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Tag: Capital Allowances

Capital Allowances

  • #Budget2018 – Good for small businesses BUT….

    Relatively favourable to growing businesses:

    1. Capital allowances of 100% (AIA) will be available on all expenditure up to £1m from 1 January 2019 to 31 December 2020 up from £200k. Even the £200k isn’t spent by most growing business but if you need to invest heavily in capital equipment this is very welcome.
    2. Research and Development cash repayments will only be available for amounts up to 3x the PAYE/NI bill from April 2020. It will be important to ensure businesses make the maximum claim they can before April 2020.
    3. A new Structures and Buildings Allowance (SBA) of 2% will be introduced for all new commercial buildings contracts entered into on or after today. This might also be a small boost to the construction sector.
    4. The £3k Employer Annual Allowance saving Employer’s NI of up to £3k will only be available for employers with an Employer’s NI bill under £100k. So this is still available for most growing businesses.
    5. The new 2% Digital Service Tax (DST) from April 2020 will apply only to certain revenues over £25m. With corporation tax at 17% from the same date, this may be bearable even if you are affected.
    6. The £85k VAT threshold remains for now (but you can’t help feel it will go eventually).
    7. The early increase in the tax free personal allowance to £12,500 and the higher rate threshold to £50,000 a year early will help business owners save dividend tax when taking dividends from their companies. Above that, remember that Child Benefit starts to get taken away so £50,000 may be the threshold to work with for a few years. 

    Some adverse changes:

    1. The qualifying period to be eligible for capital gains tax Entrepreneurs Relief of 10% will increase from 12 months to 24 months from 6 April 2019. In practice, this may have limited application but remember to get your spouse in as an owner-officer sooner rather than later.
    2. IR35 extension to the Private sector from April 2020 might encourage good freelancers/consultants to work for smaller businesses, however, there aren’t so many contracts in that sector. A lot of freelancers will face a very high tax bill. There may be some moves for their clients to take them on as employees, but this doesn’t easily fit in with the idea of a flexible, enterprising Britain. Expect a lot of debate between client and freelancer when a new contract is negotiated!
    3. The tax treatment of work related training costs will not change. This is a blow for the self employed sole trader who suffers an unfair rule where some training costs are seen to be capital and not tax deductible.
    4. Many clients also own a property they rent out and the Principal Private Residence changes mean their capital gains tax bill of 18% or 28% when they sell the property will increase. This may bring forward some property disposals to ensure they exchange before April 2020.

    With many changes effective from 2020 will the Chancellor prove to have had 2020 vision on the strength of the UK economy?

     

  • Brexit – Three Recommended Business Responses

    1. Be responsive, not reactive

    As markets and currencies move around consider if this might be a short term movement or a longer term trend. Volatility is the only certainty! Know the stresses your business can take and change course if needed. For example, perhaps as an importer you’ll need to start entering forward exchange contracts to help take out the uncertainty in currency movements. Build in the extra cost of doing this. If inflation starts to build up make sure you maintain your gross margins. Check with your IFA about the timing of any employer pension contributions and the assets invested in.

    2. Revisit your business model and plans

    Might you need to look at different customers and suppliers? Different pricing plans? Different staffing levels appropriate for your revised plan such as different skills or experience. For example, with a lower pound, exporting might be a new area for you to explore or focus on more. If wages increase, how will you react? Stress test this in your pricing and quotes to customers. If interest rates rise, how does this affect your pricing and cash flow? Perhaps ‘cash is king’ again and you’ll want to encourage your customers to pay you earlier.

    3. Consider possible tax changes

    With a possible election and probable Budget, there will be changes. VAT has always been controlled by the EU so expect some changes in this area which may help or hinder you. For example, if 5% VAT on electricity is taken away this might reduce your costs. However, with VAT eventually being charged on EU imports, allow for some adverse cash flow movements. Any government should want to encourage investment and growth so expect S/EIS incentives, corporation tax and capital allowances to remain supported. However, expect income tax and national insurance to increase. If so, you may want to take dividends out of your company sooner rather than later subject, as always, to its profits and cash flow needs.

    This is new territory and the trick is to navigate it well.

    We’ll continue to keep our clients up to date with developments and if you have any questions please do contact any of the On The Spot team.

  • How To Make Profits And Pay No Tax – Case Study #2

    If the asset originally cost £100k in 2012 was depreciated in the accounts by £95k, the accounts would show a ‘book value’ of £5k as the company expected it to be obsolete pretty quickly. Happily they happened to find a buyer in eastern Europe willing to pay £90k for this particular model. Therefore, proceeds of £90k – ‘book value’ of £5k = a profit of £85k in the company’s accounts.

    For corporation tax purposes, in this year the 100% tax allowance was low and had been used on other assets. This asset could only claim tax allowances of 18% reducing balance, the ‘normal’ rate at the time. The ‘tax value’ is therefore £54k (£100k – £18k – £15k – £13k).

    When the asset is sold, the £90k proceeds are offset against the £54k so that overall the company only claims allowances on its net spend of £10k (£100k – £90k). Some of its earlier capital allowances are reversed and £36k (£90k – £54k) is charged on the company. Happily the company can offset this by claiming 100% allowances on the replacement asset costing £60k.

    Overall, the company has made a large profit but its tax bill is £Nil:

    • Profits in the accounts are £100k, but taxable profits have become tax losses of £9k
    • (£100k profits – £85k asset book profit + £36k reversal of tax allowances – £60k new tax allowances).

    By looking at the accounts you’d expect its tax bill to be:

    • 20% of £100k = £20k tax due.

    After these adjustments there is a tax refund of:

    • 20% of a £9k loss = £2k refund from the year before.

    These are a very particular set of circumstances to illustrate that the profit in your accounts isn’t always a good indication of the tax that’s due.

     

     

     

     

     

     

  • #Budget2015 – Game, Set and Match

    Aces

    There were a few aces served up on behalf of small businesses during the ‘game’. These include:

    • The reduction in corporation tax to 18% always welcome by all businesses.
    • Permanency of 100% capital allowances for spend of up to £200k each year provides certainty in investment decisions and supports the recurring poor UK productivity conversations taking place recently.
    • The widely touted IHT (inheritance tax) saving when passing on the family home to direct descendants helps business owners who invest their profits into their family home.

    Double Fault

    However, small businesses may not be impressed with the double fault:

    • Increasing dividend tax from 0% to 7.5% on dividends over £5k within the 20% basic rate income tax band is a classic example of extending the reach without increasing the rate.
    • Add on the 32.5% rate on dividends within the higher rate band which looks the same as it is today, but is an increase from a net 25%, and you have a disincentive to incorporate, at least until the lower corporation tax rate kicks in.
    • This looks like a way to recover more tax from consultancy/freelance companies who are genuinely self employed and can arrange their remuneration tax efficiently in the same way as any other owner-director.

    Deuces

    A further disadvantage for consultancy/freelance companies but bringing some advantage to small businesses with staff:

    • Increasing the Employment Allowance from £2k to £3k saving more employer’s national insurance could encourage a small business to employ a person on a £30k salary or 3 people on a £15k salary. With part timers, under the £8k threshold, it’s not unusual for small business to have quite a few employees but no employer NI bill.
    • On the other hand the Employment Allowance will not be available at all to 100% owner-director companies who have been able to save about £200 by increasing their salary slightly. This simply revises their salary back to pre Employment Allowance levels, currently about £8k.
    • With the dividend rate changes, owner-directors will use their remaining tax free personal allowance, currently about £2k, to save some of the new 7.5% or 32.5% income tax rate on dividends above £5k.
    • They may also tip the balance to taking more dividends out this year, perhaps with employer pension contributions while you can.

    Five Setter

    It was a long game going to five sets covering other important areas such as:

    • Buy-2-let property owners by their sheer numbers are a relatively easy target to help raise more tax by restricting interest relief on buy-2-let loans to to basic rate tax and taking away the 10% wear and tear allowance.
    • Encouraging more rent-a room use of your own property by increasing the tax free income from £4,250 to £7,500, a 76% increase! Coupled with the IHT improvement is telling us to live in bigger homes and rent a room out rather than invest in a buy-to-let!
    • Bringing in non-Doms to the ‘normal’ tax net when they have either been borne to UK parents or have lived in the UK for 15 out of 20 years. Another example of extending the reach without increasing the rate.
    • Withdrawal of corporation tax relief on goodwill on acquisition of a business but allowing a lesser, non trading loss, relief on ultimate sale. An interesting way to provide a net relief, and will keep tax advisers and commercial lawyers very busy in future business sales.
    • Ensuring that when stock is sold it’s sold at market value and not a more tax efficient value agreed between both parties has clearly been identified as an area with some tax leakage.

    Winners and Losers

    Losers continue to be higher and additional rate taxpayers including consultants/freelancers. This means any future increase in the higher rate income tax threshold is very welcome providing a whole host of knock-on effects such as for dividend tax, capital gains tax, and pension reliefs. Winners continue to be trading businesses employing staff, low paid earners and many basic rate taxpayers. 

    Whether the Chancellor can continue to serve at this pace into the next Budget in March 2016, we will soon find out.

     

     

     

     

     

     

     

     

  • How To Make Profits And Pay No Tax – Case Study #1

    Imagine you’re a consultancy business with a few staff. After receiving tax efficient investment funds under SEIS (not available to large companies) you purchased top quality computer equipment for £80k for your staff to use and spent £120k on research & development into groundbreaking consultancy software.

    Your profit for last year was made up of:

    Sales             £400,000

    Costs           (£220,000) (£120k R&D + £100k salaries/other costs)

    Depreciation (£20,000)

    PROFIT         £160,000

    If you know the corporation tax rate is 20%, you might expect your company tax bill should be £32,000.

    However, a few adjustments are required to know how much tax you should pay.

    Profit            £160,000

    Depreciation  £20,000 (Ignored for tax purposes)

    AIA                (£80,000) (Capital allowances which replace the Depreciation – 100% of the computer equipment cost)

    R&D             (£156,000) (Tax enhancement available to small businesses)

    TAX LOSS    (£56,000)

    Your profit of £160,000 has become a tax loss of £56,000! You’ve become a tax avoider!

    This and other tax avoidance is perfectly legal. 

  • Open Letter To #HMRC – Why Taxpayers Need Accountants

    Dear HMRC

    Taxpayers have benefited from recent changes allowing cash accounting for sole traders and simplified company reporting. The press releases accompanying these changes talk  a lot about simplification, with the sub-text that enterprise Britain enables small businesses to deal easily direct with HMRC and companies house. There is no need to pay an accountant so say the politicians.

    The reality for small business owners is very different.

    Start ups are continually surprised that they need several different tax references for one business.

    Can’t the PAYE, corporation tax, income tax, VAT, companies house references be linked up. Why do I have to set up all these different Gateway links? How do I know if I’ve missed anything? Do I really have to file a PAYE return every month showing no tax due on separate software? I didn’t receive my corporation tax reference. Why doesn’t HMRC provide software for partnerships? Do I really have to find a private partnership software provider, pay for it and download that separately?

    Once we’ve set ourselves up online, does there need to be a screen requiring attention every time just to tell me when I last logged in? And to see my tax return on screen, do I have to attend to two screens stating Privacy Guidelines and Download Speeds, every time I log in?

    If you get past that, try filling in a Corporation Tax return (CT600).

    Clearly prepared by 3 different departments, but then stuck together afterwards. Why else would you need to enter your Turnover to the software 3 times? Can’t there be a pick up? Taxpayers don’t know what a Participator is. Can’t you just say Shareholder? Do you really care about small charitable donations when I’m making a profit and does a whole page have to be devoted to it? I’ve been told I can claim tax relief for goodwill, but there’s no sign of the write off in the deductible expenses. Small businesses can be in the VAT flat rate scheme but the income/costs this scheme generates aren’t mentioned in the expenses. Although apparently we’re all trying to take a deduction for salaries paid more than 9 months after the year end.

    Many small companies have a share premium account (or should have) but the CT600 doesn’t allow this. You have to go to the companies house version to get that included.

    Apparently lots of small companies have Franked Investment Income (they don’t) which requires my attention if I want to pay the correct 20% corporation tax rate. And don’t forget you have to notice the question requiring you to claim the 20% corporation tax in the first place. The software doesn’t want to make that leap on its own. If you don’t know the capital allowances rules, good luck relying on the software. It can’t work out £Nil brought forward, spend, allowance and then a £Nil carried forward. You have to pretend you have an opening balance to get the correct result.

    Latest complication

    Simplification can’t be a priority when new VAT rules – from the EU – require start ups with any turnover at all (including below the UK £81k threshold) trying to provide e-services to other EU countries to register for VAT in each of those countries. Definitely one for penalties down the line.

    Enterprise Britain is good at software and e-services but in the throws of setting up and trying to earn exports for the UK, it has to remember to deal with this. Governments expect gratitude for the MOSS simplification but forget that the rule in the first place is too complicated! These returns are required quarterly so businesses can’t make the most of VAT annual accounting specifically designed for them.

    Summary

    It’s simplification for governments and HMRC, for their benefit. It’s not simplification for the taxpayer. The taxpayer still needs an accountant to navigate through the rules. You don’t know the result until you go through the hoops and after that there might be a change such as the MOSS rules which take you by surprise.

    Yours sincerely very tired

    Tax Payer

    Director of The Coal Face Limited

  • #Budget2014 (Small) Makers. Doers. Savers. + Investors?

    The Chancellor chose this headline, but I think Investors also get a look in.

    (SMALL) MAKERS

    I take this to be businesses. In fact, it’s largely small to medium companies that benefit from today’s announcements being the changes to AIA, SEIS and R&D.

    What are AIA, SEIS and R&D?

    AIA – Enables all businesses to spend up to £500k on plant & machinery and to receive a 100% tax allowance on all that expenditure. The effective date is this April 2014, but take care with the unnecessarily complex transitional rules.

    Companies should also take care about the effect on deferred tax which will restrict the ability of your company to pay tax efficient dividends.

    SEIS – This has now become a permanent feature. Your start up company can continue to attract tax efficient investment in your company shares.

    R&D – The Research & Development repayable tax credits for small companies have been increased from 11% to 14.5%. This is very welcome for small companies desperate for cash at the beginning of the investment cycle. It’s now time to bring this into the main stream tax consideration, and ensure you aren’t eligible, rather than think this is for other companies. And make sure you are a company as this doesn’t apply to sole traders/partnerships.

    Please note this applies from 1 April 2014, so you might want to delay some expenditure if this is possible at this late stage.

    DOERS

    I presume these are employees. Acknowledging that there are too many 40% taxpayers by getting the tax thresholds closer to April 2012 levels wef from April 2015, helps the hard hit middle income earners.

    The childcare costs announced several times helps employees but doesn’t help owner-managed businesses, where the current voucher scheme is more valuable. Make sure you set up a voucher scheme now, so you can continue to use it after the new scheme comes in.

    SAVERS

    A big nod to savers that the government is On Your Side.

    From 1 July 2014, the ISA threshold is £15,000 whether it’s cash, shares or a mixture. This will save higher rate taxpayers a lot of tax over several years. As interest rates increase, this becomes more valuable.

    From April 2015, allowing £5,000 of interest income to be taxed at 0% is worth up to £2,250 per year if it applies to a 45% taxpayer. This might encourage small business owners to charge their companies interest on a director loan in credit. The company saves 20% corporation tax, but the owners may not be taxed on the interest income.

    With the higher personal allowance and basic rate band effective from April 2015, small business owners might benefit from delaying a few dividends this year to benefit from a 0% net tax rate, which might otherwise have been taxed at a net rate of 25%.

    INVESTORS?

    Perhaps this includes pensions, as these are more like investment vehicles than any other. A massive improvement to the flexibility of defined contribution schemes fits in with a modern working pattern where many people no longer retire fully at a certain age.

    SEIS – This is very valuable for high net worth individuals looking for a better return than bank deposits and quoted shares. It’s good to see it’s a permanent part of the investor’s options.

    As many of today’s favourable announcements apply from April 2015, we can only speculate what will be announced in the March 2015 Budget, a few months before a general election.

  • #Tax Myth 6 – Sole Trader Start Ups Don’t Receive Tax Incentives

    You have probably heard of lots of incentives for those who invest in start up companies. This is where individuals pay money to a company in exchange for shares in that company. The tax system helps subsidise the investor’s risk in the new unproven business.

    But what about your own sole trader business?

    It might be small scale and, as there are no shares, it’s probably just your money. Aren’t you taking a risk? Where are the incentives for you? After all, you might have a good idea which in the future trades from a limited company.

    Happily the tax system does assist you.

    It works by offsetting tax losses from your new venture against other taxable income you have earned in the same year or the previous three years. In addition, this relief is available for any tax loss in the first four years of your new venture.

    How does this translate in practice?

    Often you will have left your salaried employment where you have paid 40% income tax. If your start your business in January and before 5 April spend say £5,000 on a website, you will have made a tax loss of £5,000.

    This £5,000 is offset against the salary you earned in the same tax year before January. The PAYE income tax of £1,000 you paid on £5,000 of salary will be refunded to you after you have sent in your income tax return.

    A very helpful addition to your cash flow to invest further in your new business.

  • Final Chance For The Best Tax Relief When Buying Machinery

    And a few other assets…….

    April 2012 sees the end of 100% capital allowances tax relief for annual spend up to £100,000.

    What am I talking about?

    This is the amount your business can spend on plant and machinery and receive 100% of tax relief in the same year. Normally, the tax relief is spread over about 15 years!

    For March 2012 year ends, if your profits are £200,000 and you spend £100,000 on a new machine, your corporation tax bill is reduced from £40,000 to £20,000.  After April 2012, this will be reduced to £25,000 plus 20% of £75,000 = £8,000.

    If you enter into a contract to buy the machinery before April 2012, you can therefore achieve an extra £12,000 of cash flow to help grow your business.

    You don’t even need to have the cash leaving your bank account before April 2012.

    There are important transitional rules when your year end isn’t March, but the basic point remains that it is likely to be better to enter a contract before March 2012.

    Do contact us if you think you might benefit from acting on this tax relief before it goes.