – from April 2014

    As £10,000 is one of the Chancellor’s favourite numbers, the tax free income tax allowance has been increased one year earlier than predicted from April 2014.

    With the likelihood that employer’s national insurance will start at a much lower threshold and with the new £2,000 credit, there is a widening gap where the tax cost of a higher salary might start to be lower than the tax cost of dividends.  Perhaps this is the intention!

    Alternatively, where profits are made on rented profits, the £10,000 allowance will be a useful way to keep the tax on that property as low as possible.

    Seed Enterprise Investment Scheme

    The capital gains tax refund for the investor originally planned to last until March 2013, continues to be available into the next tax year, although at half the amount. This is a welcome extension which should help SMEs raise the finance they need.

    More information will come out in due course, so it’s always checking the detail before taking any action.

  • #Tax Myth 10 – R&D Tax Payments Should Always Be Claimed

    With its tax reliefs improving over recent years, Research & Development claims should be given more attention.

    For SMEs, when you spend £100 on R&D, your corporation tax is not only reduced by the £100 you’ve spent, but also by an additional £125, taking the total deduction against your company bill to £225.

    If you’re paying 20% corporation tax, you’ve saved additional tax of £25 (£125 @ 20%), taking total tax saved to £45 (£225 @ 20%).

    If you’re making losses (likely in a growth phase) this tax relief is delayed and has no immediate value.

    Fortunately, you have another option. You can decide to forgo the later tax benefit of £45 and trade it in for an earlier cash payment of 11% of the losses. For the total losses of £225, this equates to nearly £25.

    You can see you’ve received nearly one quarter of your R&D spend back in cash to help you grow your business, however, this cashflow improvement has cost you £20 of tax relief (£45 – £25).

    Therefore, if you’re expecting to make profits in the following accounting period, it may be less beneficial to reclaim the cash tax payment and instead wait to save more money against next year’s corporation tax bill.

    The same principles apply where you’ve subcontracted the R&D and your claim is reduced by 65%. The £20 cost of taking cash earlier referred to above becomes £16, or 16% of your spend on R&D.

    Follow us on Twitter for more up to date business tax information.

  • #Tax Myth 9 – Low Turnover B2Cs Should De Register For VAT ASAP

    Timing is everything for these sole traders and limited companies.

    Where a small B2C business is having a bad time, usually on the high street, their turnover may now be lower than in the past and under the VAT threshold of £77k over the last 12 months.

    De registering for VAT is very tempting as it either improves your margins, or allows you to price more competitively, or a mixture of both.

    Remember, however, that you’ve reclaimed VAT in the past on stock, fixtures, stationery etc.

    What happens to this VAT?

    In principle, you need to repay VAT previously recovered. The idea being that there should be a match between VAT recovered on supplies and the VAT charged on products or services.

    If you hold stock on the day you de register on which you recovered VAT, you may need to repay that VAT.

    If so, the solution is to run down your stocks and delay restocking until you have de registered.

    For other goods and for stock whose value has fallen below cost, you assess their market value. If you purchased shop fittings 5 years ago, the chances are they have a low market value today.

    If, in total, the net of VAT cost or market value of all relevant items is £5,000 or less, HMRC don’t ask you to repay any VAT at all when you de register.

    For small businesses with a reduced turnover, it’s quite possible that this £5,000 threshold isn’t breached. But if it might be, make sure you time your restocking or any other purchase accordingly.

    When you prepare your final VAT return, remember to reclaim VAT on services associated with your VATable business, such as your accountant’s fee!