Incentivise your key players

So, you've built up a successful business, which has grown and therefore necessitated bringing others on board to help you run it. Or perhaps you're nearing retirement, or simply wanting to slow down and let your management team take up the strain, whilst you take time to enjoy the fruits of many years hard work.

Of course, the problem here is how do you ensure that those key people, the one's you'll rely on to keep you business ticking, don't jump ship, or simply decide they could go and run their own business? Well, you could always give them a pay rise, or a bonus, but we all know that is only a short term incentive. How can you truly tie these 'employees' into your business? The answer is simple, give them ownership!

"Whoa, surely you don't mean give away my business?" I hear you cry. Well, you kind of have to, but not all of it, infact only a small part of it, and if you're careful about how you do it you will lose zero control and even only 'pay out' if the business is ever sold. No, I'm not talking about financial wizardry, or being less than honest with your people, I'm talking about share options, or more specifically the Enterprise Management Incentive (EMI) share options.

A share option gives someone the right to buy your company’s shares in the future, but at a price that is fixed now. This means in effect that you are giving away none of the business you have built to date, rather what you are giving away is an option to benefit from future growth. So, if your team do more than sail the same course, and they actually grow your business, then everyone wins!

Options are very useful for business owners that wish to incentivise and retain key employees because as I have already pointed out, if the value of the shares escalates over time those employees could make a significant capital sum when they sell their shares. An EMI share option scheme provides significant tax advantages to those employees (and you as their employer). 

Quite simply, an EMI scheme is by far the most tax beneficial structure for staff, it was introduced in 2000 to assist growing companies in attracting and retaining key employees and to reward those employees for taking the risk to work for such companies.

The principal tax benefit of an EMI share option scheme is that employees do not have to pay the income tax that would normally be charged on the market value of any shares or options granted to them. If you grant shares to an employee in other ways tax would be due on their value. It's also worthy of note that because of the advance agreement available on share values granted under EMI schemes, it is usual to agree discounts of up to 80% of the actual value, which further mitigates taxes.

If employees are given options under an approved EMI scheme, they are only charged capital gains tax at 10% on the increase in value over the option exercise price (what they pay for the shares), so long as that price is at or above the market valuation of the shares on the date of granting the options. This value is agreed in advance with HMRC as part of the process prior to entering into any agreement with the employee.

"All of this is well and good" I hear you say. Yes, it is very good news for your employees (or at least those key ones you want to incentivise).

"So what's in it for me?" you ask. The answer is simple, a team that now has an incentive to run your business well, after all they now have some ownership (albeit a small percentage) and their performance directly relates to their ultimate reward, which might be a business sale, or even a full management buy out. By giving them control of their own financial destiny, your own is assured as you step back from the day to day of running your business. Sounds nice doesn't it...

Brexit: The Aftermath

Last Thursday as a nation we voted and on Friday, depending on your personal inclination, we either celebrated or despaired as a nation divided. Yes, the vote was close, 52% vs 48%, and we saw record turnouts for the referendum, certainly higher than any I can remember in recent history for the UK electorate, which should be taken as a positive if it can be turned into greater participation in our national politics.

Anyway, as you should have guessed by now this is a blog about tax (with other musings occasionally I admit), so how has our decision to leave the EU affected tax? The short answer, as of yet is that it  hasn't, and Mr Osborne's speech this morning would seem to give us a reprieve until at least autumn time when we will have a new Prime Minister and leader of the Conservative party.

So, what can we expect?

The Chancellor was quoted pre-referendum as saying we would see £15bn of tax rises, comprising a 2p rise in the basic rate of income tax to 22%, a 3p rise in the higher rate to 43% plus a 5% rise in the inheritance tax rate to 45p. There would also be an increase in alcohol and petrol duties by 5%. He also mooted that there would be spending cuts worth £15bn, including a 2% reduction for health, defence and education, equivalent to £2.5bn, £1.2bn, £1.15bn a year respectively, along with larger cuts of 5% from policing, transport and local government budgets. Yet this morning he seemed more conciliatory, stating the strength of UK Ltd and our ability to weather the storm and emerge stronger. Was this simply scaremongering to maintain the status quo? Only time will tell...

What should be of more concern are the tax impacts of leaving the EU, rather than those likely to be imposed by our Chancellor.

As a result of Brexit the UK would no longer be part of EU’s Customs Union. This raises the prospect that the EU’s customs duties could apply to imports from the UK, making it less attractive for EU companies and consumers to source goods from UK companies. The UK of course could do the reverse, and as the UK is a net importer from the EU such a move is unlikely by either party.

After a Brexit, sales of goods to and from the UK may no longer be able to use the EU’s acquisition and dispatch system (accounted for on VAT returns). Instead they would become imports and exports which would need to clear customs and incur import charges.

These are but two of the potential impacts, but the consequences of departing from fiscal union with the EU may not be as apocalyptic as we have been led to believe, however, expect a bumpy ride on the train out of Brussels...

Brexit: A Perfect Storm?

Like most of you, I'm sure, I seem to be having a lot of conversations about Europe, the EU and Brexit, indeed I've just read a blog by our National Managing Partner on the subject. Being the political cynic that I am, I just can't help but wonder if we've collectively taken our eye off the ball as far as some of the wider economic issues are concerned, and the upcoming referendum seems to be doing little to improve the level of certainty in the UK, and wider economy.


Ignoring Brexit for a moment lets look at some of the economic indicators in the UK:

• We still have record low interest rates in the UK, combined with continued low inflation (0.3% in March);
• Today it has been announced that unemployment figures have risen over the last quarter to 1.7 million;
• Increases in earnings have begun to slow over the same period down to 1.8% from 2.1% in the previous quarter; and
• UK  property prices are around the same levels now as they were before the start of the global economic crisis (some commentators believe they have already begun to fall);

Of course, these are not all of the issues, just some of the headline ones and whilst none of this is catastrophic, it is clearly not a picture of health from an economic viewpoint. The vista is not much better if we look further afield than the UK either I'm afraid.

Our financial markets are performing much better, for now, but one wonders how long that can continue. I was listening to a leading investment manager over lunch yesterday, reflecting on how we are currently enjoying one of the longest bull markets in recent history, and that many analysts believe the markets are close to the top of that now with pessimism starting to creep in. An interesting fact I will share with you, of our FTSE 100 companies, 70-80% of their earnings come from outside the UK. So they are not a particularly good indicator of the wider UK economy anyway.

At this point I really must remove the cowl and put down the scythe, as I will be talking us into another recession, but I do think it is important to consider the impact of the upcoming referendum in light of our current economic climate. The one thing that economies and markets really do not like is uncertainty, and in the absence of any real plans being put forward by our politicians I am afraid that is what will result from a vote to leave, uncertainty...

#Budget2016

Well, that was certainly an interesting speech from our current Chancellor Mr Osborne. It very much read as more of the same and holding the current course. However there were some big bonuses for small businesses, as well as some unexpected nasties hiding in the details...

It will be interesting to see how the budget is received in the wider media, a lot of social media comment (a useful social barometer) has so far been on the negative side.


Here are some of the highlights:

• Corporation Tax Cut: it was 20% at the start of the parliament. By 2020 it will fall to 17%. "Britain is blazing a trail, let the rest of the world catch up," the Chancellor says.
• Business Rates Cut: a permanent increase to the threshold for business rates from £6,000 to £15,000 will benefit many small businesses. The higher rate will rise from £18,000 to £51,000. Over 600,000 small businesses will pay no business rates from next year.
• Insurance Premium Tax: only rising by 0.5% rather than the 3.0% that was mooted earlier in the day.
• Capital Gains Tax: current rates will be cut from 28% and 18% to 20% and 10% respectively, although it looks like the old rates may still apply to gains on property (so no bonus for beleaguered property investors). Entrepreneurs relief has also been left alone (for now), although relief on associated disposals has been extended.
• Income Tax: the personal allowance will rise to £11,500 and the higher rate band goes up to £45,000 too.
• National Insurance: Class 2 contributions are to be abolished.

There were however some not so welcome low points of the speech:

• Tax Avoidance Crackdown: The Chancellor announces a series of actions to tackle tax avoidance and evasion totaling £12bn, including moves to end the use of "personal service companies" by public sector employees to minimise their tax liabilities.
• Loans to Participators: the tax charged on loans to directors and shareholders of businesses will see the punitive tax charged from 25% to 32.5%.

Full details of the budget proposals can be found here:

https://www.gov.uk/government/collections/budget-2016-tax-related-documents 

Dividend Tax: HMRC's smash and grab...

As I'm sure you're aware the much heralded dividend tax comes into force with effect from 6 April 2016.  It will apply to all dividends received in excess of £5,000 per tax year (regardless of whether from listed investments or your own company). All of this means that an average company director taking a modest salary within his personal allowance, and the rest of his income from the company as dividends, will pay more tax in 2016/17 than he did in 2015/16.

This additional tax would be payable, under self-assessment by 31 January 2018, as the balancing payment for that tax year. However, it would seem that HMRC does not want to wait for the extra tax in the Treasury's coffers, and it's solution to improve the nation's cashflow has been to amend the tax codes of many company owner/directors to effectively collect "at source" an estimated amount based on the previous year's returned figures.

The deduction in a client's PAYE code is to be labelled as ‘dividend tax’, and the notes on the P2 (PAYE coding notice) will say: "this is to collect the basic rate of tax due on your dividend income".

The net result of this is that a lot of company owner/directors will suddenly start to see tax being deducted from their salaries (which are typically below the tax free personal allowance). Unfortunately, this is just another underhand smash  and grab by HMRC and the Treasury on the pocket of private business!

You can contact HMRC by telephoning them on 0300 200 3300 or complete an online coding notice query here. Alternatively, although not as quick as the two previous methods, you can write to HMRC at:

Pay As You Earn and Self Assessment

HM Revenue and Customs

BX9 1AS

Claiming Marriage Allowance

Source: HM Revenue & Customs

Marriage Allowance opened to the public in September this year, allowing eligible couples to save up to £212 in the tax they pay each year. An application can be submitted within your Self Assessment tax return or made online.

Marriage Allowance lets you transfer £1,060 of your Personal Allowance to your husband, wife or civil partner. Your Personal Allowance is the income you don’t have to pay tax on - for most people it’s £10,600. Adding £1,060 to your partner’s Personal Allowance means they’ll pay £212 less tax in the tax year (6 April to 5 April the next year). You can get Marriage Allowance if both:

• your partner’s income is between £10,601 and £42,385
• you and your partner were born on or after 6 April 1935

By claiming Marriage Allowance:

• your partner’s Personal Allowance increases to £11,660 - they’ll pay £212 less tax
• your Personal Allowance goes down to £9,540 - you won’t pay any tax if your income’s less than this

You can apply for Marriage Allowance online. If your application is successful, changes to your Personal Allowances will be backdated to the start of the tax year (6 April).

If your circumstances change, then you may need to cancel your Marriage Allowance, for example if your partner dies, or you get divorced. More details of this can be found here

.

Osborne Attack on Property Investors

Announced in yesterday's Autumn Statement, the chancellor continues his attack on property investors. Not only will tax relief on interest payments now be greatly curtailed, but from 1 April 2016 higher rates of SDLT will be charged on purchases of additional residential properties (above £40,000), such as buy to let properties and second homes.

The higher rates will be 3 percentage points above the current SDLT rates. These higher rates will not apply to purchases of caravans, mobile homes or houseboats, or to corporates or funds making significant investments in residential property given the role of this investment in supporting the government’s housing agenda.

The government will consult on the policy detail, including on whether an exemption for corporates and funds owning more than 15 residential properties is appropriate. This would seem to imply that smaller corporates, such as family investment companies may be affected by the proposed changes.

Also, from April 2019, a payment on account of any CGT due on the disposal of residential property will be required to be made within 30 days of the completion of the disposal. This will not affect gains on properties which are not liable for CGT due to Private Residence Relief. The government will publish draft legislation for consultation in 2016.

One has to ask if this is genuine tax policy, or merely using tax as the tool with which to discourage small individual property investors in order to open up the property market for first time buyers. If that is the case, then Mr Osborne has far more to do as the current crisis is far more complex than simple supply and demand...

Let me tell you a little about the history of tax, and tax avoidance...

Many people wonder why tax is used by government, and how it influences the masses (that’s us). Well, rather than launching into a semi-political, tax based rant I thought I’d share with you some of the more unusual taxes in British history and a little of the effects that they had on society. Some even demonstrate the very earliest attempts at that most dreaded of past times “Tax Avoidance”...

1. King Henry I allowed knights to opt out of their duties fight in wars by paying a tax called “scutage”. At first the tax wasn't high, but then King John came to power and raised it to a rate of 300%. Some claim that the excessive tax rate was one of the things that contributed to the creation of the Magna Carta, which limited the king’s power.
2. Oliver Cromwell placed a tax on Royalists, who were his political opponents, taking one tenth of their property. He then used that money to fund his activities that were aimed against the Royalists.
3. Playing cards were taxed as early as the 16th century, but in 1710, the English government dramatically raised taxes on playing cards and dice. This led to widespread forgeries of playing cards to avoid paying taxes. The tax was not removed until 1960.
4. In 1660, England placed a tax on fireplaces. The tax led to people covering their fireplaces with bricks to conceal them and avoid paying the tax. It was repealed in 1689.
5. In 1696, England implemented a window tax, taxing houses based on the number of windows they had. That led to many houses having very few windows in order to avoid paying the tax. Eventually this became a health problem and ultimately led to the tax’s repeal in 1851.
6. In the 1700’s, England placed a tax on bricks. Builders soon realized that they could use bigger bricks (and thus fewer bricks) to pay less tax. Soon after, the government caught on and placed a larger tax on bigger bricks. Brick taxes were finally repealed in 1850. Also a tax was imposed on printed wallpaper. Builders avoided the tax by hanging plain wallpaper and then painting patterns on the walls.
7. England introduced a tax on hats in 1784. To avoid the tax, hat-makers stopped calling their creations "hats", leading to a tax on any headgear by 1804. The tax was repealed in 1811.
8. In 1789, England introduced a tax on candles. People were forbidden from making their own candles unless they obtained a license and then paid taxes on the candles they produced. The tax was repealed in 1831, leading to a more widespread popularity of candles.
9. In 1795, England put a tax on the aromatic powders that men and women put on their wigs. This led to a dramatic decline in the popularity of wigs.
10. Salt was a very popular thing to tax because consuming it is necessary to humans. The British placed a tax on salt, and the salt tax gained worldwide attention when Ghandi staged nonviolent protests against it. I wonder if Jamie Oliver’s “Sugar Tax” would garner the same reaction.

As you can see, taxation has been a tool used by government to either control the actions of its populace, or benefit from the popularity of a particular product or activity. Similarly, there have always been those prepared to take the best advantage of the situation to reduce their exposure to tax. Really, very little has changed in attitudes to tax over the last 900 years…

Inheritance Tax: The Family Home Allowance

The Government has made it clear that the special inheritance tax concession for family homes should not be available to people who have no children, this against a backdrop of significant protests.

The "Family Home Allowance" was introduced in the summer budget earlier this year and comes into effect from 6 April 2017. It is intended to provide a mechanism whereby a married couple's joint £650,000 inheritance tax exemption can be extended up to £1m (although the extra allowance  is applicable only to the family home). The proposed changes provide that each spouse will have a separate £175,000 allowance each, being £350,000 combined, on top of their individual £325,000 nil rate bands. Be warned though, the £175,000 is not immediate from April 2017, it's being phased in between then and 2021 and will start at only £100,000 each. It's also worthy of note that this starts to be clawed back where the property in question exceeds £2m in value!

Now for the next sting in the tail as it will only apply where the family home is bequeathed to children and grandchildren (stepchildren and adopted children are included too). Therefore, a couple with no children effectively face up to a £140,000 bill (40% death tax applied to £350,000) above and beyond that which couples with children would pay.

It is interesting to note the use of the word “bequeath” in David Gauke’s comments too, as it may well imply that where one passes away without leaving a Will that specifically leaves the family home to a direct descendant the new allowance could also be refused. Therefore the possibility of dying intestate (without a Will) could adversely affect one’s inheritance tax liability

Dividends, an update...

Following on from my earlier blog on the changes to the taxation of dividends there has been a further update on how those changes are going to apply to all dividend income. HM Treasury confirmed in August via a HM Revenue & Customs factsheet that the £5,000 dividend allowance is actually a zero rate tax band just for dividend income and that it will still form part of the £31,785 basic rate band for income tax purposes, rather than in addition to it as some of us had hoped. HMRC state:

"The Dividend Allowance will not reduce your total income for tax purposes. However, it will mean that you don’t have any tax to pay on the first £5,000 of dividend income you receive. Dividends within your allowance will still count towards your basic or higher rate bands, and may therefore affect the rate of tax that you pay on dividends you receive in excess of the £5,000 allowance."

At present owners of small companies could pay themselves up to £42,385 a year without suffering any income tax (taking into account their personal allowance of £10,500 in 2015/16 as well as the dividend allowance), whereas assuming that the basic rate band and personal allowance remained the same in 2016/17 then the increase in tax would be just over £2,000 as a direct comparison, this is without seeing an increase in their income!

For those extracting in excess of the basic rate band the picture worsens, as currently for every £1,000 extracted as dividend only £250 would have to be paid over to HMRC. From next April with the abolition of the dividend tax credit this will rise to £325. So, for a business owner extracting £100,000 a year from their business the changes to the taxation of dividends will cost a little over £6,300 more in tax than it does currently.

Obviously these are two extremes of looking at how owners of small to medium family companies choose to remunerate themselves, but it is apparent to see that the overall increase in this bracket amounts to a flat 7.5 pence in the pound for any dividends over and above the combined personal and dividend allowances. It is quite easy to see how according to the Government’s estimates, the new dividend tax regime is expected to raise £2.54bn during 2016/17, with smaller, but still significant income flowing to the Treasury in subsequent years!