Tag: small business
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
Continuing with our detailed analysis of the tax planning opportunities that arose following the Budget 2012, we turn our attention to tax efficient investment opportunities. We already have VCTs and EIS, both of which we have covered in detail before. These were further enhanced in the Budget with a new scheme, SEIS (Seed Enterprise Investment Scheme), which is specifically aimed at start up companies.
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.
April 30, 2012
There are a lot of changes afoot this year for business owners with the government planning plenty of new policies for employers. Taking a short break from tax issues, we outline some of those most likely to impact our clients.
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. (more…)
February 27, 2012
In last month’s Livewire newsletter, we reported a change to the ruling that shareholders informally winding up their companies can distribute any remaining funds as capital and depending on the circumstances, can also benefit from entrepreneurs’ relief.
With effect from 1st 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.
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February 23, 2012
It’s very rare that our blogs are in any way trumpet blowing, but this is something we are all really pleased about and, we think, well worth a mention on Taxtalk.
As one of the Surrey area’s leading local accountants and business software specialists, Robert James Partnership has been selected as a Platinum Partner for the Sage 50 suite by business software and services provider Sage UK.
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February 15, 2012
Before we give the lowdown on the Chancellor’s autumn statement, it’s worth mentioning that pithy overviews of pre-Budget announcements such as this are easier to do when there are some upbeat headlines as well as the inevitable sharp intakes of breath and economic tightening of belts, says Paul Webb, tax partner at Surrey accountant RJP. Not so here. In his speech, Osborne said he would do ‘whatever it takes’ to protect Britain from the ‘debt storm’ in Europe. (more…)
November 30, 2011
Whatever your circumstances it’s imperative to know what you should do if you have a tax shortfall to declare. The good news is that HMRC has several initiatives up and running aimed at helping you out; the bad news is that it is more determined than ever to crack down not just on tax evasion but on poor record keeping as well. (more…)
November 18, 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
HMRC recently announced that since their pilot exercise was so successful they are going to extend their Business Records Checks programme. It was inevitable it would be deemed successful, ‘Record checks’ are effectively a euphemism for ‘getting fast access to accounts to check for tax shortfalls’.
The pilot programme involved visits to SMEs to ensure that their business records were adequate. Around 44 per cent of businesses visited had ‘issues’ with record-keeping, while around 12 per cent of those visited had seriously inadequate records. (more…)
October 14, 2011
With the IMF suggesting the possibility that the UK has slipped back into recession thanks to the continuing uncertainty in the Euro zone, obtaining business finance will remain difficult for the foreseeable future. Instability requires careful risk management and it’s important for entrepreneurs to make savings wherever possible. If you are considering additional funding or actively trying to raise money, it’s worth understanding what the most tax efficient ways to raise funds for your business are. (more…)
September 29, 2011
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