Tax

Manage cashflow with superior tax planning

Jono Wilson of accountancy firm Barnett & Turner in Mansfield shows how tax and cashflow are closely inter-related and points out some opportunities you just might have missed.

With a downturn in the economy and some uncertainty surrounding the UK’s position after Brexit, many companies are turning their attention to tax planning – especially if cashflow is becoming an issue. Here are seven different areas that are worth thinking about and, of course, discussing with your professional advisers.

Research & Development

Companies involved in qualifying R&D activity, may qualify for tax relief on certain costs incurred as part of the process. If you’re a small or medium-sized enterprise, this result in additional relief of up 130% on costs incurred. Where a company has made a loss in the year the benefit of this relief allows Small and Medium enterprises to surrender tax losses generated by R&D tax relief for a cash repayment.  

Patent Box Relief

Innovating in your market place with new, patented technologies or inventions? Patent Box Relief allows you to access a lower rate of Corporation Tax on the profits derived from the exploitation of patented technologies and products. While the qualifying criteria are complex, the benefits to companies can see their Corporation Tax liabilities significantly reduced to as low as 10% on these profits where this relief is available.  

Capital Allowances

Don’t overlook this advantageous relief, Capital Allowances are often a valuable relief assisting in reducing a company’s taxable profits, generating deductions of up to 100% of the qualifying capital expenditure incurred. If you have incurred significant expenditure on property renovations in the previous 2 years, a review of the expenditure should be undertaken to maximise any Capital Allowances available which could result in significant tax savings for companies.

Corporation Tax

With a downturn in the economy and some uncertainty surrounding the UK’s position after Brexit some companies are facing the prospect of making a current year tax losses. If a company has previously been profitable and paid Corporation Tax in the prior period there is the potential to utilise current year losses against prior year’s profits and generate a tax repayment.

Foreign Tax Credits

If you are undertaking work overseas, you may find that you suffer a withholding tax on payments received. What you may not realise is that you can claim relief against UK Corporation Tax on a pound-for-pound basis for any withholding taxes which have been suffered potentially generating a repayment. This claim can be made for a period of up to four years, in some cases allowing companies to access significant tax savings.

Tax-efficient remuneration and benefits

We always encourage our clients to think about what savings can be made in other areas of their business. Staff costs will typically be a significant cost to most company’s therefore any savings that can be access in this area are usually welcome. Simply changes like moving to an alternative provider for your Corporation Benefits package can result in significant cost savings for a company as well as great some tax efficiencies for your employees as well, for example moving to a salary sacrifice pension scheme.

If you would like to discuss anything related to this article please do not hesitate to call Barnett & Turner on 01623 659659 or email Jonathan at jwilson@barnettandturner.co.uk

2019: the year VAT goes digital

April onwards sees a major change in the way that businesses have to file VAT. It’s time to get prepared, says Jono Wilson of accountancy firm Barnett & Turner.

April 2019 is looming fast and that means a big change in the way in which we account for VAT.

From that date, any VAT-registered individual or business above the threshold will have to comply with the new Making Tax Digital regime. There may be some leeway for people who have registered for VAT voluntarily, but anyone else will have to file quarterly returns online.

It’s important you’re fully compliant and up and running by the deadline, so now’s the time to talk to your professional adviser. They’ll be able to help you select the most appropriate software, such as QuickBooks or Xero unless bridging software can do the job for you.

If you’re currently using Excel spreadsheets or keeping paper-based book-keeping records though, there’s no doubt the new system may come as a big change and you have some decisions to make. So the sooner you can make the transition, the better.

If you would like to discuss anything related to this article please do not hesitate to call Barnett & Turner on 01623 659659 or email Jonathan at jwilson@barnettandturner.co.uk

HMRC proposals signals cross-border tax change

Taxation has long been based around the physicalpresence of a business in a particular country.

The huge expansion of the digital sector has, however, challenged our preconceptions. Many people would argue that if a global tech firm, for example, makes profits in a particular country, they should be taxed there – regardless of whether they have offices, plants or facilities in the jurisdiction.

Governments and global tax authorities are currently working together on a more uniform and coherent approach to the digital economy. And as part of this process, HMRC are proposing a significant change. 

Right now, if a UK company pays royalties for the exploitation of intellectual property and similar rights to overseas entities, they are subject to the deduction of UK tax at 20%. The only exception is if there’s an international agreement to reduce this amount.

The UK now proposes to include payments made by a non-UK entity to a fellow non-UK connected party in a jurisdiction (often with low or zero tax), with which the UK does not hold a suitable double tax treaty. 

In the example below, Company A derives UK income, but has no UK taxable presence and pays no UK tax. It may obtain a tax deduction in its location of residence for the royalty it pays to B. If B is in a location which has low or zero tax, the structure is very efficient.

Under the proposed reform, a 20% UK tax could apply on the royalty paid from A to B. It closes a loophole, but may have a wider scope than imagined, as it signals a radical shift away from current principles on the taxation of cross-border payments.

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 If you would like to discuss anything related to this article please do not hesitate to call Barnett & Turner on 01623 659659 or email Jonathan at jwilson@barnettandturner.co.uk

Could changing your accounting date help reduce your tax bill?

If you’re an unincorporated business (a sole trader or partnership), you have free choice when it comes to your accounting date says Barnett & Turner’s Jono Wilson. Some choose a date for commercial reasons – for example to fit in with a cyclical trading pattern or to fall in a slack period – and for others the logical choice may be 5 April (or 31 March) to align with the tax year.

Choosing the right year end will not only make life administratively easier for a business, but choosing a year end other than 5 April (or 31 March) can also give you a cash-flow advantage and create outright tax savings, if the circumstances are right.

Depending on the choice of accounting date, new businesses and individuals joining existing partnerships may see some of their profits taxed twice because of special rules which dictate when – and to what extent – business profits are assessed. Profits taxed twice are known as “overlap profits”. 

Businesses trading when self-assessment was introduced in 1996/97 may be carrying overlap profits and changing a business’ accounting date can also cause profits to be doubly assessed.

The value of any doubly assessed or overlap profits is subsequently carried forward and given as a tax-reducer when a business ceases, when an individual leaves a partnership and on certain changes of accounting date.

The thought of profits being taxed twice naturally gives rise to a common misconception that overlap profits are bad. In reality, a change of accounting date can be used to your advantage, which is illustrated in the very simple case study below.

 A partnership with a 30 April year end went from being highly profitable to being loss making, almost overnight. A 30 April year end is great, as it allows a lengthy period between making profits and paying tax on them, but, where a business falters as above, tax becomes payable when the business has no cash (unless it has a very prudent and very disciplined tax provision policy). In this case, changing the year end to 31 March enabled the partners to use their significant overlap profits and it also enabled earlier access to trading losses; this not only created significant cash-flow benefits for the business, but it also got rid of the overlap profits.

A few years later, the business returned to significant profitability, almost as spectacularly as it became loss making, resulting in significant tax bills made worse by the catch-up effect of a large self-assessment balancing payment plus payments on account. In the light of this, the partnership year end was returned to 30 April, which created some new overlap profits, but it also had two additional and significant benefits:

o   It deferred payment of significant amounts of tax by 12 months, creating positive cash flow and allowing the business to get its tax provisioning in check; and

o   It pushed profits into a later tax year, giving the opportunity to undertake some income tax planning and reduce the deferred tax liabilities.

So if you’re unincorporated and interested in finding out more about this specific issue of your accounting date, it’s certainly worth starting a conversation with your accountant.

If you would like to discuss anything related to this article please do not hesitate to call Barnett & Turner on 01623 659659 or email Jonathan at jwilson@barnettandturner.co.uk

How to handle termination payments correctly

Tracy Henson of Barnett & Turner tackles some frequently asked questions on the payments made when you terminate an employee’s contract.

With careful planning, you can save tax and national insurance when you make termination payments, but it’s important to bear a number of different factors in mind. Remember that the first £30,000 of any such payment can, in theory, be made tax free, but there are a number of conditions attached.

What are the current conditions which for the exemption to apply?

Currently, if you have a contractual right to make a payment in lieu of notice (‘PILON’), that payment is subject to income tax and national insurance contributions (‘NICs’).

If there is no PILON clause and the employer grants a termination payment to the employee at the end of the employment, the first £30,000 can be paid tax-free. Any amount above this threshold is taxable, however no NICs are due.

What are the conditions which must be met after 5 April 2018?

From 6 April 2018 all payments in lieu will be taxable. The intention of these reforms is to ensure that the basic pay an employee would have earned had the employee worked his or her notice in full will be subject to tax (any amount above this may benefit from the £30,000 exemption).

The reforms will therefore require employers to identify the amount of basic pay that the employee would have received if they had worked their notice period and to split a termination payment between (1) amounts treated as earnings and (2) amounts which are being paid in true compensation for loss of employment and which may benefit from the £30,000 threshold for tax exemption.

And from April 2019?

Currently, where the exemption is available no National Insurance (NI) will be due on the payment made. However, from April 2019, this rule will change with employer’s NI being payable on the balance over £30,000. 

Can some payments qualify for a higher limit?

Yes. Some can even be paid tax free, where the payment relates to injury, disability or death. However, HMRC interpret the exemption for termination on injury or disability very narrowly.

What are the rules about non-cash benefits?

There is a requirement to include the cash equivalent of any non-cash benefits made, for example the provision of a company car. Any non-cash benefits are treated as income in the year in which the benefits are enjoyed.

Does the timing of the payment make a difference?

Where a qualifying termination payment is made to the employee before they leave, the excess over £30,000 is subject to deduction of tax under PAYE under the normal rules. If payments are made to an employee after they leave, and after a P45 has been issued, then the employer must deduct tax under PAYE at the basic rate. The employee is then liable for any additional tax charge on the termination payment received under the self-assessment system.

What planning opportunities do you have?

There are a few possibilities where the termination is to exceed the £30,000, such as:

  • making a contribution towards the employee’s legal fees, which may include, for example, the fees for their solicitor to review a compromise agreement;

  • deferring the tax point – there may be a saving to the employee by spreading the payment over two tax years, where the entitlement to deferred consideration should be specified in the settlement agreement;

  • making a contribution into the employee’s pension fund; and

  • considering whether any element of the payment made could be identified as compensation for discrimination, or injury/disability, which may be tax free.

 Given the complex nature of the legislation, it’s always good to seek advice before a termination payment is made, to avoid any potential bear traps. Failure to take reasonable care in analysing the nature of the payment and describing it in the settlement agreement may result in the parties facing unnecessary or unexpected tax liabilities. 

If you would like to discuss anything related to this article please do not hesitate to call Barnett & Turner on 01623 659659 or email Jonathan at jwilson@barnettandturner.co.uk

Your shares are worthless? Things may not be as bad as you thought...

It’s a nightmare scenario. You’ve invested in a company and then discover that it has collapsed and that its shares have become worthless. 

Imagine, for example, owning a slice of Carillion – which went from being one of the UK’s largest construction businesses to a company revealed to have £1.5bn in debt and whose shares were suspended.

If HMRC declares shares to have ‘negligible value’ (as they have in the Carillion case), you’re entitled to capital gains relief, which will help you to reduce your tax liability. 

Here are some commonly asked questions:

How does it work in practice?

In effect, you can set the original cost of the asset against other capital gains in the current tax year or even carry it forward against gains in future years. 

Can I backdate a claim?

Yes. You can treat it as a loss arising in either of the two preceding tax years.

Can I claim loss from unlisted, negligible-value shares against income?

In theory, yes, but you’ll need to consult your accountant as you’ll need to meet a significant number of conditions.

If you would like to discuss anything related to this article please do not hesitate to call Barnett & Turner on 01623 659659 or email Jonathan at jwilson@barnettandturner.co.uk

A grand idea for would-be business people writes Tracy Henson of Barnett & Turner

Are you a budding entrepreneur who’s selling products over the web from your back bedroom? Or perhaps you’re renting out one of your rooms via Airbnb?

From the start of the 2017/18 tax year, it’s been possible to claim annual tax-free allowances – one related to trading and the other to property. These provide an exemption from income tax and an excellent opportunity to test the water with a business idea without having to worry about tax compliance issues. There’s no need to register with HMRC if you are generating income of a thousand pounds per annum or less.

Property Allowance

This applies to both commercial and residential lettings and gives you full relief from tax if your annual income before tax is less than £1,000. If the property is jointly owned, each individual can claim the allowance against their share of the gross rental income. If you’re earning more than £1,000, partial relief is available. 

Trading Allowance

This is designed for people who are trading in small amounts or receiving miscellaneous income from goods, services or assets. You might, for instance, be selling items on a website such as eBay. Again, with some exceptions, you can claim the allowance where total income is less than £1,000 and partial relief is available for sums under this amount.

If you would like to discuss anything related to this article please do not hesitate to call Barnett & Turner on 01623 659659 or email Jonathan at jwilson@barnettandturner.co.uk

HOW TO AVOID A POST-PARTY HANGOVER

Jono Wilson of Barnett & Turner looks at the tax implications of the Summer or Christmas bash you hold at your workplace. If you’re looking to the summer and planning a party for your employees, it’s worth bearing in mind the potential tax implications. The good news is that, unlike entertaining customers, the costs of entertaining employees are generally allowable against the profits of the business.

But what about the consequences for the employees themselves? Will they have to pay tax on the benefit?

The general rule is that as long as the total costs of all employee annual functions in a tax year are less than £150 per head (VAT inclusive), there will be no tax implications for the employees themselves. In considering this limit, it is necessary to include all the costs of an event including any food, drinks, entertainment, transport and accommodation that you provide.

If the total costs are above the limit of £150, the employee will have to pay tax on the full cost of the benefit. In that scenario, it should be reported on each employee’s P11D or, alternatively, you may choose to enter into a PAYE Settlement Agreement with HMRC to cover the tax.

It is also worth noting that a new exemption in relation to employee entertainment was introduced on 6th April 2016.  From this date, a benefit provided by an employer to an employee was made exempt from tax and need not be reported to HMRC on a P11D if all of the following conditions are satisfied:

  • The cost of providing the benefit does not exceed £50;
  • The benefit is not cash or cash vouchers;
  • The employee is not entitled to the benefit as part of any contractual obligation; and

Where the employer is a close company and the benefit is provided to an individual who is a director or other office holder of the company (or a member of their family), the exemption is capped at a total of £300 in the tax year.

 Example

A company holds two annual functions open to all its employees in the tax year – a summer party and a Christmas party.

The total costs of the summer party, including transport and accommodation, are £10,000 including VAT. The total number of attendees was 100, so the cost per head was therefore £100.

The Christmas party cost £8,000 including VAT, and 100 people attended this. The cost per head is therefore £80.

The total cost per head for both functions is £180, so they cannot both qualify for an exemption. As the cost per head of each party is not more than £150, either event can qualify on its own, however it is more beneficial overall for the costlier summer party to be exempted.

If an employee attends both events, they will be taxed only on the benefit of £80 for the Christmas party. If they only attend the summer party, there will be no taxable benefit because that event is exempt. If they only attend the Christmas party, they will be taxed on the benefit of £80.

Both functions would be taxable if the average cost per head of each of the events exceeded £150. This limit is not an allowance to be set against an amount that exceeds that figure.

It’s worth talking to your accountant if you have any concerns about the tax implications of the summer party season ahead. That way, everyone can enjoy the event without a financial hangover.

If you would like to discuss anything related to this article please do not hesitate to call Barnett & Turner on 01623 659659 or email Jonathan at jwilson@barnettandturner.co.uk

Build up your funds for future generations

Barnett & Turner partner Jonathan Wilson considers how life insurance can become an investment. For a number of years, we have had the option of using what are called “Whole of Life” insurance policies to help to fund potential inheritance tax (IHT) liabilities.

Put simply, these policies are a form of insurance where annual premiums are paid in return for a guaranteed payment on death. They are structured in such a way that the proceeds do not form part of the deceased’s estate and therefore escape IHT.

In reality, this means the IHT liability is potentially reduced to the total cost of the premiums.

Traditionally, clients have taken out life insurance for peace of mind, so they know their beneficiaries’ inheritance tax bill will be met. They haven’t necessarily considered whether the policy proceeds represent a good return on the premiums paid. With interest rates falling to record lows, it is now more appropriate than ever to view life policies as investments.

At the time of writing, the post-tax return for a 45% taxpayer, on a very long-dated UK government gilt (49 years to redemption), is only 0.8% per annum.

A couple aged 60 can obtain £1m of second-death, last-survivor, whole-of-life cover for an annual premium of £11,700, assuming standard health terms apply.  If we were to assume that one of the policyholders lives to age 109 (a very cautious assumption to match a 49 year old gilt), the return on the total annual premiums of £573,300 is just under 2.2% per annum net of tax.

To continue with this example, we could assume, more realistically, that the life expectancy of the last survivor is 95.  In our scenario above, the effective return on the total annual premiums is £409,500 – a relatively attractive 4.73% per annum net.

However, these figures also ignore the fact that the proceeds will generally fall outside of the estate, due to the policies being held in trust.  The actual return on the policy payer is effectively enhanced further by 40% (representing the IHT that would have had to be paid had the proceeds remained within the estate) in most cases.

Therefore, life policies not only provide a lump sum for your beneficiaries, but they also provide a comparatively excellent return over the period until the beneficiaries receive the money.  Life policies can be a good-value option for building up funds for the next generation. You may benefit from advice from your IFA or Accountant tailored around your own personal circumstances.

If you would like to discuss anything related to this article please do not hesitate to call Barnett & Turner on 01623 659659 or email Jonathan at jwilson@barnettandturner.co.uk

Could your generosity end up costing you? - Make sure you don’t lose out writes Jono Wilson of Barnett & Turner.

If you’ve given some money or household items to a charity recently, the chances are you’ve been asked whether you’d like to ‘Gift Aid’ your donation. The representative of the charity will have told you that this claim increases your gift by 25%.  So, for every £80 donated, the charity receives £100 – made up of your own donation of £80 and £20 of tax reclaimed from HMRC.

On the face of it, the Gift Aid option may seem like an obvious choice, but there is a potential downside.  If you have not paid sufficient income tax or capital gains tax during the year to cover the reclaimed tax, HMRC will require you to make up the difference, which may result in an unexpected tax bill due to your generosity!

It’s an issue which is likely to take on a greater prominence, as recent changes to the way in which investment income is taxed will result in many individuals ceasing to be taxpayers:

  • Prior to 6 April 2016, dividends were received with a notional credit which was included when calculating tax paid for Gift Aid purposes, but the notional credit has now been abolished and the first £5,000 of dividend income (decreasing to the first £2,000 from 6 April 2018) is taxed at a rate of 0%; and

 

  • The savings rate of income tax offers another 0% tax band available to individuals with interest income falling within the first £5,000 in excess of their personal allowance.

These changes will disproportionately affect pensioners with modest incomes and owners of companies who remunerate themselves in the most tax-efficient way.

Many of the individuals that will be impacted by this change are not required prepare tax returns each year. It does seem likely, however, that because of HMRC’s digital and information gathering powers, they will soon be able to identify non-taxpayers who have made Gift Aid donations and pass on an unexpected bill to the donor.

It’s therefore worth considering your own position, as well as that of those close to you. You may have some options to ensure that neither you nor the charity lose out.

If you feel that you might be caught out, but your spouse would not, it’s worth considering getting them to make the donation instead.

If you are the owner of a small company, it may be possible to make the charitable donations through the business, rather than on an individual level.  Although a company cannot make donations through the Gift Aid scheme, it should receive corporation tax relief on the donations and there may be scope to increase the amount you give to reflect this.

If you believe that you may be adversely affected by these changes, it’s worth having a chat with your accountant.

If you would like to discuss anything related to this article please do not hesitate to call Barnett & Turner on 01623 659659 or email Jonathan at jwilson@barnettandturner.co.uk