Forms P11D can be a good example of this and are a topic we cover every year because they are the single biggest cause of PAYE enquiries for business owners.

Clients who have experienced an enquiry by HMRC know only too well what a difficult and stressful experience it can be – preferably one to be avoided. The problem with forms P11D, which is likely to be the reason why they are the source of so many tax enquiries, is that they are particularly time consuming to complete, since they involve the collating of receipts and paperwork, and analysing these into the correct declarations.

What are forms P11D?

They are returns required to be submitted to HMRC which detail all the expenses and benefits in kind provided by the company in the previous tax year to directors and employees, irrespective of whether they are taxable. Returns must be made by 6 July 2012 of benefits provided in the year ended 5 April 2012. This is a strict deadline after which time penalties apply. As a result of information disclosed on the P11D by the company, depending on the level of benefits received and whether a claim can be made that they were ‘wholly, necessarily and exclusively’ incurred for business purposes, the individual may be required to pay additional tax on their self- assessment tax return and the company as employer will be liable for additional national insurance contributions on the benefits provided.

Smartphone exemption from P11D

There is some good news, given that 1 in 4 mobiles now in use is a Smartphone; last year HMRC decided that devices like iPhones and Blackberrys are now classed as business tools just like laptops, and so are not subjected to tax as a benefit in kind even where used for private calls and e-mails, provided the contract is between the provider and the employer directly (not the employee). Most companies actually did not make a distinction anyway between a Smartphone and an ordinary mobile, which has been tax exempt for some time. But if you did, it is possible to reclaim any extra tax paid back as far as 2007, provided your application is received by the end of July.

Mistakes to watch out for on the P11D

Having to complete such a detailed form makes P11Ds open to errors and it is therefore well worth getting the administrative work completed by your accountant. If you do decide on a DIY approach to completing P11Ds this year, these are some of the most common mistakes:

-       Not ticking the director box when the applicant is an employee and director;

-       Forgetting to complete all the relevant sections of the form;

-       Leaving the cash equivalent box empty;

-       Not including the full gross value of a benefit with mixed business and private use, a car for instance;

-       Failing to specify fuel payments as a benefit.

Dispensation: how to avoid completing such detailed forms P11D

To save time, many businesses opt for a dispensation from HMRC, which means you no longer need to include itemised reimbursed expenses. To obtain a dispensation you will need to show that reimbursed expenses are incurred purely for business purposes, and are not therefore taxable; that all expenses claims are independently authorised within your organisation; and that receipts for expenditure are provided. A dispensation can save a substantial amount of analysis work and is well worth obtaining for future years if you don’t have one already.

For help or advice on completing P11Ds please contact Lesley Stalker by emailing las@rjp.co.uk.

www.rjp.co.uk

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.

Tax relief under SEIS started to become available on 6th April this year, although we are currently awaiting Royal Assent, and is expected to be available until at least April 2017. SEIS offers a more tax efficient way to invest in new ventures and, for the business owner, a useful way of obtaining finance for a new venture, up to a maximum level of £150,000.

How SEIS works

SEIS allows anyone who invests up to £100,000 in a tax year in a qualifying company to benefit from 50% income tax relief on the amount they have invested and, depending on their circumstances, to also benefit from full CGT relief. The income tax relief can either be backdated to a previous year or be given for the year the investment is made.
For investors, this represents another way to get 50% tax relief alongside pension contributions.

Qualifying criteria for SEIS

The rules, as relevant for different stakeholders involved in SEIS are as follows:

• The company must be a start up business (incorporated within 2 years of the date on which the shares are issued);
• It must be a UK company, not controlled by another company;
• It must not employ more than 25 workers;
• It must have assets of less than £200,000;
• It must trade in an approved sector;
• Certain industries and types of business are not permitted to raise finance through SEIS, including property development, farming or market gardening and those involved in the leasing industry;
• The total amount of SEIS investments made into the company must not exceed £150,000;
• Investors can invest £100,000 in a single tax year rising to a maximum of £150,000 over two or more tax years into a single company;
• Investors cannot own more than 30% of the company receiving their capital;
• The shares must be held by the investor for 3 years after they are issued;
• In the 2012/13 tax year, investors can roll any gain in the tax year into an SEIS with full capital gains tax exemption;
• Neither the investor nor his associates (e.g. business partners, parents, children) can be an employee of the company at any time from incorporation to 3 years after the shares are issued;
• All of the money raised by the investment must be spent by the company for business purposes within 3 years after the shares are issued;

Our verdict on SEIS

This is a more tax efficient scheme than EIS as 50% income tax relief is achieved; together with full CGT roll-over (i.e. there is no clawback of the gain rolled over when the SEIS shares are sold). However the amounts that can be raised by companies and contributed by individuals are severely restricted, making this scheme applicable for small start up businesses only. For those businesses however, it can help attract very valuable funding for growth in the early years. And although there are quite a few rules to navigate, this is a very useful scheme, which benefits investors and business owners alike.

For more information on investment related tax planning please contact Lesley Stalker by emailing las@rjp.co.uk.

In the 2012 Budget, the Chancellor reaffirmed his commitment to creating the right conditions to make the UK one of the best places globally to conduct business. Illustrating this, some important enhancements to the R&D tax credits scheme were announced, which make this even more attractive as a form of tax planning. In addition to the improvements confirmed in the Budget and the 2012 Finance Bill, the Government also intends to change the way tax relief awarded to companies via the R&D tax relief scheme is accounted for.

Above The Line Tax Credits – Rewarding hard work

The consultation document relating to this was published in late March 2012 and the change is referred to as the ‘Above The Line’ R&D Tax Credits. It is designed to make the impact of successful R&D tax relief claims more obvious to those actually doing the work, because instead of the benefit appearing in the annual accounts, it will be attributed as a reduction to the actual cost centre. So, a team of researchers will immediately see the benefit of their work and can be acknowledged within their organisations accordingly, instead of the benefit being lost in tax accounting fine print.

There are other changes. If a company does not pay corporation tax because it is loss making, it will be eligible for an ATL Credit as a payout under the new rules, which is a further benefit for larger organisations. Any credit payments would be made net of tax, with the tax withheld being carried forward for use against future corporation tax liabilities, possibly discounted over a number of years.

The introduction of an Above The Line R&D Tax Credit should be viewed as a positive development for companies of all sizes. In reality it is intended to incentivise larger organisations, where research teams will be more removed from the financial and business operations, than smaller firms where organisational communication tends to be more immediate and fluid.

Claiming R&D Tax relief – what has changed?

The main enhancements to be aware of are as follows:

1. Increase to the maximum relief allowance – from 200% to 225%

Starting from this month, the amount of tax relief available on R&D tax credit claims will increase to 225% from the previous 200%. This means that for every £10,000 a company or qualifying organisation spends on allowable research and development, they can receive further corporation tax relief of £12,500. This is in addition to the £10,000 of costs already written off as expenses before tax. If the company is loss making and the additional corporation tax relief is not attractive, it is possible as an alternative to claim a payable credit under the R&D Tax Credits scheme, by repayment of PAYE paid – this is in addition to the new Above The Line Tax Credits initiative being consulted on at the moment.

2. Removal of the cap to credit payable

In the past, there was a cap limiting the amount of the R&D cash credit payable in relation to the total amount of the company’s PAYE/NIC liability for a previous accounting period. This has now been removed for accounting periods ending on or after 1^st April 2012 and it means that smaller companies could have greater access to increased cash refunds even if their salary and wage costs are relatively low, as a result of re-investing money back into the business.

3. Minimum spend of £10,000 abolished

This is particularly relevant for micro businesses because it removes the requirement to spend a minimum level on qualifying R&D activities before being eligible to claim R&D tax relief.

4. Claims can include R&D carried out by contract workers

In the past there have been strict rules governing the use of contract labour – consultants, IT contractors and freelancers operating as limited companies – the eligibility criteria for these have been difficult to navigate. Now, from April 2012, all the restrictions requiring research to have been conducted by employees have been removed. It’s a bonus for SMEs because it means they can recoup a broader range of R&D costs and also allows them to have access to highly skilled workers in a flexible way. Linked to the previous point, it also means start up and micro companies are more likely to be able to pursue a claim because their initial costs are more easily managed.

UK Patent Box Scheme – what is it?

Loosely connected to the R&D tax credits scheme, the Government has also launched a UK Patent Box Scheme, which is due to come into effect in 2013.

Under this initiative, companies who own patented products or processes (excluding trademarks or copyrights) will pay a 10% tax rate on worldwide profits attributable to those patents instead of paying whatever corporate tax rate is then in force.

This regime will be phased in from 1 April 2013 and is designed to attract innovative companies into the UK. The 10% tax rate applies to worldwide profits attributable to the patented invention. Qualifying profits include profits arising from licensing, disposals of patent rights and the sales of products which include patented inventions.

It is relevant to take a long term perspective when planning research and development activities and consider in advance whether you might benefit from the Patent Box initiative. For instance, would it be worthwhile pursuing a patent for types of technology that historically you may not have chosen to patent? Or, if you have operations overseas, would it be beneficial to centralise patent ownership in the UK and pay a flat 10% tax rate on global profits? These are questions worth asking one of RJP’s tax experts.

Zero risk with our no win no fee approach – take action to claim R&D tax relief

If you think there is even a small chance the R&D tax relief may apply to your company or idea for a start up, investigate the possibility further. RJP has a lot of experience in this area of tax planning and will take on claims based upon a no win; no fee basis.

To find out more about claiming for R&D tax relief or the UK Patent Box initiative, please email Lesley Stalker at las@rjp.co.uk.

The key changes announced are as follows:

Currently, only £120,000 worth of EMI options can be held by any single individual. This will be increased to £250,000 in the future, although the Chancellor did not yet confirm when. It was also confirmed that additional guidance from the Government, aimed at giving enhanced support to start ups, is to be provided in the near future.

It is also likely that the following changes will be announced in the 2013 Finance Bill. Firstly and very significantly for many of our clients, there will be an improved position for share owners in relation to qualification for entrepreneur’s relief (ER). This is an important form of capital gains tax relief for business owners, since it offers the potential to pay just 10% tax when business assets are sold, provided certain qualifying criteria are met. Contrast this to the usual main rate of 28% and it highlights how valuable these enhancements will be for EMI scheme operators and members.

Under normal circumstances, to qualify for ER requires that shares have been owned for at least 12 months prior to a disposal and that the individual involved owns a minimum 5% holding. Although the exact details have not yet been announced, it is expected that although the 12 month ownership ruling will remain, for shareholders within an EMI scheme, it will not be necessary to have a 5% holding to qualify for the 10% tax rate upon disposal of the business. This is welcome news for EMI scheme members and a powerful additional staff motivator because under the old rules, most employees with EMI options would not hold a large enough stake in the company to be able to benefit from this tax relief.

Another positive development affects entrepreneurs with academic links. In the future, university initiated research initiatives spun out as a business will also qualify for ER. This change will be useful as in most instances, company directors in this position would not be eligible for the 10% rate because they would not satisfy the full time working criteria.

It is also likely that other announcements to improve access to other tax efficient share ownership schemes will also be included in this year’s Finance Bill, although we do not have further detail at this stage.

All in all, now could be an excellent time to consider an EMI scheme if you do not already operate one. It has always been highly tax efficient and is set to become even more so in the near future. Added to this, whilst you may not be able to offer your most valuable staff members pay rises at the moment, shares in a growing business are a powerful motivator and a very good way to retain their loyalty in the long term.

For more information on setting up an EMI share scheme, contact Lesley Stalker by emailing las@rjp.co.uk

Lesley Stalker gave her views on the matter to Businesszone’s editor Dan Martin. You can read the full article here.

HMRC has said that they will carry out any planned visits but will postpone any new SME business record checks (BRC) until a new approach has been developed which concentrates on higher risk businesses. New visits will not resume until HMRC announces the detail of a ‘revamped’ approach, which is expected some time after April 2012.

So far, over 2,000 businesses have had their records checked by HMRC since the pilot scheme first began in April 2011. Of those, 28% of businesses were considered to have “some issues” with their bookkeeping, while an additional 11% had issues “serious enough to warrant a follow-up visit”.

Whilst the immediate pressure may have eased slightly over the threat of being visited for a business records check, HMRC’s focus on identifying sources of additional revenue continues unabated.

Contractual Disclosure Facility

Last month, they announced the introduction of tougher procedures for civil fraud investigations and a new Contractual Disclosure Facility. Under the rules of the new facility, HMRC will contact taxpayers, in writing, to inform them that they are suspected of serious tax fraud, and offer them a chance to make a formal disclosure within 60 days. The benefit of making an upfront disclosure is that it is the only way you can admit to a tax fraud without HMRC criminally investigating you. A further benefit is that long as you abide by the terms of the facility this will ensure that any penalties payable are at the lower end of the scale.

Those who choose not to make a voluntary disclosure could face a full investigation by HMRC and in some cases, this will result in a criminal investigation and prosecution. This would also be the case for any taxpayers who sign the contract, but then do not subsequently admit and disclose fraud.

Taxpayers who are not under investigation, but who want to admit to tax fraud, may fill out a form to voluntarily request that HMRC consider their suitability for a CDF contractual arrangement. HMRC still retains the right to decide which cases are dealt with civilly, and which are investigated with a view to criminal prosecution.

What else is new in the world of tax initiatives?

A new campaign is due to be launched by HMRC during the coming year aimed at people who fail to make tax returns and who are liable to pay tax at the highest rates of tax. Added to this will be two further campaigns, targeting trades people working in the home improvement market – roofers, joiners, decorators etc – and people who receive income from buying and selling goods direct to others – sellers on eBay for instance, or who are paid commission. HMRC has confirmed they will be using new technology to search for internet based evidence on potential target cases. Specifically they will be looking to identify people who fail to complete tax returns and who are liable to pay tax at the highest rates. In each case, there will be an opportunity to make a full voluntary disclosure prior to further action being taken.

So far more than £500m has been raised by HMRC from voluntary disclosures and a further £105m from follow-up activity. According to experts, the recent initiative aimed at plumbers raised over £4m in unpaid taxes and saw 10 people arrested.

If you think you might have under-declared your income and owe tax to HMRC we recommend you discuss your circumstances with our specialist, Anne Eager, who can be contacted on ae@rjp.co.uk.

Pensions

Although the government has announced that automatic enrolment legislation for pensions will start as planned for employers with more than 250 employees, smaller companies are being given more time. Organisations with between 50 and 249 employees are getting an extra year, and will need to start auto-enrolling employees between 1 April 2014 and 1 April 2015. Companies with under 50 employees will not have to auto enrol their staff for pensions until April 2017.

Our advice to clients affected by this is to start re-thinking your remuneration packages as soon as possible, to slowly build in the impact of this change rather than have to face the financial implications in one hit.

Employment tribunals

From the start of February, new maximum compensation award levels were introduced.  The maximum total payout is now £72,300 and the cap on a week’s pay for calculating redundancy payments and basic awards will increase to £430.

Other Employment Tribunal changes coming into force will include an increase in the maximum deposit order from £500 to £1,000 and a doubling to £20,000 of the maximum costs that a Tribunal can award.

Parental Leave

Starting from 8^th March the new Parental Leave Directive is being implemented. It means an increase by one month in the maximum leave allowed to no more than 4 months.

Unfair Dismissal

The period in which an employee can pursue a claim for unfair dismissal will increase from one to two years.

To discuss any of these issues, please contact Simon Paterson by emailing sp@rjp.co.uk

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.

For the vast majority of academies, claiming VAT without VAT registration will be the most efficient and simplest way to reclaim any VAT. However, if you are already VAT registered, all is not lost and nor is it if you have already submitted a VAT Return – you can simply change to the much simpler method of reclaiming the VAT suffered.

In the majority of cases, our VAT experts can get you onto the correct and most efficient method and put in place a system to ensure you do not fall foul of the VAT Registration rules going forward. The charge for this service is  £450 (plus VAT of course), which we believe is money well spent if you compare this to the time, worry and drain on resources if you continue to claim VAT back via an unnecessary and complicated VAT registration process. Contact us for a free no obligation discussion.

2. On-line Filing of VAT returns

From 1 April 2012, all VAT-registered businesses must submit VAT returns online and pay any VAT due electronically. This applies for all VAT returns filed for accounting periods beginning on or after 1^st April 2012.

This might seem like an administrative headache but there are actually benefits to filing online. These include:

-       automatic acknowledgement that your return has been received;

-       a check to ensure the calculations are correct; and

-       e-mail reminders when your next return is due.

3. VAT is now payable on salary sacrifice arrangements

VAT changes to salary sacrifice schemes became effective from 1^st January 2012, and these could increase the overall cost of the scheme. Note that apart from the VAT changes, HMRC have confirmed they do not intend to make further changes to the tax treatment of salary sacrifice schemes.

The rule change means employers must account for VAT on deductions for supplies that are subject to VAT. There is an upside to this for employers because they will be able to recover the VAT incurred, which in the past was not possible in all cases. Childcare vouchers are not affected because they are VAT exempt anyway.

In cases where salary sacrifice arrangements were either agreed before 27^th July 2011 or where they extend beyond 31^st December 2011, organisations will still be able to avoid accounting for VAT on amounts of salary exchanged for taxable benefits. This rule will apply until either the agreement expires or is fulfilled, an employee’s annual salary/benefits review is conducted, or any other situation occurs which affects benefits provided by way of a salary sacrifice.

If you have any VAT related questions or would like further advice on any of the above matters please contact Paul Webb by emailing pw@rjp.co.uk.

With effect from 1^st March, if the company concerned has distributable funds in excess of £25,000 all funds distributed will be treated as dividends and subjected to income tax in the usual way. This means tax will be payable at rates from 25% to 36% depending on the individual circumstances, rather than potentially at a rate of 10% if distributed as capital.

The news of this change inevitably created something of a rush as companies tried to benefit from a last minute tax planning opportunity. Whilst it is now too late to make a new application for this facility and benefit from the old rules, there are still options to consider going forward. We therefore thought it useful to explain what the rules are on the informal closure of a limited company, where this is undertaken under HMRC extra statutory concession 16 (ESC C16), and provide you with some advice on what to do in the future should the need to dissolve a company arise.

Usually when a company is dissolved any remaining assets, once all monies have been collected and all debts paid,  are distributed to shareholders and a professional liquidator – an insolvency practitioner – will be responsible for presiding over the process.  Because of the costs involved, which can amount to between 6 and 8 thousand pounds, many business owners have historically preferred to take advantage of ESC C16 which permits the informal closure of a company instead. Once confirmation is received from HMRC that ESC C16 can apply, and once certain undertakings are provided by the shareholders, any money remaining in the company can be distributed to shareholders in proportion to their shareholdings and can be treated as capital distributions in exchange for their shares. Hence the proceeds will be treated as capital, subject to capital gains tax rather than income tax, and with the potential to claim entrepreneurs’ relief.

Following the conversion of ESC C16 into legislation with effect from 1^st March, and the curbing of the level of funds which can be distributed in this way, the situation will be slightly different.  If a company has distributable reserves of £25,000 or less, it may proceed as previously with a capital distribution following agreement from HMRC. However if the funds exceed this amount, the entire distribution will be subjected to income tax.

If funds exceed £25,000, they can still be extracted as capital if the company enters into a formal liquidation. There are of course liquidator’s fees involved in this route, and if the funds are significant, they may warrant paying these fees.  In such cases, there will be no issue relating to any remaining funds being treated as capital and the existing rules can be applied as appropriate, regardless of how much is left in the company. The tax payable in this case by the individual shareholders may be as low as 10% if the capital gains qualify for entrepreneurs’ relief.

If however the funds are not significant enough to warrant the payment of liquidator’s fees, a better alternative may be for the company to pay a dividend, reducing the available funds to £25,000 and then pursue an informal winding up. Care needs to be taken with this approach to ensure the dividend does not fall foul of HMRC’s anti avoidance measures. For instance the dividend paid needs to be regarded as a proper dividend, which is declared according to the correct procedures. The level of the dividend also needs to be covered by the company’s available reserves. For these reasons, it is wise to seek professional advice to ensure all aspects have been considered and addressed.  HMRC has indicated that in instances where it believes a company has not followed correct procedure with a pre-liquidation dividend, the full level of income tax will be payable.

If you are in this situation and may need to discuss the best way to wind up a company containing funds, please contact Lesley Stalker or Paul Webb by emailing las@rjp.co.uk or pw@rjp.co.uk.