A recent First-tier Tribunal case was unusual in that HMRC were arguing for self-employment, whereas they would normally take cases to Tribunal arguing against self-employment, due to the extra National Insurance costs and less relief for expenses.

Yellow hard hat. Studio photography.
(Photo credit: Wikipedia)

Mr Coffey had been in partnership with his wife as a builder, but had retired through poor health. He claimed that he had been employed by Dr Selvarajan to supervise the refurbishment of the Doctor’s clinic.
Mr Coffey was paid a set weekly amount, regardless of hours worked. There was no written contract, no invoices were raised and there was no right of substitution.
The tribunal found that Mr Coffey had control over the building project. In the absence of a written contract, two documents were considered. The first was a document which Mr Coffey had signed which referred to him as, “principal contractor” and “planning supervisor”. The second was a note in his diary setting out the payments to contractors, which was held as evidence that Mr Coffey was in charge of these payments. Dr Selvarajan was still responsible for actually making these payments.
The tribunal also noted that there was a lack of financial risk, but that this was not “necessarily determinative”.
The Tribunal determined that Mr Coffey was self-employed, with one key indicator apparently being the fact that Mr Coffey had previously been a builder for a number of years and that he had not checked with his accountant how his new engagement would be taxable.
Whilst the outcome of this case, and the approach taken by HMRC, might be surprising, there may be some elements that could be used to build a case in favour of self-employment.

A fairly common feature on a sale of shares in a private company is an element of consideration which is delayed, either for a set period of time or based on certain conditions being met.

The tax impact of these innocuous looking payments can often be surprising and can lead to unwanted tax liabilities arising before any funds have been received.  In most cases, the tax will be payable in the year following disposal, regardless of when the deferred proceeds are received.

In a recent case which Eaves and Co have been involved with following an HMRC enquiry, a sale was agreed with an element of the sale price becoming payable only when dividends were paid by the company in the future.  No tax advice was sought at the time the sale was agreed.

HMRC had stated that the contract was unconditional and that the proceeds were simply deferred.

Our analysis was that the payments are contingent, as something has to happen (the payment of dividends) before the amounts are due.  However, having established that the payments are contingent, we then have to determine whether the proceeds are ascertainable or not.

If the proceeds are ascertainable, they will be taxed in full as part of the proceeds of the disposal, despite the fact that they may not become payable until some time into the future.  The position is more complex if the proceeds are unascertainable, as the value of the right to receive the funds in the future is taxed on the original disposal.

In this case, the chances of dividends being declared are thought to be low, and as such the right could potentially be valued at a substantial discount and therefore bring down the initial tax cost.

The distinction between ascertainable and unascertainable can be quite subtle, but the key is whether or not all the events that can affect the amount occur before the disposal.  For example, where the proceeds are based on a percentage of future profits, this would be unascertainable as the future profits are not known at the date of the sale.

We successfully argued that the payments in this case are unascertainable, because whilst there is a limit on the maximum that can be received, there is no way to determine what dividends will be declared in the future.

HMRC confirmed that they accept our position, despite having previously argued that the payments were not even contingent.  We have begun negotiations with HMRC as to the value of the potential right to future consideration and have begun with a low valuation due to the facts of the case and the likelihood that any funds will be received in the future.  The downside to this is that any further receipts would be taxable without Entrepreneurs’ relief being available, however the cashflow benefits are thought to outweigh this drawback.

The key point is that taking tax advice at the time of the disposal would have prevented this unexpected tax treatment, and the contract could have been worded in order to provide a more clear outcome without the expense of negotiating with HMRC.

Top Tax Tips for Owner Managed Businesses
10.  Capital Allowances
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.

Top Tax Tips for Owner Managed Businesses
9. Succession Planning
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.

Top Tax Tips for Owner Managed Businesses
8. Tax Free Employee Benefits
Tax free benefits are a great way to incentivise staff and are tax efficient from the point of view of the company.
Examples of tax efficient benefits include:

  • Provision of one mobile phone per employee, – HMRC have now confirmed that i-phones and smart phones will be treated as mobile phones and not computers,
  • Free or subsidised meals provided on the employers’ business premises,
  • Annual function (such as Christmas party) – up to £150 per head,
  • Long service awards of up to £50 for each year’s service where employees have worked for their employer for more than 20 years,
  • Workplace parking spaces,
  • Provision of works buses with seating capacity of 9 or more,
  • Up to £8,000 of qualifying removal expenses,
  • One health screening or medical check up,
  • Childcare facilities where the employer is at least partly responsible for the financing and management of the facilities,
  • The provision of loans up to £5,000

Top Tax Tips for Owner Managed Businesses
7. Ownership Structure of Business Property
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.

Top Tax Tips for Owner Managed Businesses
6. Entrepreneurs Relief on Sale of Shares/Business
Entrepreneur’s relief (ER) allows individuals to pay tax at 10% on the disposal of qualifying assets including shares in trading companies and represents a very important relief for business owners.
ER may be due where in the 12 months prior to the disposal the individual was an employee / officer of the company and held at least 5% of the share capital and voting rights.
An entrepreneur/shareholder may expect the 10% rate of capital gains tax but potential pitfalls are lurking:

  • Shares with restricted rights may not qualify for relief,
  • The relevant conditions must be met throughout the 12 months immediately prior to disposal,
  • The existence of preference shares in the company could complicate the 5% calculation
  • 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%.

Top Tax Tips for Owner Managed Businesses
5. Pensions
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).

Top Tax Tips for Owner Managed Businesses
4. Employer Supported Childcare
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.

Top Tax Tips for Owner Managed Businesses
3. R&D tax relief
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.