Filed under: tax planning
Now that the top income tax rate is definitely being cut to 45% and we know this will take effect on 6 April 2013, clients may be wondering if they can avoid paying the 50% rate altogether. For some taxpayers, the 50% tax rate coupled with the withdrawal of the personal allowance for higher earners has meant they have been taxed at an effective rate of 62%. This happens where total income falls into the £101,000 to £113,000 band where the erosion of the personal allowance has the biggest impact.
For many it is possible to delay receiving income until the 45% rate takes effect – this really depends on how much flexibility you have over how you receive your income. What we are suggesting as tax advisers is to weigh up the viability of temporarily reducing your income for the current tax year, until the 50% rate is removed.
Tax planning like this obviously needs to factor in two things: can you afford to be flexible and potentially survive on less money this year to cut your tax rate for longer-term gain? And do you have the ability to influence the ways you can take your income?
Assuming the answers to those questions are yes, here are some tactics you can consider. We would always suggest you discuss the ramifications with one of us beforehand, but this list will give you some useful food for thought.
#1 Incorporate your business
A very good way to shelter excess income from higher rate tax is through a limited company. A limited company provides flexibility which is not available to sole traders or partnerships, therefore clients who are sole traders or members of partnerships or limited liability partnerships (LLPs) should consider incorporating all or part of their business.
Running your business as a limited company (by incorporating) offers many tax planning opportunities. This is primarily because of the additional flexibility offered over the way your income can be taken, for example as salary, benefits or dividends.
#2 Use and manage your director’s loan account
For those running their business through a limited company, routing dividends through their director’s loan account can be useful for spreading income. A director’s loan account requires careful monitoring because if it goes overdrawn for any reason, there are adverse tax consequences both for the director and the company. Overdrafts such as these can be minimised (or even avoided) if loan accounts are monitored and reviewed on a regular basis and any necessary action required to minimise tax is taken.
The status of a director’s loan account should always be reviewed both at the company’s year end and at the tax year end, in line with directors’ income levels so that any necessary adjustments can be made, and to provide maximum opportunity to reduce tax liabilities. Whilst it is possible to do this after the company’s year-end, or when the accounts are being prepared, there is less scope to reduce the tax liabilities arising because planning options are significantly reduced. It is worth discussing this with us sooner rather than later to see what steps might be taken.
#3 Income equalisation
How might you be able to reduce your income but maintain your existing standard of living as much as possible? If you are an owner director with a non-working spouse, one option to consider is income equalisation. Can this be done through salary or dividends? This will depend on the facts of the case, but should certainly be considered.
#4 Consider tax efficient investments
Another possible tax planning option, for those with excess income, is to consider a tax efficient investment option in an approved small enterprise. Provided you have a well-diversified investment portfolio and understand the risks, Venture Capital Trusts (VCTs) or investments through the Enterprise Investment Scheme (EIS) or the new Seed Enterprise Investment Scheme (SEIS) may be suitable and will help to reduce your income tax liability for the year.
Especially of interest for business owners thinking about their next venture, it is possible to invest in your own start up company through SEIS with your own funds as an owner director. This is a very attractive opportunity and the main qualifying condition is that the venture must be a completely new entity to qualify. We have covered SEIS in detail this month, read our other article for more information about this scheme.
#5 Consider longer term investments
Interest arising on funds invested becomes taxable when the income is credited to the account. Often investments will be made for a fixed term, with the interest accruing once the fund reaches maturity. If this maturity date arrives before 6 April 2013, the interest will be taxable at 50% for those with total income over £150,000; if the fund matures after that date, the tax rate will be 45%
#6 Maximise tax relief on pension contributions
There are issues with pensions currently due to interest rates being so low, but in spite of this, they remain a very tax efficient investment. You might want to consider reducing your taxable income levels by increasing pension contributions and making use of the maximum tax-free allowance. This can have a double benefit because in addition to reducing your personal tax rate, limited companies can obtain corporation tax relief on pension contributions of up to £50,000 a year for each director. There may also be an opportunity to bring forward unused contributions from previous years, but this needs to be analysed carefully as the legislation surrounding this area is complex.
If you would like to discuss these ideas in more detail, please email Lesley Stalker at las@rjp.co.uk.
April 30, 2012
According to Government figures, R&D tax credits provide nearly £1 billion of support to over 6000 UK companies. Over the past year, RJP has helped many clients to reduce their corporation tax bills – some to almost nothing – by taking advantage of the Government’s R&D tax credits scheme. This is a generous relief and allows over 200% of the money invested in qualifying R&D activities to be offset against corporation tax. (more…)
April 27, 2012
As announced in the 2012 Finance Bill, there have been a number of important changes to VAT rules, which it is important clients are aware of.
1. VAT and Academy schools
We have recently come across a number of academies who have applied for VAT registration without taking proper advice in relation to the implications and without weighing up the pros and cons of what VAT registration means for them. It is actually possible for schools with academy status to reclaim VAT incurred on non-business activities without the need for VAT registration and all the complications that come with it.
(more…)
February 24, 2012
George Osborne has pretty much confirmed that the 50% tax rate will be here for the foreseeable future. With the deadline for self-assessment tax payments looming, now is the time most additional rate tax payers will feel the pain and start to wonder whether they might have been able to reduce their tax burden with some careful tax planning. Hindsight is a truly wonderful thing, but straight after the January 31st filing deadline is one of the best times to formally review your personal and business tax affairs. Virtually all of the changes for the 2012-2013 financial year have now been confirmed and the sooner you put measures in place to limit your tax liability, the better. (more…)
January 29, 2012
Tax planning is an important issue to bear in mind when SMEs are considering their business strategy to ensure that the business operates in the most tax efficient way. This is why getting to grips with upcoming changes following the release at the beginning of December of draft legislation for Finance Bill 2012, is of the utmost importance. Taxtalk explains what has changed and what business owners should be aware of when making claims for capital allowances. (more…)
January 23, 2012
There are just 7 days to go before the 31st January self-assessment tax returns deadline and Taxtalk’s Paul Webb outlines some very useful advice for those still needing to get organised. With trading conditions so tough at the moment for many small business owners, many people have had no option but to leave their Self-Assessment tax returns to the last minute and need to complete them in a rush.
Personal tax returns might be something of an administrative burden, but with HMRC out in force to collect as much revenue as possible, it is important to make sure yours is accurate and filed on time. Apart from resulting in an immediate £100 penalty (which will apply even if no tax is payable) and possible daily penalties of £10 per day, it’s never a good idea to fall under the tax officer’s spotlight. It could result in being targeted for an enquiry should HMRC’s officers start to wonder whether your business record keeping is being maintained diligently and whether there might be a tax shortfall to detect.
Taxtalk’s top tips for completing Self-Assessment tax returns (more…)
January 23, 2012
In our recent experience working with a selection of different clients, Research and Development (R&D) tax credits are proving very valuable as a source of tax relief. Over the past few years, R&D tax credits seem to have earned a reputation for being difficult to qualify for, with a misconception that it is essential for your line of business to include white coats and laboratories.
Our experience as Surrey accountants is to the contrary though and a wide range of IT and technology companies are reaping the rewards. Applications for projects that are new and innovative, which cut operational time, help to achieve a competitive advantage, or even involve translating software into another language, are being approved successfully. In some cases the savings are mounting into hundreds of thousands. (more…)
December 20, 2011
It’s almost Christmas and the end of another busy year. It’s one many of us will be glad has passed, with business conditions continuing to be difficult due to a lack of available finance and uncertainty over the Euro and Europe affecting demand.
So what have we got to look forward to in 2012 by way of tax breaks and opportunities. Here are our picks of what was announced in the November Autumn Statement. As is becoming customary with this government, the draft legislation has already been issued, which means the changes will go ahead as suggested. (more…)
December 15, 2011
With tax return season looming, there have been some important changes to the penalty system created in the Finance Act 2009 which have just come into force and which those keen to minimise tax with tax planning should take note of.
(more…)
November 27, 2011
Exit strategy, succession planning, call it what you will; deciding what to do, and when, with your business to provide a secure future – possibly a retirement or the basis of a second career, is an issue all business owners face. And whether you are considering it because you feel the time is right to move on or step back now, or whether you’re planning ahead; as with all important business decisions forewarned is forearmed.
Whilst, a decade ago, business purchasers were aplenty and the banks had no problem providing the funds required to sustain a hungry M&A market, the recession means that things are now rather different. It is therefore useful to consider a variety options you might not have thought about before; for instance, how much deferred consideration you can afford to take, or whether a ‘partial exit’ may be an attractive alternative.
Indefinitely deferred consideration?
When selling in the good old days, many companies achieved a high goodwill value based on historic profits, and although in an ideal world most sellers preferred the total sale price to be paid in cash on completion, they regularly accepted a slightly lower payment initially and could also look forward to future lump sums paid at intervals in the form of deferred consideration.
Now, typically, the initial payment received on the sale of a company is far less, mainly because the borrowings available to the buyer are less, with a higher balance of the sale proceeds being payable in the future based on the future profits of the company (over which the seller typically has little, if any control). And of course, whilst the level of future profits, and hence the return on those profits is a concern, in the current economic climate, you also need to be sure your buyer is going to be around to actually make the payments. This is a very real issue today as future profits may be vulnerable if, for example, a major client goes out of business or indeed the buyer himself runs into financial difficulties.
If these issues are holding you back from a trade sale, then you might want to consider other alternatives that will give you the outcome you need without unnecessary risk and stress. These outcomes however require forward planning.
Partial exit might offer a win-win?
A partial business exit can be very attractive. It can bring new blood into the organisation whilst allowing you to take a back seat, explore other interests and ideally, enjoy some of the wealth you have generated. It can enable you to take part cash consideration and continue to enjoy a (reduced) level of income from the business – perhaps for helping out on a part time basis, helping with marketing or a smooth customer transition.
The key thing to bear in mind if you choose to take this route is the importance of ensuring continuity within the company both in terms of reassuring the current employees that your commitment is as high as ever and also by making sure that the team you bring in, whether through an MBO or entirely new blood, is up to the job and the process is managed as carefully and diligently as possible. It might also be an idea to retain a reasonable shareholding at the outset in order to reassure colleagues that you are not immediately diluting your own power too much.
Partial exit can give you the liquidity you need and offer a more flexible way to fund your lifestyle.
In order to decide on the best balance, you will need to consider the following:
1. How much time do you want to commit to the business after the sale? Work this out early so everyone involved knows what to expect – including you.
2. Your retirement is apt to go on a bit as we’re all living longer, so do the maths and make sure you’ll have sufficient income for your needs and those of your dependents.
If you are considering an external investor to finance a partial exit, one risk is the possibility that the dynamics of the business may change too abruptly. This can occur for instance if that investor is to be involved with actively running the company and for example, wants to exit in the medium term, having seen a return on his investment. Find a partner who shares your core values and has a good cultural fit with the business and who can take it to the next level while you enjoy some time to rest and relax.
Tax planning opportunities
Depending on how your company is structured and the nature of what is being sold, HMRC will either view the sale proceeds as personal income or capital gains, or a mixture of both, with the latter being taxed at a lower rate. Get tax planning advice and ensure you consider all aspects for you and your team, including entrepreneurs’ relief, gift relief, EIS relief and business property relief.
Grooming your team
If you go down the MBO route, an experienced and balanced team is critical, not just to the funding of the deal but to secure the future success of the business (and of course your future income!). No matter what role you intend to have after the sale, you must analyse the quality and balance of the team. Its skill-set should cover all key aspects of the business including sales, finance, marketing and IT. By ensuring that you groom the right team for the job well in advance and pass the business on to a robust and experienced line up, you are managing part of the risk associated with giving up control and putting your company in the best possible position for future success, hopefully enabling you to enjoy your retirement, or semi retirement without cause for concern.
So whether you sell up completely or partially to existing employees, agree a merger with a competitor or get an outside investor interested, it always pays to be aware of the options available well in advance.
Lesley Stalker is head of tax at RJP, contact her at las@rjp.co.uk
This blog has also been published by Real Business
October 26, 2011
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