Capital Allowances are a right, not a privilege!
Capital allowances are a means of saving tax when your business buys a capital asset. If you own commercial property, are about to sell commercial property, or are about to buy commercial property, you could be claiming tax relief in accordance with Capital Allowances legislation.
What are Capital Allowances?
Capital Allowances are the tax allowances available to a business when capital expenditure is incurred on assets in the course of trade or property investment. They are a way of obtaining relief on some types of capital expenditure, this is because they are treated as a business expense so reduce your taxable profit.
Does all capital expenditure qualify?
No, not all capital expenditure qualifies as the expenditure must be on a particular type of asset on which the tax relief can be claimed.
What is included in Capital Allowances?
- business vehicles, e.g. cars, vans or lorries
How we can help
If you already own or are acquiring commercial property, we can assist to ensure that valuable tax relief is not lost, helping you to understand both the buyer’s and the seller’s position and steps necessary to avoid losing out.
The UK tax system has a variety of specifications and guidelines that should be followed strictly as deviation can result in serious penalties. Reliefs and allowances are also offered as they encourage spending and investment; these should also be followed just as strictly as they can also result in penalties.
To ensure you avoid penalties we have generated a tax planning guide with tips to help you save on your personal taxes:
As long as you’re eligible, you can open an Individual Savings Account (ISA) to help save on income tax. ISA’s are tax free and you can receive a 25% bonus on your savings. ISA’s are particularly useful if you are a first time buyer, there is a help to buy ISA. The maximum investment into all ISAs is £20,000 per adult per year.
Distribution between family
Sharing income or gains around the family can reduce the marginal tax rates for the highest earners, and make use of the allowances available to those on lower incomes. To be most effective, the lowest earner must own the investment or bank account which produces the gain. If you have a family business, ensuring each family member is either employed by or has a share within the business can assist with income sharing and therefore tax savings.
Marriage has a whole host of benefits, including a variety tax benefits. Married couples or civil partners can generally transfer assets between them without charges. A spouse with a high income can transfer assets into joint names to save on tax.
Where both spouses or civil partners pay tax at no more than 20%, and one of them doesn’t use all their personal allowance, that person can transfer £1,150 of their personal allowance to their partner. This saves tax of £230 in 2017/18. This marriage allowance can also be claimed for 2015/16 and 2016/17.
If your household is claiming child benefit and the highest earner in the house has an income of £60,000 or more, the benefit will be clawed back as a tax charge. To avoid this you can either opt out of receiving child benefit or arrange income sources so neither parent earns over £50,000.
As long as you are eligible, it is important that you claim child benefit, even if you opt out of receiving the payment for a period. This is because the benefit claim provides national insurance credits for the non-earning parent, and in-turn helps towards building state pension entitlement.
Earning small of amounts of extra income can be tax free as long as they fit within the guidelines that follow:
- £7,500 from letting a room in your own residential home
- £1,000 from letting a property which doesn’t qualify for rent-a-room relief
- £1,000 from providing services, hiring assets or selling goods
You may be offered non-cash benefits by your employer, those that are NI and tax free are worth taking up. Take a look at our employee benefits blog post to see which benefits are tax free.
Arrangements such as salary sacrifice can be taxed as if they are salary, so we would always suggest gaining advice before going ahead with such an agreement as they can be very complex.
Employee pension schemes
Pension’s are probably one of the most tax-efficient savings methods. Your employer will receive tax relief on the full amount paid into a pension scheme as long as the contributions are reasonable for the work you do. The money contributed from both yourself and your employer will be built up inside a fund, tax-free.
The only time you will start to pay tax on a pension is if you go over the annual pension allowance, which is usually £40,000.
You should always take qualified independent financial advice before making a significant investment into a pension fund, or other savings scheme, and beware of pension scammers. John, our financial adviser would be happy to help with any pension advice John.Winstanley@ascendis.co.uk
For any further information or advice, get in touch with your client manager or call us on 0845 054 8560.
The UK Government are continuing to encourage more businesses to claim their Research & Development tax relief (against Corporation Tax) – they are planning to spend an additional £2bn per annum on it by 2021!
Most eligible companies are currently not claiming for the relief that they are entitled to, in most cases because they don’t think they qualify.
Apparently only 0.5% of those eligible have claimed the relief.
If you work within manufacturing companies, technology companies, companies with enhanced IT. Have a think if your business has improved processes, techniques or technologies – if so then you might be losing out on this government incentive.
Does your company do any of the following:
- Develop new software
- Implement product automation
- Launch new projects
- Develop new materials
- Create new recipes
- Improve processes
- Develop new products or improve existing ones
There is nothing to lose by checking if you have a claim – there is only a fee for the claim services if tax relief is obtained.
Please contact either Richard Fleming, Jason Kings or Andy Wilson to discuss your situation, call us on 0161 359 4227/0845 054 8560
Owning a property portfolio can create a challenge for even the most experienced investor. As of 2015, the Government’s amendments to property taxes has left most Property Investors with the question of how to make their investments financially viable.
Changes to the availability of mortgage interest relief are due to start affecting rental profits from 2017/18, along with changes to the long-standing concept of the Wear and Tear Allowance. Other barriers to entry to the property marketplace include the increasing SDLT costs for buy to let and second homes over £40,000.
In many cases, property is commonly held personally either by the individual or as part of a partnership. These portfolios are often built up over a number of years, going through the property lifecycle and morphing into a property business. Holding a property in this manner allows freedom of choice in respect of the type of property, i.e. it can be either residential or commercial, whilst also offering the investor flexibility with the asset, access to income and capital, and all within a reasonably straightforward legal and compliance environment. The question these businesses now face is what to do next?
A common theme amongst property investors is around the concept of incorporating their property business, that is taking the investors’ property business and incorporating into a UK limited company. This is suitable for those who run an active property business and want to create an Income Tax (“IT”) and Capital Gains Tax (“CGT”) efficient environment.
Whilst the advantages and disadvantages of various ownership structures are often discussed, for many property investors who wish to consider a change of ownership structure, the CGT consequences of property incorporation can be prohibitive without the ability to claim Incorporation Relief under the Taxation of Chargeable Gains Act (TCGA) 1992
Incorporation Relief allows the investor to defer their charge to CGT by rolling over the chargeable gain arising on transfer of the property to the company against the base cost of the new company shares. Therefore, the gain will become subject to CGT when the shares in the new company are sold.
Incorporation Relief is automatic and no election is required by the taxpayer.
There are three conditions to be satisfied before Incorporation Relief is given:
- The business transferred must be a “going concern”;
- All assets (except cash) must be transferred to the company to obtain the relief;
- The consideration paid to the partner/individual by the company must be wholly or partly in shares.
While the partner/individual, when determining the availability of this relief, can manage Conditions 2 and 3, the concept of “business” in condition 1 is critical. Below, the concept of “business” for the purposes of Incorporation Relief is considered and the practical steps a Property Businesses can take to ensure they qualify for this valuable relief are identified.
Transfer of a ‘Business’ as a going concern
Business is not defined for the purposes of TCGA 1992, so HMRC agree that the word must be given its normal meaning. Whilst the term ‘Business’ includes a `trade’, the two words are not synonymous.
The question arises whether the individual/partnership conducts a business for the purposes of Incorporation Relief, or whether it would be considered a passive investment. This is a question of fact and in the absence of clear definitions in legislation or from HMRC, each case must be judged on its own merits.
Six criteria for determining whether an activity is a business was set out in the case of Customs and Excise Commissioners v Lord Fisher  (“the Fisher case”) heard in the High Court in 1981:
- Whether the activity is a ‘serious undertaking earnestly pursued’;
- Whether the activity is an ‘occupation or function actively pursued with a reasonable or recognisable continuity’;
- Whether the activity has ‘a certain measure of substance as measured by the quarterly or annual value of taxable supplies made’;
- Whether the activity was ‘conducted in a regular manner and on sound and recognised business principles’;
- Whether the activity is ‘predominantly concerned with the making of taxable supplies to consumers for a consideration’; and
- Whether the taxable supplies are ‘of a kind which…are commonly made by those who seek to profit by them’.
In the absence of a definition of a “Business” for the purposes of claiming Incorporation Relief, determining a client’s entitlement to the relief is a subjective exercise. As the burden of proof lies on the taxpayer, it is imperative that the partner/individual maintains their records to ensure that any enquiry into the claim can be meet with a robust and convincing response.
All evidence should point towards the property business being a serious undertaking earnestly pursued, and not a passive holding of investments.
As the property environment continues to come under further scrutiny and taxpayers, owning residential property, look at ways of improving their tax position, advisors should have a selective and robust procedure for analysing a scenario. This will ensure that the business is a qualifying business for the purposes of Incorporation Relief, to avoid challenges in the future.
If there is anything in this article that you would like to discuss further, please contact Richard Fleming or Andy Wilson
When it comes to renting a room in your property you have two options on how to deal with this income:
- You can treat the income as taxable rental income and from this you can deduct an apportionment of allowable property costs to determine your taxable rental profit
- You can use rent a room relief
Rent a room relief is available to individuals renting out a room (or part of their home) in their own private residence.
There are a number of conditions attached to the relief with it being key that the accommodation is furnished and is part of the individuals main or only home for the tax year the relief relates to.
The relief cannot be claimed when the property is let to a business (so you can’t rent your room to your limited company and claim the allowance).
As long as the rental income is below the rent a room scheme threshold for the tax year then the income is automatically tax free.
However, no costs are allowed to be offset against your rental income if you use this scheme.
Also bear in mind that your rental income will include any money you receive from your lodger for meals and services such as cleaning.
In 2015/16 the rent a room relief limit was £4,250 per household but for the 2016/17 tax year (since 6th April 2016) the allowance has increased to £7,500 per household.
If you share the rental income with someone else such as a partner or spouse then the allowance is shared between you, so for the 2016/17 tax year it would be £3,750 each if applied on an 50/50 basis.
As long as your rental income is below the threshold then the scheme applies automatically and you won’t need to report anything on your tax return.
However, if you earn more than the rent a room allowance you have two options on your tax return:
- (A) You can opt in to the rent a room relief allowance and pay tax on any rental income above it
- (B) You can record your rental income and allowable costs on the property section of your tax return in the traditional manner
Where your rental income is above the rent a room allowance, HMRC will automatically assume option (B) unless you choose to use rent a room relief by ticking this option on your tax return.
You can change which method you use from tax year to tax year, which can be handy if your circumstances change.
Sometimes it can be beneficial to not use the rent a room scheme and instead report the rental income and costs on the property pages of your tax return.
For example, if you have a portfolio of rental properties and with apportioned costs the rental of a room in your home generates a loss, you could instead offset that loss against other property income, which would be more tax efficient than using rent a room relief.
Alongside auto-enrolment, is the lifetime ISA the new pension for the under 40s?
From April 2017, any adult under 40 will be able to open a new Lifetime ISA from which they will also be able to withdraw amounts they have contributed.
Up to £4,000 can be saved each year. The government will pay in a 25% bonus on these contributions at the end of the tax year (i.e. up to £1,000 each tax year).
Savers will be able to make Lifetime ISA contributions and receive a bonus from the age of 18 up to the age of 50. No additional contributions will be allowed after the age of 50.
Tax free funds, including the government bonus, can be used to buy a first home worth up to £450,000 at any time from 12 months after opening the account. The funds, including the government bonus, can be withdrawn from the Lifetime ISA from age 60 for any other purpose.
Lifetime ISA managers will claim the bonus due on the accounts they manage from HMRC. Where the individual is purchasing a home they will be able to receive their bonus in-year based on the contributions they have made in that tax year. They will not have to wait until the end of the tax year to receive their bonus.
Individuals will be able to transfer savings from other ISAs as one way of funding their Lifetime ISA. In line with existing rules, transfers from previous years’ ISA contributions do not affect that year’s £20,000 overall ISA limit.
During the 2017-18 tax year only, those who have a Help to Buy ISA will be able to transfer those funds into a Lifetime ISA and receive the government bonus of 25% on those savings. Any Help to Buy ISA funds that were saved prior to the introduction of the Lifetime ISA on 6 April 2017 will not count towards the Lifetime ISA annual contribution limit.
Contributions made after this point to the Help to Buy ISA and transferred to the Lifetime ISA will count against the annual contribution limit of £4,000. At the end of the tax year they will receive a bonus on the full amount of the transferred Help to Buy ISA and their Lifetime ISA contributions.
Withdrawal to purchase first home
First time home buyers will be able to withdraw up to 100% of their Lifetime ISA balance, including the government bonus (which will have been added to the account at the end of each tax year and up to the date of purchase in that tax year).
Their withdrawal can only be put towards a first home located in the UK with a purchase price of up to £450,000.
The Lifetime ISA must have been opened at least 12 months before the withdrawal that is to include the government bonus for the first home purchase.
If more than one person is buying their first house together they can each use a Lifetime ISA and each benefit from their government bonus.
The withdrawal must be for a deposit on a property for the first time buyer to live in as their only residence and not buy-to-let.
The account holder will inform their ISA manager of the house purchase, who will claim any additional bonus due up to that point from HMRC and the funds will then be paid direct to the conveyance. If a purchase does not complete after a withdrawal has been made then the funds will be returned to the same ISA manager by the conveyancer and will not count against the annual contribution limit.
The Help to Buy ISA will be open for new savers until 30 November 2019, and open to new contributions until 2029. Savers will be able to save into both a Help to Buy ISA and a Lifetime ISA, but will only be able to use the government bonus from one of their accounts to buy their first home.
The following options will be available:
- use their Help to Buy ISA with the government bonus to purchase their first home and save with their Lifetime ISA to make withdrawals after age 60 with the government bonus
- use their Lifetime ISA with the government bonus to purchase their first home and withdraw the funds held in their Help to Buy ISA to put towards this purchase but without the government bonus
- use their Help to Buy ISA including the government bonus to purchase their first home and withdraw from their Lifetime ISA to put towards the purchase. Although the government bonuses on the Lifetime ISA savings would be returned to HMRC and the individual would be required to pay a charge as set out below.
Withdrawals after 60 years of age
Full or partial withdrawals including the bonuses can be made from age 60 and used for any purpose and will be free of tax. Funds may remain invested and any interest and investment growth will be tax-free.
Withdrawals in other circumstances when bonus can be retained
Tax free withdrawals including the bonuses will also be allowed where people are diagnosed with terminal ill health regardless of the individual’s age. The definition of terminal ill health will be based on that used for pensions.
Withdrawals in other circumstances when bonus will be returned to the government
Savers will be able to make withdrawals at any time for other purposes, but with the government bonus element of the fund (including any interest or growth on that bonus) returned to the government, and a 5% charge applied. The individual saver will still have access to those savings and any interest or growth earned on those savings minus the 5% charge.
Balance held on account when the individual dies
Upon the death of the account holder, the funds will form part of the estate for inheritance tax purposes. Their spouse or civil partner can also inherit their ISA tax advantages and will be able to invest as much into their own ISA as their spouse used to have, on top of their usual allowance.
Points for the government to explore in the future
- The government wants it to be easy for individuals to save additional funds on top of those receiving a bonus and will explore the best way to achieve that. For example if individuals want to save more than £4,000 per year or keep contributing after the age of 50.
- The government will explore whether savers should be able to access contributions and the government bonus for other specific life events.
- The government will explore whether there should be the flexibility to borrow funds from the Lifetime ISA without incurring a charge if the borrowed funds are fully repaid. For example some set percentage of the savings could be borrowed subject to some maximum value.
The total amount which can be saved each year into all ISAs will increase from £15,240 to £20,000 from April 2017. Therefore if someone saves £4,000 in a Lifetime ISA in 2017/18 that person will also be able to save up to £16,000 in other ISAs in that year.
From 6 April 2015 to 5 April 2016 the annual amount which can be paid into an ISA has been £15,240. This can be in a cash ISA, a stocks and shares ISA or any mix of both types of ISA. Withdrawn funds cannot be replaced by paying more into an ISA unless still within the £15,240 annual allowance. For example, if during the year to 5 April 2016 £14,000 was paid into an ISA then £5,000 was withdrawn only a further £1,240 would be able to be paid into the ISA (i.e. £15,240 less £14,000).
From 6 April 2016 savers will effectively be able to re-invest withdrawals into ISAs if within the same tax year. For example, if during the year to 5 April 2017 £14,000 was paid into an ISA then £5,000 was withdrawn a further £6,240 would be able to be paid into the ISA (i.e. £15,240 less (£14,000 less £5,000)). Each tax year will be considered in isolation so for the following year to 5 April 2017 withdrawals and contributions in the previous tax year will be ignored.
Not all providers may be able to offer this additional flexibility, even though they are allowed to under the new regulations.
Help to Buy ISAs
These were introduced from 1 December 2015 and are available to first-time residential property buyers. Such savers, when saving for a deposit, receive a £50 contribution from the government for every £200 the individual contributes subject to a maximum government contribution of £3,000. Savers can pay up to £200 per calendar month into a help to buy ISA except for the first month the account is opened when an extra £1,000 can be paid in making £1,200 in total for that month. These are only available to first time home buyers, so are not available to people who already own a property or have done so in the past.
The government bonus is only paid when the property is purchased so will not be paid if the money is used for another purpose. It is not limited to newly built homes although the property should cost no more than £250,000 or £450,000 if buying in London.
If purchasing a property with other first time buyers, each first time buyer is entitled to this account and the government bonus. So if two first time buyers are purchasing a home together, each would be entitled to a bonus of up to £3,000 making £6,000 in total.
Innovative finance ISAs
These are being introduced from 6 April 2016 and will have effect for qualifying peer to peer loans made on and after 6 April 2016. This account will be available to investors aged 18 and over. Along with loan repayments, interest and gains from peer to peer loans will be eligible to be held within this type of ISA, without being subject to tax.
Peer to peer lending platforms with full regulatory permissions from the Financial Conduct Authority (FCA) will be eligible to offer the Innovative Finance ISA in accordance with the ISA Regulations. Like other ISA providers, these platforms will be required to supply HMRC with information about the accounts they provide. Various account requirements set out in the ISA Regulations will be amended to accommodate the Innovative Finance ISA.
These changes will mean that an ISA investor will be entitled to subscribe new money each year to a maximum of one Innovative Finance ISA, one cash ISA and one stocks and shares ISA. The amount of new money paid into all of the ISAs held by an investor must not exceed the overall ISA subscription limit for the year. For the year ended 5 April 2017 that limit is £15,240 and the limit will increase to £20,000 for the year ending 5 April 2018.
The March 2016 Budget announced that from April 2017 two new allowances of £1,000 each would be introduced for property and trading income.
Individuals with property income or trading income below the level of the allowance will no longer need to declare or pay tax on that income.
Those with relevant incomes above £1,000 can either simply deduct the £1,000 allowance from their property and/or trading income or they can deduct their actual expenditure in the normal way.
This measure is aimed at taking out of the taxation system those individuals who sell items occasionally whether by new media such as eBay or via more traditional means such as car boot sales.
Individuals who may rent out their house for a few weeks a year, or rent out their drives as parking spaces, may also benefit from these new allowances.
- Bob has rental income, from letting people park their cars on his drive, of £5,200 for the year ending 5 April 2018 and the actual expenses relating to this are £320 for the year. Bob would declare income from land and property of £5,200 less the allowance of £1,000 to give a net taxable income of £4,200.
- Tom sells tomato plants from car boot sales and via the internet. His sales for the year ended 5 April 2018 are £890. He would not need to disclose this on his tax return or via any other means to HMRC.
This article provides a round-up of the payroll changes that OMBs will need to be concerned with. There are four key changes affecting payroll from 6 April 2016.
Removal of the £8,500 higher paid employee rule
Currently, only directors and higher paid employees pay tax on benefits such as cars and medical insurance; employees earning less than £8,500 per annum are not taxed on such benefits. Historically, couples have been able to take advantage of this by employing the wife in the business in return for a small salary of say £5,000. As neither a director nor higher paid employee, she could then be given a company car tax-free – providing the benefit calculation does not put her above the £8,500.
From 6 April 2016, with the exception of ministers of religion, all employees will pay tax on all benefits and there is a new exemption for live in carers. Board and lodging provided on a reasonable scale at the home of the person they care for, will not be a taxable benefit.
- Currently, many employers have a dispensation in place for business expenses that are reimbursed to employees. Where no such dispensation exists, employers must report reimbursed expenses on the employees’ P11Ds and employees must record these amounts as benefits on their self-assessment returns, making a claim on the return for the allowable cost element.
From 6 April 2016 dispensations are scrapped and a new statutory exemption is introduced for reimbursed business expenses. These amounts will not be reportable on the P11D nor by employees on their self-assessment returns.
The exemption applies to expenses that would attract a deduction under current legislation but it does not apply to salary sacrifice arrangements.
For the exemption to apply, there are two qualifying conditions that need to be satisfied:
- Payer must operate a system to check that the employee is incurring and paying for the expenses
- Neither the payer nor anyone operating the system knows or could reasonably know or suspect that expenses were not incurred or not deductible
Employers can apply to HMRC to reimburse expenses at a flat rate. Once approved, these flat rate amounts would also qualify for the reimbursed business expenses exemption.
Once the flat amounts are agreed, HMRC will issue an approval notice which will specify the:
- rate at which the expenses are to be paid or reimbursed
- date from which this takes effect (earliest date is the date of the notice)
- date of expiry (no more than 5 years after the date of commencement)
- type of expenses to which the approval notice applies.
HMRC will have the power to revoke these approval notices if an officer considers there is reason to do so and the revocation can be backdated to the date of approval.
- From April 2016, there is a new system of voluntary payrolling of benefits that will allow employers to report and account for tax on certain benefits and expenses via the RTI system rather than on Forms P9D or P11D. Cars, fuel, healthcare and gym subscriptions can all be included but beneficial loans, living accommodation and vouchers cannot be payrolled.
Employers who want to register for 2016/17 should do so via their government gateway by 5 April 2016.
Once registered, HMRC will identify the employees who are affected and will issue revised tax codes which exclude the payrolled benefits.
Once the tax year has started you must continue to payroll the benefit or expense you’ve registered for the whole tax year or for as long as you provide it.
How it works
This new system enables you to collect the tax due on benefits and expenses by adding a notional value to your payroll run.
Before making the first relevant payment to an employee in a tax year, you need to calculate the cash equivalent of the annual benefit (say a company car benefit of £3,000). You then need to determine the number of payments to be made to the employee in the tax year and divide the cash equivalent by the total number of payments to be made. So if paid monthly, divide the £3,000 car benefit by 12 to arrive at a notional value of £250 per month. This notional value is included in the monthly payroll for tax calculation purposes. The individual should not see any difference to their monthly tax as previously their coding reflected the car benefit.
All payrolled benefits are reported in your Full Payment Submission so no P11D or P46(Car) is needed but you do still need to complete Class 1A form P11D(b).
- Currently employers can agree with HMRC that some benefits are trivial and need not be reported. However this can be burdensome for the employer and HMRC and is disproportionate to the tax and NIC that would be due.
From 6 April 2016 a statutory exemption is being introduced for trivial benefits. To qualify as a trivial benefit the following conditions must apply:
- The trivial benefit must not be cash or a cash-voucher (s.75 ITEPA 2003)
- The cost of providing the trivial benefit must not exceed £50
- The trivial benefit cannot be provided by way of a contractual obligation or salary sacrifice arrangement
- The trivial benefit must be given for a non-work reason e.g. birthday or social event
For close companies there is a £300 annual cap for directors and other office holders and family members but when those family members are also employees, they will get their own £300 annual cap
Consultation on Company Distributions – Prepare for Change
The recently published consultation and draft legislation on company distributions closes on 3rd February 2016, and has the potential to have significant implications for owner-managed businesses (“OMBs”) and their advisors.
It is a well-established cornerstone of tax planning that extraction by way of capital, rather than income, is usually advantageous for OMBs. Not only is the “top” tax rate for capital significantly less than that for income, but where trading businesses are concerned, Entrepreneur’s Relief will typically be available to reduce the tax rate to only 10% on extraction. This compares very favorably to income treatment in almost all instances.
However, the Government now intends to significantly restrict the tax advantages in this area – a savvy move by the Chancellor in light of the impending increase in dividend tax rates. These changes were set to make tax planning in this area much more attractive, though Mr Osborne seems committed to taking pre-emptive action.
The Consultation is titled “Company Distribution”, which is exceptionally broad, but in effect it is aimed solely at three main types of arrangements:
- Distributions on Winding Up
- Company Purchases of Own Shares
- Repayments of Share Capital
It is useful to look at each in turn to understand precisely what the Government is seeking to counter, the legislative changes that have been proposed, and the likely implications.
Distributions on Winding Up
Where a company has expended its commercial usefulness, the directors and shareholders may elect to enter it into formal liquidation. On liquidation, assets distributed to the shareholders are treated as capital. Where a company has significant cash on the balance sheet, this can permit tax-efficient extraction of cash.
Whilst the Government does not appear to want to change this tax treatment for genuine commercial transactions, it does highlight a number of types of behavior that it is seeking to counter:
- Moneyboxing – the retention of profits, in excess of commercial need, with a view to a future winding up.
- Phoenixing – where the company is liquidated, only for a the trade to effectively continue via a new entity
- Special Purpose Companies – where business operations are separated across multiple companies to allow a winding up to take place after each project comes to an end.
Although the Government have highlighted the above three areas as potential targets, the specific measures that have been proposed in the draft legislation thus far appear to only target “phoenixism”. A targeted anti-avoidance rule (“TAAR”) has been recommended which will, in broad terms, seek to tax distributions retrospectively as income where, within a period of two years, the shareholder is involved in a “similar” trade or activity.
However, in addition to this specific TAAR, a number of broader solutions are currently being consulted upon, with the potential of much broader effect. Few details are provided in the Consultation document itself, as submissions are requested from stakeholders. However, one particular idea that is mooted is a re-introduction of some form of the close company apportionment legislation – which were abolished in 1989 and taxed shareholders of close companies on retained (not only extracted) profits – which could have significant implications.
Company Purchase of Own Shares (CPOS)
The second area that the Government is consulting on is the CPOS rules. Where this takes place, the company purchases shares from a shareholder at market value and, in the correct circumstances, it can allow a substantial cash balance to be extracted from the balance sheet of the company as capital.
Capital treatment will not always be available. Rather, a number of statutory conditions must be met (as found in CTA 2010, s.1033), which include that the purchase must be wholly or mainly for the purpose of the trade, and that the purchaser’s interest in the company (including that of their associates) has been reduced by 75%.
The Revenue has expressed some concern over the ability for shareholders to continue to hold 30% shareholding while still qualifying for this relief, suggesting that this may not fit with the intention behind the rules (primarily to facilitate the retirement of shareholders where no external purchaser is on the cards), given the continued influence of the shareholder. This indicates that the Government may seek to lower this threshold in future, though the consultation considers this in only broad terms.
Reduction of Share Capital (ROSC)
Finally we look at ROSC, an area that has seen a lot of publicity in the tax planning press of late. On appearance, ROSCs are similar to CPOS – they both involve the company buying back shares and can result in distributions being taxed as capital. However, the relevant statutory conditions for ROSCs are very different, and where not met, the tax treatment is not altered – rather the transaction cannot legally take place.
For a ROSC to be implemented, the company must have sufficient share capital. The directors must also undertake a statement of solvency to prove that the company is left with sufficient capital post-reduction. Sufficient share capital can often be a limiting factor, as it typically relates to the capital invested by the shareholders themselves. However, share capital can also arise from a suitably implemented commercial reconstruction of the business, providing much broader application for this type of transaction.
Where the relevant conditions are met capital treatment will be obtained. This is regardless of the commercial circumstances surrounding the transaction (for example, the shareholder can continue to maintain a significant interest in the company). This flexibility makes capital reductions an attractive way to distribute excess cash on the balance sheet tax efficiently.
The Government has sought to prevent shareholders from being able to benefit from this treatment by amending the Transactions in Securities (TiS) rules. The TiS rules seek to counteract an income tax advantage resulting from transactions made between close companies and their owners. The changes are to ensure that reductions of share capital are more likely to be caught, by amending the definitions and closing some of the potential loopholes. The TiS rules will also face a procedural change, to make counteraction assessable under self-assessment, which marks a major change in this area.
The consultation on company distributions is currently still underway. The implications for owner-managed business may have pronounced repercussions for years to come.
If you would like to discuss any of the above further, please get in touch.
The Financial Secretary to the Treasury, David Gauke, launched a new 2 year plan, outlining how the government will make it easier for small businesses investing in research and development to claim tax relief.
The incentive encourages companies to invest in costly new product development, helping reduce the amount of corporation tax payable on profits by offsetting them against any investment in R&D. The plan, ‘Making R&D Easier: HMRC’s plan for small business R&D tax relief’, sets out that:
- From November, small companies (with a turnover under £2 million and fewer than 50 employees) will be able to seek advance assurance on R&D tax relief. This will give them greater certainty and enable them to plan their finances accordingly.
- HMRC will explore ways to improve its communication around R&D tax relief, including looking at ways to use data and work with other government agencies to identify companies that have carried out R&D but have not claimed relief.
- Interactive guidance will be developed with stakeholder involvement.
A wide-variety of companies can claim R&D Tax Credits:
- Companies who create a new product or improve an existing product
- Companies who develop a new service or improve an existing service
- Companies who design a new business process.
As long as science or technology is used in an innovative way tax relief can be claimed.
Here at Ascendis, we can assist with R&D claims. If you think your business would benefit, get in touch and we can look into potential savings
T: 0845 054 8560