Owner Managed Businesses and Tax Efficient Remuneration

If you own and/or run an Owner Managed Business (OMB) then at some point you will have considered not only the most tax efficient way to remunerate yourself, but also most likely the other key directors and employees of your family-owned business.

When looking at this there are several important factors to take into account. Ways of remunerating your directors will vary enormously from business to business, so it’s vital to weigh up the taxation and other implications of each profit extraction method: salary, bonus and/or dividends. Here are my top points to further aid your cogitation:

• Consider the tax rates – dividends are taxed at lower rates than salary. For higher/additional rate tax payers, dividends are taxed at 32.5/42.5% compared to 40/50% on salary/bonus. The dividend rates are further reduced by a 10% tax credit to 22.5/32.5% respectively. National Insurance contributions (NIC) are also not payable on dividend income.  However, dividends are taken after taxable profits, whereas salary is a deduction for corporation tax purposes.
• Certainty and timing of payments – With corporation tax rates reducing, there will be increased profits after tax available for distribution. But your business must have sufficient profits after tax to pay dividends, which is riskier for the parties involved. Dividend payments are flexible, in terms of timing and amount, while a monthly salary is fixed, providing less flexibility for the business.
• Cashflow considerations – if your director/employee is paid a salary/bonus, your company is responsible for deducting and paying the tax at source to HM Revenue & Customs (HMRC). If dividends are paid, these are included within the recipient’s personal tax return which they’re required to submit to HMRC annually and tax payments on account need to be made throughout the year.
• Pension considerations - dividends are not treated as ‘earned’ income for pension purposes, so your directors will need to consider whether they have sufficient pension provisions before reducing salary and increasing dividend payments.

You can contact me at HCB Solicitors on 0844 556 8674 if you would like to discuss any of these, or indeed other tax issues.

Selling your business?

As a tax professional I come across a lot of clients who are looking to sell their business within a certain time frame, some the next 12 months, usually the next 3 to 5 years, and occasionally some with a view to a longer game.  However, regardless of their respective time frames almost everyone I speak to has failed to consider the same vital question.  What is it I hear you ask?

"How do I make sure I receive the sale proceeds from my business tax efficiently?"

I appreciate that most of you reading this will think that an odd question to ask, but let me put it into context.   Primarily we are talking about Inheritance Tax (IHT) here, the great leveler.  Whilst you are running your business (provided its a trading business of course) you don't really need to worry about paying IHT on it's value should you die.  This is because shares in a trading company, or the assets of a trading business receive a 100% relief from IHT.  So, as long as you continue to own those assets, and either the company, or you as a sole trader continue to trade, there is nothing to worry about.  Hopefully you've started to spot the rub here.  When you sell this "tax free" asset, what does it become?  The answer is of course...

"CASH!"

and as we all know, cash is very much taxable under the IHT regime.  So at a point around retirement (and hence closer to the date on which we will "shuffle off this mortal coil", to quote the Bard) we convert our single biggest asset from tax free to taxable!

In some cases clients will need the funds to provide them with an income in retirement, or may like the idea of having a large next egg behind them for life's unexpected events.  However, in my experience most business/company owners have already built those lifelines up through pensions, savings and other investments and are unlikely to make much of a dent in the monies they get from selling their business.  Of course this is good news for HM Revenue and Customs as they get 40% of whatever is left when you do pass away.

Of course, post sale you can go down the route of conventional tax planning, giving money away to the children, setting up trusts for the grandchildren and so forth.  You could even leave money to charity through your Will if you wished.  However, all of these measures take time, and in almost all cases rely on you surviving 7 years from implementing them, and in the case of trust giving are limited to £325,000 each (assuming you're married) in a 7 year period.  I don't want to discount these ideas, but there is a much quicker, easier way of saving IHT without these limitations and restrictions where the value involved comes from a business sale, all it takes is a little forward planning! It doesn't require the use of any outlandish or risky schemes, just a little forethought and consideration of your finances ahead of time.  I see clients put so much time and effort into getting their business ready for sale, but so little into getting ready for it on a personal level.

Obviously I don't want to give away all of my secrets here, but if this sounds like you and you'd like to discuss it further give me a call on 0844 556 8674 for a no obligation discussion about how I can help you to help yourself.

IHT and Tuna Fishing... (read on)

An unusual title for this post, but I'm hoping you'll understand the connection by the end of it! One of the lesser covered elements arising out of this years budget was the unheralded Inheritance Tax (IHT) anti-avoidance legislation that was brought in under the radar.  It has been some time since we have seen such wide ranging proposals hidden under the plethora of briefing notes released by the Treasury and HM Revenue & Customs, a move more reminiscent of the current chancellor's predecessors.

The particular measures that I am referring to relate to the offsetting of borrowing/debt against ones estate for the purposes of IHT.  It has long stood that if one has an outstanding debt upon death that this is deductible from your estate before arriving at the sum which is ultimately chargeable to IHT at the death rate of 40%.  The proposed changes turn this long standing pillar of IHT planning on its head, by disregarding certain borrowings.  If the rules are enacted as planned, the estate's outstanding loans will not be deductible in three particular situations. These are: 

• where money borrowed is either invested in assets for which IHT relief is given,
• invested in assets excluded from IHT, or
• where the loan is not repaid by the executors. 

The changes in the legislation are clearly designed to attack tax planning where home loans were taken for investment in third party assets qualifying for business and agricultural property reliefs, or arrangements such as Employee Benefit Trusts.

However, it is clear that is will potentially catch many more normal arrangements, such as someone borrowing funds against their main residence to invest in their business.  In theory they have borrowed funds against a taxable asset (their residence) and invested it into an asset benefiting from an IHT relief.  If this is indeed the case, and it is not cleared up by later guidance, then a lot of fledgling businesses will stand to be affected.

Another example is where an elderly testator receives a loan from a family member. Often such loans are written off on death, but under the new rules the executors will have to pay off the loan to make it allowable as a debt against the deceased’s estate.  Alternatively, where a trust was established under that testators death, and the assets (usually the house) are then loaned to his surviving spouse with an appropriate loan agreement in place.  In practice these loans are not repaid as the beneficiaries to the spouse's Will are usually the same as the trust and so the assets devolve to the same people, and the loan is subsequently cancelled out.

I think this will certainly make the IHT landscape interesting for a while yet in regard to Business Property and Agricultural Property Relief, and we will have to look at how the issue develops.  However, we could be looking at a situation where business owners are having to budget for unexpected IHT bills as a result of these moves, despite only having entered into the arrangements for purely commercial purposes.  Ultimately this sees the continuation of HMRC's "tuna-net" approach to tax avoidance, meaning that not only are the tuna caught, but everything else that swims in the tax ocean too!

Budget 2013 - a reward for hard work?

I know it's been a long time since my last blog entry, but what can I say as we've had little in the way of exciting tax news since Christmas!  However, that all changes today with George Osborne's latest budget which he has billed a s reward for hard work.  We've certainly seen some announcements that would seem to echo that, but others I'm not so sure...

• Increase in the personal allowance for income tax to £10,000 by April 2014, a year earlier than expected.  Making good on their promise has lifted millions of low earners out of tax altogether and provided a tax saving for those affected of around £700 since the beginning of this parliament.  However, none of this has been passed on to middle-England as it has always been accompanied by a lowering of the higher rate tax band.  Couple this with the loss of Child Benefit that any household with one person earning in excess of £50,000 per year, and those that work hard (and get paid accordingly) clearly aren't being rewarded, rather it looks like being penalised.

• The proposed cut in mainstream corporation tax is however a completely different story for businesses going forward, as if helps to remove the increase in tax as a business succeeds and becomes more profitable.  This coupled with the first £2,000 being taken off all employers National Insurance bills gives a real boost to small businesses too as they look to expand and take on staff.

• Pensions have taken a bit of a hammering though, with the Lifetime Allowance (LTA) being reduced from £1.5 million to £1.25 million, and the contribution limits from £50,000 to £40,000 per annum.  There is some good news in the form of fixed protection for those so affect though, and also the drawdown limits go up from 100 per cent to 120 per cent.

• Tax avoidance has come in for some special treatment over the last year, and this budget sees the introduction of the GAAR (or General Anti-Abuse Rule).  I must admit that having looked at the guidance my main concern is that it will initially at least be abused by HMRC in the same way that some promoters have abused avoidance strategies.  Until we see some cases come through to the tribunal it will be difficult to see how GAAR is going to work in practice.

I haven't covered everything that's been announced here, but these are just my initial thoughts following on from the budget and heading into this evenings seminar with HCB Solicitors where I'll be discussing these and other issues with Iain Wright from Claritas Tax.

VAT Man on the Rampage

HMRC have announced that from 9 January 2013 they are embarking on a new campaign to chase up businesses that have one or more VAT returns outstanding. Their announcement reminds businesses that failure to submit a VAT return is an offence and penalties could be levied on top of any additional VAT that might be due to HMRC.

However, somewhat unhelpfully, they have also stated that detailed information about how they plan to approach this campaign is not going to be released until the date the campaign is launched!

What to do?

The obvious answer is to get your outstanding VAT return(s) completed and submitted online as soon as possible and, preferably, before 9 January 2013 to avoid getting caught up in this campaign.

What if you cannot pay?

Get the VAT return completed and submitted anyway and, where possible, make whatever payment you can with the return.

You should also contact HMRC on 0845 302 1435 (Business Payment Support Service) or 0845 010 9000 (General Advice Line) to explain that the return has been submitted (with part payment where appropriate) and ask about the possibility of negotiating a Time To Pay (TTP) arrangement.

You will need to explain the circumstances why you are unable to make full payment and what steps you have taken to find funding to meet the debt. You will also be expected to make a proposal of the timescale over which you will meet the full liability taking into account that any TTP arrangement will only be entertained on the condition that future returns are submitted and paid in full by the due date.

HMRC’s agreement to a TTP arrangement is by no means guaranteed so you will need to be prepared to put forward a justifiable case for further deferral of payments.

Failure to submit a return or pay in full by the due date can result in a Default Surcharge ranging from 2% to 15% of the unpaid tax. However, worryingly in certain circumstances, HMRC might look to impose Civil Evasion Penalties.

Next steps

Until we are made aware of precisely how HMRC plan to approach this campaign, it is difficult to provide specific advice other than to get the returns into HMRC before they contact the client.

31 January Filing Deadline Looms

A stark warning in the New Year for business owners, the self-employed and those with pensions or investment income.  If they don’t get their tax affairs into shape and submitted online by the end of this month, they will face heavy penalties from HM Revenue & Customs.

The deadline for filing paper assessments passed on October 31 so filing tax returns online by January 31 is the only option.

Under the self-assessment system, people who file their returns online after the expiry date will face minimum fines of £100 even if no tax is due. And those who still fail to file could rack up the fines to as much as £1300.

The longer people delay the more they will have to pay brought on by late-filing penalties after three, six and twelve months, as well as a daily penalty of £10 for each day the return remains late and the tax unpaid.

The advice is quite simple, make sure your tax affairs are in order and file the information on the HMRC website  by January 31, and don't forget to pay the tax that's due too.

It worries me that more people each year are choosing to ignore the deadlines and are being hit by what are very severe penalties.  Looking the other way as the deadline approaches could prove to be a costly mistake. The complicated fines framework is rigidly enforced and I can’t stress enough it is crucial for taxpayers to straighten out their paperwork quickly and submit their tax returns online.

If this is something that you require assistance with, please contact Steven on 0844 556 8674.   

Chancellor’s Autumn Statement - Pensions!

As widely predicted, George Osborne had brought in even more restrictions around tax planning with pension contributions.

The changes, to be implemented in 2014/15, will mean a reduction from £50,000 to £40,000 gross on the annual contribution limit; a lifetime allowance brought down to £1.25m from £1.5m; the restoration of the previous rate of income drawdown and an increase in the IHT threshold of one per cent. And the higher rate of tax relief remains.

I suppose we should all breathe a collective sigh of relief, but it continues the theme of watering down the incentives for pensions planning of the previous government. At the least, the fall in limits is not as great as that heralded over the weekend.

Nevertheless, the tax focused incentives remain for pension contributions, for now, and so it is clear that one should consider maximising use of these while they are still available.

I cannot recall pension allowances being increased so I wouldn't bank on these cuts being reversed once the economy is in recovery.

In short, people need to maximise contributions while they can as soon as they can. The plan may be then to close down pension funding in subsequent years - depending on circumstances - and switch at that point to alternative ways of investing and funding an income in retirement.

All of this, however, does seem to run contrary to government policy of encouraging people to save for their retirement, which is a worrying contradiction.

October's a busy month for tax...

October isn't a month normally associated with big important dates as far as direct taxes are concerned, however this year looks like its going to be a little different.

 

Yes, there are the usual deadlines we see every October, the need to notify HM Revenue & Customs of new sources of income by the 5th October, and the filing of paper tax returns by the 31st October, but what else is there?

 

Well this month has seen the end of HM Revenue & Customs amnesty for those with unsubmitted tax returns in years prior to 2011.  After this Tuesday HMRC will use its legal powers to pursue those who have failed to submit self-assessment forms and have tax payments outstanding.  Letters have been sent to those who have gaps in their returns records, the amnesty was aimed primarily at higher-rate taxpayers.

 

So what else do we have, well we see the continued introduction of the new style of penalties for non-submission of tax returns, so that 31st October deadline will have some added significance this year.  Previously this only meant a £100 fine, but that has now escalated (with daily charges) to a possible maximum of £1,200!  Of course, if you can get online to submit your return you should still be able to avoid this if you file before the end of January.  This does not just apply to individuals, but to trustees as well.  Make sure you're not caught out...

Paying too much tax, or just don't think you should be?

Paying tax is something that none of enjoy doing (or at least I have yet to meet someone who does!), but in certain circumstances you could find yourself paying tax unecessarily, or where you are owed tax back from Her Majesty's Revenue & Customs you've drawn a blank on how to go about it.  Well, here are a few simple tips to help you along the way...

If you have paid tax that you shouldn't have done, perhaps having it deducted from bank interest even though you're a non-taxpayer, or perhaps you're retired, or the income arising belongs to a minor, you don't need to do a self-assessment tax return to reclaim it.  It is possible to fill and file a much simpler repayment claim, called a form R40, which can be found here http://bit.ly/QIn8QI along with full guidance on what to do.

To prevent yourself having to go through this process every year, if the tax issue you have does relate to bank interest (or similar) you can complete a form R85, which can be found here http://bit.ly/NAYUb4 again along with full guidance.  This will stop your bank from deducting the tax in the first place and allow them to pay your interest gross going forward.

If it seems that your having more tax taken out of your earnings or pension than seems right, its worth checking what tax code your employer/pension provider is using.  Firstly does it match up to the one HMRC have sent to you?  If so then check that the code issued by HMRC is correct.  Some guidance about tax codes can be found here http://bit.ly/egCDn.  If something seems amiss, make sure you notify HMRC straight away, and ensure that whoever is deducting tax from your earnings uses the right code going forward.  Provided this is done during the tax year in question then the matter should resolve itself without the need for further action.

Finally, a word of caution.  Possibly you've recently received a tax refund from HMRC, on this I would caution that you treat it warily.  In recent months HMRC have been doing a lot of work to correct the errors made in peoples tax codes (which can affect the amount of tax deducted from your salary, or pension if retired).  What they do not seem to have been doing is marrying that up the taxpayer's self-assessment record.  I have over the last 12 months had clients who have received a tax refund as a result of the tax returns I have completed for them, only to receive a very similar refund from HMRC later in the year.  Eventually HMRC will ask for this back as you've been refunded for the same thing twice, only they'll also ask for interest at a punitive rate.  So always check first before you run off and spend that refund cheque!

This is by no means an exhaustive list of the issues that can arise, but are some of the more common ones that I find clients experiencing.  If you need any assistance, please contact me at HCB Solicitors.

HMRC: A case of Jekyll and Hyde?

Her Majesty's Revenue & Customs (HMRC) have certainly been busy this month, announcing new amnesties and issuing penalties in an approach more akin to the tale of Jekyll and Hyde than the usual manner of the tax authorities.  Lets take a review of some of the last months edicts from HMRC.

 

New style penalties have been issued to around half a million tax payers in the last month for those who still haven't filed their 2010/11 tax returns.  New penalties were introduced in April 2011 to boost the incentive to file and reduce the costs to taxpayers of chasing up missing forms. As a result, anyone who ignores their Self Assessment filing obligations is now liable to higher penalties than in previous years.

 

The penalties issued this month will be for a minimum £1,200, comprising:

• the maximum £900 in daily penalties for non-filing
• a further late-filing penalty of £300 or 5 per cent of the tax due (whichever is higher).

People who receive a late-filing penalty can appeal against it if they think they have a reasonable excuse for not sending their tax return; for example, a family illness or bereavement.

 

On the flip side of HMRC's personality we see a tax amnesty for those having not filed their tax returns for 2009/10 and earlier years.  If HMRC have sent you a Self Assessment tax return or notice to complete a tax return for 2009-10 or earlier and you have not yet taken any action, HMRC are offering you a quick and straight forward way to bring your tax affairs up to date. There is also a dedicated telephone helpline to support you, which can be found here http://www.hmrc.gov.uk/campaigns/tri.htm .

 

So, we see HMRC really hitting hard those who have still not filed their tax returns for 2010/11 (which should have been filed by 31 January 2012), but seemingly letting off the hook those that have reneged in earlier years.  An odd approach to take, and you may call me a cynic, but it does make sense from HMRC's point of view.  The 2010/11 defaulters are easier to identify and the potential penalties are far greater, whereas the older late filing issues have very minimal penalties attached to them.  So, what we are seeing here with HMRC is a combination of a very commercial attitude towards risk and return (something that has been evident in the corporate world of tax for some time) seeping into the domain of personal tax, whilst offering a carrot to those that offer a lower reward to chase down.

 

N.B. Should any of the above affect you, I'd be more than happy to offer advice and assistance.