Timing of expenditure is an important consideration with capital allowances, especially with frequently changing rates and allowances.
Specific comparisons should be done for large purchases and items such as cars where the rules can greatly slow down the rate of relief compared to leasing.
Capital allowances may be due to a business on elements of a building and this valuable tax relief is commonly missed. A survey of the property may be required for tax purposes in order to maximise the relief.
It may also be possible to claim capital allowances on furnished holiday lets.
When passing the family company to future generations, it is important to consider the structure adopted to ensure that no unexpected tax liabilities arise on both the outgoing and incoming shareholders.
It may be possible to gift shares to the children in a tax neutral way. Alternatively a sale of the business to the children through an earn out mechanism could provide a way for the retiring shareholders to withdraw future monies generated from the company at 10%.
Consideration should be given to the income tax, capital gains tax and inheritance tax implications and the benefit of applying for pre transaction clearances from HM Revenue and Customs.
The ownership structure of a property can have a major impact on the overall tax charge.
Where properties are expected to be sold for a significant gain, it can often be beneficial to retain personal ownership (or operate through a limited liability partnership) as the tax cost of extraction of capital gain from a company can be prohibitive.
Where property is held in the taxpayer’s personal name, the taxpayer may wish to charge rent in order to extract funds from the company. However, entrepreneur’s relief may not be available to secure the 10% rate of capital gains tax on a future sale of the property if the company pays rent to the taxpayer for the use of the property.
Pure investment property held for the long term may be better through a personal company.
It is sensible not to hold business property in a trading company. If the trading company gets into financial trouble then the creditors can access the property.
There are partnership structures available for more significant portfolios that can provide hybrid tax arrangements to cater better for capital growth and rental profits.
Another option is the use of a personal pension scheme. The pension can charge a rent to the trading company and it will not pay tax on the rents received. However, the entrepreneur must way this very tax efficient mid to short term arrangement with the tax costs of extracting the property’s value from the pension scheme in retirement.
Investments and/or surplus cash could taint the trading status of the company and ER could be lost all together
A purchaser of the trade may prefer to buy the trade and assets of the company rather than the shares. In such a transaction the company will be subject to tax on the sale and additional tax will be payable on extraction of the funds from the company. Therefore the overall rate would be much higher than 10%.
Pensions are a highly effective and tax efficient manner in which to remunerate employees. Not only are contributions deductible for the employer but they are a tax free benefit for the employee.
A major consideration for the employer is the fact that no Employers’ NI is payable on the contributions. This makes the cost to an employer lower and may also help to meet their commitments under the imminent NEST (National Employment Savings Trust) rules.
Care should be taken where both the employee and employer make pension contributions because the employer contributions are taken into account in determining whether the annual allowance has been reached. The annual allowance is the maximum amount of pension contributions that receive tax relief and is set at £50,000 for 2011/12 (subject to carry forward of unused allowances in the previous 3 years).
Up to £55 per week may be provided free of tax and NICs to employees through childcare vouchers which may be used to cover the cost of childcare such as registered child minders, nurseries and play schemes.
In the case of husband and wife companies, the couple may between them extract up to £5,720 pa tax free from the company with the expenditure qualifying for a corporation tax deduction for the company.
Care needs to be taken because for individuals joining the scheme after 5 April 2011, tax relief for high rate and additional rate taxpayers is capped at that which would be due to a basic rate taxpayer.
For small and medium size companies, relief is available for qualifying costs incurred on Research and Development (R&D) at 200%, (increasing to 225% from 1 April 2012).
This means that for every £100 spent on qualifying expenditure the company should receive a deduction for corporation tax purposes of £200.
For loss making companies a tax credit/refund is available to give a cash flow advantage.
When making a claim for R&D tax relief, it is important to ensure that the activities qualify as Research and Development.
This is the subjective area of making an R&D credit claim and our policy is to draft a document as part of our claim which supports the activity as R&D. It may be possible for us to prepare a claim with a contingent element for fees.
Enterprise Management Incentive (EMI) share option schemes are a tax efficient way in which to retain and recruit key employees by offering them the opportunity to acquire a stake in their employing company.
The terms of the option are personalised to the company’s specific circumstances and may include performance requirements and / or time constraints that must be met before the employees can acquire the shares. The employees’ acquisition of shares is very tax efficient for them.
The advantages to the business owner are that staff incentivisation will not cost the business cash, as a bonus would. Also, if the company’s value increases they may be able to withdraw money from the business at a rate of tax that is effectively less than 10%
Remuneration planning is a key strategy to mitigate the tax liability of a shareholder-director.
The planning adopted will depend on the commercial requirements of the company but may include:
■Capital Distributions (perhaps on a liquidation)
For a stand-alone small company the best strategy remains to pay a small salary complemented by dividends.
Every case is different though and depends on the marginal rate of the company and individual. Utilisation of a spouse’s unused basic rate band should also be considered but must be handled with care and advice taken.
If you would like further advice on any of the topics discussed, please contact us by: