Four ways married couples and civil partners can reduce their tax burden

David Wilson of Barnett & Turner mentions four ways married couples and civil partners can reduce their tax burden If you’re married or have entered into a civil partnership, you certainly benefit from tax breaks that other people can’t claim. In this short discussion of family tax planning, we’ll use the word ‘spouse’ as a generic to cover husbands, wives and civil partners.

Essentially you are looking to make sure that you use all available exemptions and allowances and – where appropriate have income or capital gains in the hands of a spouse, where it may be taxed at the lowest possible rate. Some examples might include:

Registering buy-to-let property in the name of the spouse with the lowest income tax rate. Properties may be owned entirely by one spouse, as joint tenants, or as tenants in common in unequal shares. The underlying ownership determines the division of the property income. Property owned as joint tenants is divided equally, whereas property owned in differing shares – as tenants in common – is divided equally (or, upon a specific election submitted to HMRC, in accordance with the underlying ownership). In this way, the property income can be altered to suit the circumstances of the couple.

Transferring ownership of all or part of the property to the other spouse.

While it may be advantageous for one spouse to own a buy-to-let property from the perspective of income tax, it may not be so good from a capital gains tax (CGT) perspective. Prior to the sale of a property at a gain, it may be a smart idea to transfer ownership of all or part of the property to the other spouse where, for example, that spouse has significant capital losses available to offset against the gain, or has an unused CGT exemption. The ability to transfer assets between spouses without incurring any CGT liability is another tax break which is available only to married couples or civil partners.

Paying a salary or gifting shares to a non-working spouse

An individual running a business can save significant income tax by employing their spouse on a salary, or gifting shares upon which a dividend is paid. The salary payment may also possibly enhance the spouse’s state pension entitlement. These arrangements however can come under close scrutiny from HMRC. Any salary paid needs to be commercially justifiable, taking into account the duties of the employment, and must be paid. Any gifts of shares between spouses must constitute more than just an entitlement to income. It’s important to ensure that these arrangements are not open to challenge by the Revenue and are not caught under the settlement rules or even the employment related securities legislation for example, so make sure to talk to your accountant about them.

Putting savings into the name of the spouse with the lowest tax rate

By far the most common example of switching income between spouses is to put savings into the name of the spouse with the lowest tax rate. You can reduce or avoid income tax on any interest generated. With the introduction of the personal savings allowance and the 0% starting rate applicable to interest in certain circumstances, income tax savings on interest received can now be significant.

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

Profit averaging for farmers: harvesting the benefit

Although farming businesses have had a tough time in recent years, there may be some relief in sight, writes Andrew Williams, Tax Manager at Barnett & Turner. Farmers have in the past benefited from two-year averaging of their profits for tax purposes, which may have been helpful to some, but was still fairly restrictive. Many have therefore welcomed the extension of the averaging period to five years.

In the months since the EU referendum, farm gate prices have increased a little, but there are still a number of problems facing the agricultural sector. Subsidies are lower and trading conditions are generally poor. Any relief is therefore quite welcome.

What are the rules?

If your taxable profits after capital allowances in 2012/2013 were higher than in 2016/2017 and you faced significant tax bills, then you may be able to claim relief.

You need to be a sole trader or partnership with a financial year-end which ends in the year to 5^th April 2017.

Annual reviews

It’s important to keep a record of your profit history and review it on an annual basis. The averaging exercise is designed to take out profit previously taxed at higher rates. You may be able to reinstate personal allowances or make use of those that were unused before.

Imagine you made £115,500 in profit in 2012/2013, £65,000 the next year and £26,000 in 2014/15. And let’s assume that your profitability continued to drop – to, say, £10,000 in 2015/16 and to zero in 2016/17.

In this scenario, you could save £5,800 in tax by electing to average the profits over five years rather than using the previous two-year averaging relief.

Issues to bear in mind

Unfortunately, you can’t five-year average every result. There’s a test for ‘volatility’. In order to make an averaging claim, you’ll need to show either that one or more of the five years shows zero profit or a loss or that the average of the previous four years, when compared to the fifth, is 75% or less than the other.

Losses in a year will be treated as being nil profits for the averaging calculation, so you can still make use of the loss in the normal way.

Only your farming profits count for these purposes, so if you’re renting out cottages or making money from wind turbines, you must exclude this profit from the claim.

Another rule is that if you are in a ‘year of commencement or cessation’, you can’t make a claim. (This includes individual partners joining or leaving a partnership.)

As there are some complexities here, it obviously makes sense to talk to your accountant about the issues if you think you’re going to take advantage of the 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

Why the year-end chat should start well in advance

Jono Wilson of accountancy firm Barnett & Turner always aims to be proactive in the advice given to clients. That way tax planning becomes so much easier. An important part of my job is to ensure that clients are informed of the tax efficient planning opportunities available to them in advance of the year end date in order to allow them sufficient time to assess each of the options available to them and decide whether these opportunities are right for them. In order to provide clients with enough time to make informed decisions in relation tax planning, these conversations need to start well in advance of the year end date to prevent any last-minute scrambles and pressurised decision making.

When it comes to discussions on efficient tax planning opportunities with clients it pays off to be proactive. Meeting with clients during the final quarter in advance of the year end, provides an excellent opportunity to discuss the business owners aspirations and strategy for the coming twelve months, allowing us to provide tailored tax planning advice which suits the specific needs of each client.

Here are some of the tax planning topics which are frequently raised in advance of the year end:

PROFIT EXTRACTION

First of all, we look at the profits which have been extracted to date, then take into consideration the client’s specific circumstance in order to assess whether there are any additional requirements in the coming 12 months. This may be that the client has a big life event coming up; possibly a family wedding, a house move, maybe even planning a big family holiday or winding down to retirement. It is important to think ahead in order to ensure that the needs of the client can be met and profits can be extracted from the business in a tax efficient way.

There are several ways in which this can be achieved; looking at a combination of salary and dividends (provided the individual is a shareholder), providing a solution which fits the needs of each client while taking advantage of the tax free allowances available. There is also the additional consideration of pension contributions which are an extremely tax efficient method of profit extraction. Given that a pension fund can grow tax free, it’s an efficient way of investing in the future and has the added benefit of allowing the company to access corporation tax relief on contributions made on behalf of employees. If there is a possibility of making a contribution before the year-end date, it’s worth discussing.

BONUSES

Bonuses can be used to reward key members of the team who have contributed to the success of the business, but who are not necessarily shareholders. Depending on the employee’s level of earnings, the marginal rate of tax payable on a bonus may be significant. Perhaps it would be more beneficial to discuss the potential of an additional pension contribution or the provision of other benefits to top up their remuneration package, such as a company car?

CAPITAL ALLOWANCES

Where a company has undertaken significant investment in capital expenditure during a financial year for the purpose of their trade, there can be some very beneficial tax reliefs available in the form of Capital Allowances. It is also possible to claim 100% tax relief on qualifying expenditure by utilising the Annual Investment Allowance (“AIA”) available to businesses, up to a value of £200,000.

When advising clients in the lead up to their year-end date, it is also worthwhile discussing whether they are utilising their AIA in full and whether there is any additional expenditure which is likely to be incurred in advance of the year end.  As the AIA is a use it or lose it allowance it is important to discuss the timing of capital expenditure with clients as it may be worthwhile to defer expenditure into the next year if the AIA has already been fully utilised in the current period.

RESEARCH & DEVELOPMENT (R&D)

Companies involved in a qualifying R&D activity may claim additional tax relief on certain costs incurred directly in the R&D process. The rate at which relief is given is dependent on various factors, however it is possible to access additional relief of up to 130%. Engaging in discussion with clients in advance of the year end can allow you to ascertain whether they have undertaken activities which you think may qualify for R&D tax relief. Small and Medium Enterprises can surrender tax losses generated by R&D tax relief to create a cash repayment, which is another factor which can be useful in discussing tax planning opportunities with clients. .

LOSSES

The current market may result in previously profitable companies making current year tax losses. If a company has been profitable and paid CT in the previous 12 months there is potential to utilise these current year losses against the prior year’s profits and generate a tax repayment. Liaising with your client as early as possible may allow them to access these repayments at an earlier stage. This can be of great benefit to companies where ‘Time-To-Pay’ arrangements are in place for tax liabilities currently overdue and cash flow is tight.

SHAREHOLDING STRUCTURES AND SUCCESSION PLANNING

Many of the clients which I deal with are family owned businesses. It is an important aspect of my role to assist clients not only with potential tax planning opportunities in advance of the company’s year-end date but also to engage in discussions surrounding the future success of the business and the owner’s plans for the future. Commencing discussions of succession strategy and the future strategy for exiting the business allows the management team time to consider how this will be achieved and begin putting the necessary operational frameworks in place to achieve these long term objectives. It is also important to assess how any shareholder who is planning to exit the business can do so in a way which fits with the aspirations of the company, whilst also being achieved in as tax efficient a way as possible for both the company and the individuals involved.

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

Have they paid us? The critical question every business needs to ask.

The most important task for any business is making sure that they get paid for their work. Here are some top tips from Jono Wilson of accountancy firm Barnett & Turner on how to ensure that the cash flows in.

1. GET YOUR INVOICE IN QUICKLY

It’s easy to forget to invoice clients in a timely fashion, but it inevitably will lead to a delay in the ultimate payment date. So be prompt and don’t let things slip. This can be a particular issue if you’re an owner-manager, who gets bogged down in the day-to-day work.

2. USE TECHNOLOGY

If you invoice electronically, use software which allows you to see whether your client has opened and viewed your invoice. It’s a great way of keeping on top of payments.

3. SUBMIT THE RIGHT DOCUMENTATION

Make sure you reference the relevant purchase orders and, if applicable, customer approved timesheets, as there’s then much less wriggle room for your customer. And less chance they’ll tell you to go back and resubmit your invoice. You can even attach your paperwork to the invoice in a cloud platform such as Xero and ask your client to approve it.

4. INTRODUCE PROPER CREDIT CONTROL

If your customers haven’t paid you within the time you stipulated – usually 30 days – then you need to know and be prepared to follow up.

5. BE CONFIDENT

Some businesses are reluctant to chase an invoice because of the potential repercussions and effects on the relationship. But how good can that relationship really be if you’re not actually getting paid?

6. PUT SOMEONE IN CHARGE

Businesses which get paid promptly are often those with dedicated staff responsible for chasing debts. As soon as your company reaches a size to justify it, you may well find that the investment in staff makes a real difference.

7. CONSIDER INVOICE DISCOUNTING FACILITIES

These are not right for everybody, so consult your accountant, but there are options out there in which funders may agree to pay you, say, 85% of the debt you’re owed. Banks prefer these types of facilities to overdrafts as they have security over the debtors. Some funders provide integration with platforms, such as Xero, which make it easier to administer.

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

Greater visibility: how management accounts help you to plan

Jono Wilson of Barnett & Turner answers some of your questions about management accounts and how they can assist in making your company more efficient and potentially more profitable. I recently visited a client who has been using his traditional accounting methods since he started in business many years ago. As an owner, he is heavily dependent on his finance team and book-keeping staff for information and they were using outdated software. Much of the data the business relied on was entered manually and many records were still in paper form, sitting in filing cabinets. Whilst it is of course key to have a system you know and understand to help you run your business effectively, it made me think about how much progress we’ve made in recent years and how important it is to maintain proper management accounts.

What is the main advantage of keeping management accounts?

Essentially, they’re about being in control of your business and looking to the future. If you want to make proper cash-flow projections, for instance, your working capital requirements or whether you’re likely to exceed an overdraft limit, management accounts are an essential starting point. If you’re a small one-person operation, using Key Performance Indicators (KPIs) rather than full management reports may be enough. But as any business grows, they become essential.

How frequently should they be produced?

We would always recommend quarterly reports at a minimum if you’re a proper trading business, but monthly management accounts are often ideal.

How much time and effort are involved?

There are very few excuses these days for not having management accounts, because there is so much technology out there to help. With cloud software, it’s an easier process than it’s ever been. You can work collaboratively with your accountant, which makes everything more seamless. And of course the integration of automated banking feeds cuts down on a lot of time too.

What will it cost?

Well, there’s obviously a one-off investment in software, but in the longer-term, you may see significant benefits in terms of staff costs. You may be able to outsource more work to your accountant. And, of course, there may be significant gains in terms of visibility within your business.

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

Earning commission on holiday? That would be the perfect break.

There have been a number of recent court decisions surrounding entitlement to holiday pay says Jonathan Wilson of Barnett & Turner. Specifically they have been considering whether overtime, commission and work-related travel should be factored into holiday pay calculations. A court judgement 18 months ago found that contractual (but not voluntary) overtime must be included in holiday pay calculations.  This decision was followed earlier this year by another which confirmed that a worker who received performance related commission was entitled to have this taken into account when his holiday pay was calculated.

It sounds straightforward enough, but unfortunately the court did not explain how the holiday pay should be calculated to take account of lost commission.  As the ACAS website currently states: “There was no definitive legal answer about how such holiday pay calculations must be made, or how/if such claims can be backdated.  ACAS continues to monitor the case and will provide further updates when they are available.”

While the legal obligation on employers is therefore clear – that commission and contractual overtime must be included in holiday pay calculations – it is still unclear as to how some of this should be calculated and whether employees will be able to make backdated claims. The case may also be subject to further appeal.

Our expectation is that the maximum period for backdating a claim will be two years, based on  recent legislation from July 2015, which limited unlawful deduction of wages claims to a two-year period.  This law prevents an employment tribunal considering deductions which were made more than two years before the unlawful deduction claim was brought.

A useful summary of the rules can be found here: http://www.acas.org.uk/index.aspx?articleid=4109

Given this is an area which is still going to require further clarification, we would recommend that you talk to an employment lawyer if you are seeking advice.

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

Direct answers on the role of directors

Some frequently asked questions about the responsibilities of company directors. And some straightforward responses from Jonathan Wilson of Barnett & Turner. How do you set up a limited company?

It’s an easy online process which can be done for as little as a £15 fee. The company will be registered within 24 hours, although often it makes sense to instruct a formation agent to ensure the new company’s statutory books are completed with relevant and correct information from the beginning of the company’s life. This will result in a greater fee than above but it is often money well spent.

Does a company need directors?

It must have at least one director, although it’s a simple procedure, as no test or qualifications are involved. You don’t even need to understand the rules and duties of a director to become one. It is essential, however, you are over the age of 16 and have not been disqualified.

Where are the director’s duties set out?

Chapter 2 of the Companies Act Part 10.  The same framework applies to a ‘shadow’ director, who effectively performs a director’s functions without being formally appointed.

What is expected of a director?

Directors are responsible for promoting the best interest of the company and its shareholders, rather than their own personal interests. They need to act with the care, skill and diligence of a reasonable person, although if they have a specialist background – accountancy, for example – there would be an expectation that they would perform to a higher standard.

A director is also responsible for a company’s compliance with regulations – keeping proper books and records, lodging accounts, filing tax, VAT and PAYE and so on.

What are the Articles of Association?

This is a document which may set limitations on the power of directors and define how decisions should be made. Effectively, it’s the constitution of the company.

What are a director’s potential liabilities?

Contrary to popular perception, it is possible for Directors to be held personally liable if they breach duties owed to the company and set out in the Companies Act. A failure to file tax returns, for instance. Wrongful or fraudulent trading. Or continuing to trade when you know there is no chance of avoiding insolvent liquidation.

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

Why honesty is always the best policy

Preventing bribery should be the concern of every business, writes David Wilson of Barnett & Turner. It’s also a legal requirement. It may well be that you’re familiar with rules regarding money laundering, which apply to businesses in a number of specific sectors. There’s an associated set of rules, however, connected with the 2010 Bribery Act. In my experience, people tend to be less aware of them, but they are just as important.

Essentially, the Act covers situations in which your staff might be induced or coerced into doing something which is fraudulent, illegal or unethical in return for an incentive.   This could, of course, include money laundering and tax evasion, but actually extends far beyond.   It is essential that your staff are aware of such potential scenarios and are not put into difficult situations, where they inadvertently accept a gift or incentive which would be deemed unusual or excessive and which could later be used as a form of bribery.

Therefore, from a business perspective, it’s important that members of staff are trained to identify situations when an approach or a particular pattern of behaviour looks strange and needs to be reported either under the Money Laundering Regulations or within the terms of the Bribery Act itself. My recommendation is that you consider introducing such training as part of an induction process.

If you fail to prevent or report bribery, you’re committing an offence, so it’s in everybody’s interests that you have proper procedures in place. Of course genuine hospitality – if it’s reasonable and proportionate – doesn’t fall foul of the rules.  So the context and nature of the relationship is absolutely critical.

Here are the six key principles that you need to observe, according to government guidance:

Proportionate Procedures – these need to be appropriate ‘to the nature, scale and complexity of the commercial organisation’s activities’.

Top-level Commitment – the management of your organisation needs to foster a culture in which bribery is never acceptable.

Risk Assessment – commercial organisations must assess the nature and extent of their exposure to potential external and internal risks of bribery.

Due Diligence – you must take ‘a proportionate and risk based approach’ in respect of persons who perform or will perform services for, or on behalf of, the organisation.

Communication (including training) – your bribery prevention policies and procedures need to be embedded throughout your organisation.

Monitoring and Review – it’s essential to review your policies and make improvements where appropriate.

Find out more by speaking to your accountant and visiting https://www.justice.gov.uk/downloads/legislation/bribery-act-2010-guidance.pdf

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

Some great ideas to help your grandchildren

There are a number of steps grandparents can take to help their grandchildren financially, argues Jonathan Wilson of Barnett & Turner. In fact, they may be in a stronger position in this respect than the kids’ parents. Everyone wants to do the very best they can for their children. It may be, however, that grandparents are in the strongest position to help when it comes to finances.

Some of the basic options are really simple. Every individual can make a £3,000 gift each year, free from inheritance tax, for instance. This won’t form part of the sums considered for the seven-year exclusion period usually applied to gifts prior to death.

Contributions to Junior ISAs might be something to consider. And pension contributions can be very efficient too. For a £2,880 contribution, the government tops up by 20%, leading to a gross figure of £3,600 – the maximum on which a non-earner can gain relief. And this can be doubled if both grandparents are around.

Understanding Trusts

Discretionary Family Trusts can seem a little more obscure and off-putting, but are well worth discussing with your accountant.

If a parent sets up a trust, it is deemed to be ‘settlor-interested’ and all of the income is treated as belonging to the parents and taxed accordingly. This issue doesn’t arise if we’re talking about grandparents.

Very often, you might choose to help with school fees or create a pot of money that can be used for university. If circumstances allow, each grandparent can transfer in up to £325k in cash or assets not covered by other inheritance tax relief. Anything above this figure is subject to lifetime inheritance tax at 20%.

Company Shares

As discussed above, assets such as cash may be transferred into trust with no immediate tax implications, subject to the £325k per person limit.  If, however, the grandparents hold shares in a trading company, subject to certain conditions such as periods of ownership, the shares are likely to qualify for 100% IHT relief.  Shares of unlimited value may therefore be transferred into Trust with no IHT liability.

Capital Gains Tax may be due on the disposal of shares into the trust, but this can be deferred or “held over” until such time as the shares are sold or passed out to a beneficiary (although again, it may be possible to hold over the liability on such a transfer).

Essentially, the deferral is until such time as there has been a real gain. The tax is levied on the difference in market value at sale and the original base cost of the shares.

If grandparents hold shares in a company, take a dividend and use this to fund, say, school fees, they pay tax at their marginal rate. The net income then goes to the child. If, however, you use a trust instead, you can appoint an interest over the trust assets to the child. Any dividends are treated as the child’s income and when you combine the £5,000 dividend tax-free threshold with the £11,000 personal allowance, the child can benefit from up to £16k tax free.

It is possible to set up trusts for reasons unrelated to tax. Trustees retain control and are responsible for the trust’s day-to-day running. Assets are ring-fenced and they decide who is going to benefit and when. They help their own inheritance tax position without adversely affecting anyone else. What’s more, grandchildren can be protected from the demands of future spouses or creditors.

It’s a complex area, so if you’re interested in finding out more, the first step is to sit down with your accountant and talk through the options. But as a grandparent, you may be in a unique position to help your family.

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 annual return to Companies House? It’s now a thing of the past.

The requirement to send an annual return to Companies House has come to an end says Sam Fisher of Barnett & Turner.  From 30 June 2016, your company now files a confirmation statement instead. What is the Confirmation Statement?

The Confirmation Statement (Form CS01) provides similar information to the annual return, but if no changes have taken place, you can make a declaration to this effect. This means that the process is much simpler.

When you file a CS01 for the first time, there are five parts of the confirmation statement you need to complete. The most fundamental change is the requirement to file information on ‘People with Significant Control (PSCs). Any company incorporated after 30^th June 2016 must include PSCs in their initial application. 

When must the Confirmation Statement be filed?

If you have an existing company, your first confirmation statement must be filed 12 months after your last annual return and then at least once every 12 months thereafter. An updated statement can be submitted at any time within the 12-month review period and a new review period of 12 months will be set from the date of the most recent confirmation statement.

This rolling 12-month window means that a company can combine the confirmation statement with another filing at any point during the year, if this is administratively easier. Therefore, you can capture key events (such as a change in shareholders) when they happen, rather than having to wait until a later date, when information may have been forgotten.

What is the filing period?

Companies were allowed a period of 28 days from the due date of the annual return to file it with Companies House. This has been reduced to 14 days for the confirmation statement.

If 12 months have elapsed since the last filing of the confirmation statement, a company will therefore only have an additional 14 days to file the next Statement before the company is no longer considered to be compliant. If you fail to deliver the Statement by the end of the 14-day period, you have committed an offence and may be fined.

What is the cost?

A filing fee must be paid when the confirmation statement is delivered.  This is the same as for the annual return (£13 online, or £40 on paper).  Updates to the information can, however, be made as many times as required throughout the year, without incurring an additional fee.

If you require any assistance with your confirmation statement or in interpreting who should be recorded as a PSC, please talk to 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