Making sure a break-up doesn’t break the bank

Divorce can be very painful at many levels. That’s why you don’t want the additional burden of being unnecessarily penalised by Capital Gains Tax (CGT), writes Jonathan Wilson of accountancy firm Barnett & Turner.  During the emotional upheaval of a divorce, tax considerations are generally the last thing on your mind.  By taking advice early in the process though, you may be able to avoid unnecessary tax liabilities.

The general rule is that a married couple (or civil partners), who are living together, can transfer assets between each other without paying capital gains tax, until the end of the tax year following the date of separation.

After the 5^th April following your separation, these inter-spouse “no gain/no loss” transfers no longer apply.  At that point, even if you are still married, the transfer of an asset between you and your partner will be treated for tax purposes as if the spouse who is giving up their interest in the asset has received market value for that interest.  This may give rise to a capital gains tax bill if the asset has increased in value since it was acquired.

Of course, if you have limited cash resources, the CGT can be particularly unwelcome.  It’s therefore a sensible idea to consider transferring assets before the end of the tax year of separation, even if an overall financial settlement is still some way off.

But what if the separation takes place in March?

You would have less than a month to decide whether or not to transfer an asset before the end of the tax year in order to avoid a capital gain.  Unfortunately, this is just an anomaly of the regulations and does indeed create a lot of pressure.

By contrast, a couple who separate in May have eleven months to make these decisions, which might well be enough time to negotiate and implement an overall settlement.

In summary, if you are considering separation – or are in the process of separating – you should take advice on potential capital gains tax liabilities which might be triggered on a division of your assets. You should also start to think, as early as possible in the process, about how these might be mitigated.

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

What’s your status? It may be complicated.

Providing consultancy for a local authority many not be as straightforward as you imagine, writes Jono Wilson of Barnett & Turner. If you’re running a limited company and are offered a contract to provide consultancy to a council, the supply of those services is covered by the ‘intermediaries legislation’ – also known as IR35. This means that if it is decided that you are actually an employee, the company’s income could be taxed as employment income and subject to PAYE and national insurance.

How should you approach the issue?

First of all, you should have a contract with the council about your arrangement to provide services, which records the risks and duties of the engagement and the details of control your customer has over how you carry out the work. This contract and the actual arrangement will be considered in determining your employment status, so make sure you talk about it with your adviser beforehand.

What additional requirements are there?

From April 2017, public-sector bodies had to ensure that contractors providing their services through a limited company are operating under the correct employment status. The body – or agency, if applicable – will decide this using a set of tests, the details of which are yet to be announced. If these tests determine that the contractor should be an employee, then the income will be subject to PAYE and National Insurance. Again, talk to your accountant and ensure that you keep up to date with the latest developments.

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

Glimpsing a post-Brexit world of R&D

Jonathan Wilson of Barnett & Turner explains the current system for tax credits and thinks business may benefit eventually from a more relaxed regime. There’s little doubt that Brexit has created a great deal of uncertainty. But whatever your view about the likely impact on business overall, there’s speculation that the decision to leave the EU might be good news from the point of view of R&D tax credits.

Under the state-aid rules drawn up by Europe, there are limits to how far governments can support industries with tax breaks. Some people glimpse a world of greater freedom and generosity once ties with Brussels are cut.

The background here is that over 22,000 companies submitted claims for R&D corporation tax relief in 2014-5, which is a 12% increase on the numbers recorded in the preceding tax year. So the tax break is certainly popular. What’s more, the total value of the expenditure across these companies was a whopping £21.8 billion.

Who can claim this relief?

You might think that it’s the province of, say, big pharmaceutical businesses, but that’s really not the case. Any company has been potentially able to qualify for a 130% extra corporation tax deduction after April 2015 (effectively 230% tax relief on qualifying costs).

To claim the relief you must have a qualifying project, which seeks to:

• Achieve an advance in overall knowledge in a particular field
• Resolve a scientific or technological uncertainty

The systematic approach must be documented by the company and, according to government guidelines, you must prove you are:

• Extending overall knowledge or capability in a field of technology
• Creating a process, material or device, product or service which incorporates or represents an increase in overall knowledge or capability
• Making an appreciable improvement to an existing process, material, device, product or service

 What other criteria apply?

The technical challenges you face must be ones which can only be overcome by bespoke and unique methodologies. If there is already a standard solution in the public domain, then you won’t be able to claim. You also need show that you have taken a systematic, investigative and experimental approach to the problem – drawing on scientific knowledge and practical experience.

This may involve:

• A technical analysis and documentation of the requirements
• The specification of a solution
• Development of the solution against the documented requirements
• Implementation and integration of the solution
• Documentation of trials and tests to record actual behaviour against expected
• Correction of any significant deviations in behaviour

What costs count towards the claim?

Qualifying costs include those of staff, subcontracted staff, consumables and heat and light. You can also count the costs of software used directly in the R&D process. Remember that you will need to apportion staff time between the R&D and regular work.

Capital Expenditure

If you use plant and machinery capital expenditure solely for R&D, you will gain 100% writing down allowances.

How can HCWA help?

Firms in the HCWA association can:

• Ensure that you are maximising your claim
• Advise on the best option available if a choice arises between surrendering a loss or carrying it forward
• Ensure that the claim is valid (there can be particular difficulty in assessing whether consumables’ costs are qualifying expenditure)
• Assisting with the narrative of the accompanying R&D Report

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

Has flat rate fallen flat?

Accountant Jonathan Wilson of Barnett & Turner explains why the new flat rate regime may have effectively spelt the end of the flat-rate scheme for many small businesses. For a number of years now, many businesses with a turnover of less than £150k have opted to make use of the flat-rate VAT scheme.  Rather than balance the VAT they charge with the VAT they incur through purchases, they are given a percentage figure to apply to the gross sales over a three-month period. This rate will depend on the industry they are in and can vary quite considerably. In compensation for the beneficial repayment rate, they are not allowed to claim back VAT they have been charged, the only exception being capital items above £2,000.

In December 2016, the government entered into consultation on the flat-rate scheme which makes it much less attractive to many small businesses. Originally, it was effectively possible for small companies to gain from the charging of VAT, by retaining a proportion of the money collected as taxable profit. HMRC seems determined to close off what is now seen as a loophole, but which may have been presented originally as a benefit to encourage registration and growth rather than supressing sales to stay below the VAT threshold.

From 1^st April 2017, a large proportion of businesses on the flat-rate scheme have had to apply the figure of 16.5% to their gross sales. So with £100,000 in sales and £20,000 in VAT on top, charged out to customers, the payback rate becomes £19,800. As a result, many small business owners currently on the flat-rate scheme may have chosen to opt out and record VAT in the traditional way.

There is, however, one way in which you can stay on the flat-rate scheme and retain its more favourable terms. That is if you can prove you are not a ‘limited cost trader’.

The definition of the limited cost status is that your expenditure on goods is less than 2% of your VAT-inclusive turnover. In some circumstances, it may be more than 2% but less than £1,000 per annum.

The issue giving accountants sleepless nights is over the precise definition of goods. We know that it excludes capital expenditure, food and drink and any type of vehicle maintenance or fuel (unless you’re running a taxi service). Where things become more complex would be, for instance, over the purchase of something like a software subscription. It seems that if the software is bespoke to your business, it will probably count as a service not goods.

It’s these kinds of assessments that small businesses will need to make and it’s important to take professional advice, as the situation is still fluid and everyone is racing to interpret what exactly the new regime will mean. HMRC will be writing to all affected companies in due course, but as April has come and gone, it may be worth having another conversation with your accountant if you haven’t already.

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

We all gain from thinking before selling shares

Jono Wilson of Barnett & Turner gives some valuable advice if you’re planning on realising the value of your shares. Whenever you sell or dispose of certain types of asset, you may find that you owe Capital Gains Tax (CGT). The tax is based on the ‘chargeable gain’ – or, in simple terms, the difference between your proceeds and the original cost.

CGT is payable on the disposal of property which isn’t your main home. It’s also charged on company shares. You can, however, make a gain of up to £11,100 before you reach the threshold at which you have to pay tax.

• Before the 2016 Budget

Two rates of CGT existed for individuals prior to the 2016 Budget: a standard rate of 18% and a higher rate of 28%.

• After the 2016 Budget

Following the Budget announcement, the two rates were reduced to 10% and 20% respectively, although different figures apply to certain residential properties.

With regard to shares, here are some questions to think about when considering your liability:

How are the shares held?

If they’re held in an Individual Savings Account (ISA), they are exempt from CGT.

What type of shares are they?

Are the shares held in a large PLC or a family-owned trading business? If they are in a trading business in which you work (and hold at least 5% of the shares and voting rights), you may qualify for Entrepreneur’s Relief, which provides for a rate of 10% on the whole gain. If you’re unable to claim Entrepreneur’s Relief, some or all of the gain may be taxed at 20%, depending on the level of your other income.

Are you planning on disposing of a number of assets around the same time?

If you want to take full advantage of your annual allowances, it probably won’t make sense to dispose of a number of assets at a similar time. It’s certainly worth taking professional advice before proceeding.

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

Tougher penalties for tax avoiders – summary of the new ‘STAR’ by Jonathan Wilson of Barnett & Turner.

In the 2016 Budget, the then Chancellor, George Osborne, signalled an intention to introduce harsher penalties for those who take part in tax avoidance schemes. As part of this the Government confirmed that clarification would be given on the definition of ‘reasonable care’ in relation to the penalty provisions where a person uses tax avoidance arrangements which HMRC later defeats. The Finance Act 2016 introduced a new ‘Serial Tax Avoidance Regime’ (STAR). Whilst the legislation uses the word ‘serial’, it is not only aimed at frequent users of avoidance schemes, but also includes any taxpayer who has used any scheme which is later defeated by HMRC.

STAR will apply to any tax avoidance schemes entered into after 15 September 2016, as well as any schemes entered into before that date which HMRC defeats on or after 6 April 2017. HMRC have, however, confirmed that the regime should not apply to schemes entered into before 15 September where either:

• the taxpayer advises HMRC before 6 April 2017 of their firm intention to relinquish their position and settle their case; or
• where ‘full disclosure’ has been made before 5 April 2017.

The schemes or arrangements caught under this regime include those:

• disclosed or disclosable under Disclosure of tax avoidance schemes (DOTAS) or VAT Avoidance Disclosure Regime (VADR);
• arrangements for which HMRC have given a follower notice to the taxpayer;
• arrangements counteracted under the General Anti-Abuse Rule (GAAR).

 Following the first defeat, HMRC will issue the taxpayer with a warning notice saying that if the taxpayer participates in any further tax avoidance schemes within the next five years, which are defeated by HMRC, any penalties levied will be at a higher rate and the warning period will be extended.

During the warning period, the taxpayer will also be required to send details to HMRC about any tax avoidance schemes entered into.

If HMRC defeat three tax avoidance schemes while the taxpayer is on warning, the taxpayer’s names and other details will be published.

In addition to the above measures, HMRC released a consultation document in August 2016 called ‘Strengthening tax avoidance sanctions and deterrents’.

The Government’s proposals set out in this document were to:

• introduce penalties for those who design, market or facilitate the use of tax avoidance arrangements which are defeated by HMRC; and
• to look at modifying the way the penalty regime works for those whose tax returns are found to be ‘inaccurate’ as a result of using such arrangements, by defining what does not constitute the taking of ‘reasonable care’ and placing the requirement to prove ‘reasonable care’ on to the taxpayer.

The legislation, included in the 2017 Finance Bill, introduces a penalty for those who design, market or facilitate the use of tax avoidance arrangements which are defeated by HMRC, and focuses on abusive schemes rather than reasonable commercial arrangements.

By introducing these measures, the Government is sending a clear message of much tougher sanctions to not only those who get involved in such schemes, but also to those who promote the arrangements.

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 streamlined new system for employee benefits

Tracy Henson of Barnett & Turner explains how the world of taxable benefits has changed since April 2016. As accountants & tax advisers, one of our many jobs is to prepare P11D forms on behalf of clients. It’s the way in which we inform HMRC about the taxable benefits to employees that go beyond their salary.

At the start of the 2016-17 tax year, a number of changes came into force, which in theory make the process a little more streamlined.

First, the distinction between the P90 form and the P11D has been removed. The P90 existed for lower-paid employees, but it’s been decided that two systems running alongside each other is rather inefficient.

The second change is that the P11D was always compulsory if you were paying expenses related to employment. You’d show any payment on the form and then it could be reclaimed on a tax return. There’s now, however, an exemption for certain expenses – predominantly related to travel. (It’s important to note that you still need to keep full records though, as you must be able to provide proper documentation if HMRC raise a query.)

Third on the list of new rules is the option to pay tax through the payroll, where a P11D would previously have been used. This relates to all benefits not covered by the exemptions discussed above, with the exception of accommodation, loans, credit tokens and vouchers.

Finally, there is now an exemption for trivial benefits. If the cost doesn’t exceed £50 – and the employee isn’t receiving cash or cash vouchers – there’s no requirement for it to be filed in the P11D.  The exemption is capped at a total of £300 a year and includes any member of an employee’s family or household.

The net result of the changes is that we’re now in a rather simpler and more straightforward environment. But it’s certainly worth talking to your accountant about your own specific circumstances and the impact the new rules will have.

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

Island life beckons if you’re an entrepreneur or investor...

Are you a non-EU resident? If so, it may be that you haven’t previously considered the option of moving to the Isle of Man. PHAEDRA BIRD of Barnett & Turner’s Associates, Crowe Clarke Whitehill reveals the ‘Enterprise Isle’ initiatives that are designed to boost inward investment. Have you ever considered becoming a resident in the Isle of Man? New tax incentives and changes in financial regulation certainly make it an attractive option. But what practicalities are involved?

There are two types of residence visas you can potentially obtain from outside the EU.

The first is the Tier 1 Entrepreneur Visa, which you can obtain for three years and four months initially by investing £200,000 in a new or existing business. The company needs to be registered, pay tax and have a bank account in the Isle of Man.

You also have to meet certain other criteria, such as proving you haven’t been absent from the IOM for more than 180 days in any 12-month period.  (The Isle is, however, inside the Common Travel Area which includes the UK, Ireland and the Channel Islands, and if you spend time in this zone, that doesn’t count as an absence. So if you wanted to visit London for the weekend, for instance, it wouldn’t set the clock running on the 180-day limit.)

You can make an application to extend the visa for another two years, provided you remain engaged in the business and have created at least two full-time jobs lasting more than 12 months.

After five years, you can apply for Indefinite Leave to Remain in the IOM and this process can be accelerated if the business expands or more jobs are created.

The other option is a Tier 1 Investor Visa by making a qualifying investment of £2 million in the IOM within three months of arrival. Again, the initial visa is for three years and four months and the same absence criteria apply.  If the money remains invested throughout the period, then you can apply to extend the visa by another two years. And, once again, application for Indefinite Leave to Remain can be made after five years, with the possibility of speeding up the process by increasing the level of funds.

So, what about dependants?

Well, a spouse and children under the age of 18 can accompany the holder of either type of visa.

As an additional incentive to Tier 1 applicants, the IOM Government is also considering exempting people who come to the Island under the visa arrangements from the requirements to obtain the work permits that are generally required for all non-IOM workers.

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

Sole trader or limited company? Some points to consider.

Changes in legislation make the choice more complex today, argues Jonathan Wilson, Chartered Tax Adviser at accountancy firm Barnett & Turner. If you’re setting up a business for the first time, one of the key choices you’ll make is over how you choose to structure it. The simplest option is often to become a sole trader or, if there are two or more individuals in business together, a partnership. Many businesses start life in this way.

Alternatively, some might set-up in business as a limited company, appointing themselves as company director. There is no right or wrong answer here, but the way in which a business is structured will probably depend on a number of factors including possibly the business owners’ personal circumstances and the likely profits of the business.

It’s worth remembering that the Taxes Acts and the Companies Act are vast and complex, which means it’s important to get support from those who have knowledge and experience of the rules.

Limited liability

If you are a sole trader, you do not benefit from ‘limited liability’ and as a result are potentially at risk of losing your own personal assets if the business fails. A company is a separate legal entity and therefore it is possible for the business owner(s) to benefit from ‘limited liability’.

 Administration and formalities

If you run an unincorporated business, you prepare annual business accounts and a Self-Assessment tax return. The accounts are not filed at HM Revenue & Customs or Companies House, although some of the information contained within the accounts is declared on the tax return.

If you run a limited company, you are required to prepare accounts in a specific Companies Act format. Company accounts are filed at HM Revenue & Customs and at Companies House. You need to observe certain formalities before taking profits from a company, including the necessary recording of board meetings. It’s possible to pay salaries and bonuses, provided the company operates a payroll scheme.

 Rates of tax and national insurance contributions

As an unincorporated business owner, your tax and national insurance contributions on profit are at rates of 20% (basic rate), 40% (higher rate) and 45% (additional rate).

In addition, class 4 national insurance contributions are due on profits falling between £8,060 and £43,000 at 9% and 2% on profit over £43,000. Class 2 national insurance contributions of £145.60pa are due if profits exceed £5,965.

Regardless of the value of the amount you draw, tax and national insurance contributions are due on the taxable profit of the business.

As a company owner, you are able to control the level of income on which you pay tax by drawing only the level of income required to fund your lifestyle. Depending on circumstances, it is also possible to control the type of income on which you pay tax by voting yourself a tax-efficient remuneration package.

Companies are currently subject to corporation tax at 20%, although this rate is set to reduce slightly in the years ahead.

Should I review my existing business structure?

The Finance Act 2015 introduced major changes to the way in which business owners are taxed on profits extracted from a company - in particular by way of dividend. These included:

• the abolition of the notional 10% tax credit on dividends;
• a new 0% tax rate on the first £5k of dividends;
• and a new rate of taxation on dividends of 7.5% (basic rate taxpayers after the first £5k).

For most small business owners the result of these changes will be an increase in taxation.

In light of the changes introduced in the Finance Act 2015, business owners should consider whether the vehicle through which they trade is still appropriate for them and, if trading as a company, whether they are extracting profits in the most tax efficient manner. That’s why it is always worth having a discussion with your accountant or tax adviser about the most appropriate option for you.

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

Getting the best price for your business takes preparation

Jono Wilson of accountancy firm Barnett & Turner gives his top five tips for selling your company. If you’re thinking of selling your business, it really pays to plan ahead. In my experience, you’ll never get the best price if you’re reactive or rushed. You need to prepare properly as a vendor. Here are my top tips:

SEEK ADVICE

You need a realistic expectation of value, so take the advice of experienced individuals, such as your accountant or corporate finance adviser. If you have a figure in mind, but it turns out to be badly wrong, you’ll have a nasty shock waiting around the corner. Of course, if your advisers tell you that your business is worth less than you expected, you can always take a step back and re-evaluate; you’ll have lost very little in terms of time, effort and money.

DO YOUR HOMEWORK

Use the time prior to starting a sales process to “get your house in order”. You will need financial forecasts demonstrating future growth potential and your historic numbers will be scrutinised in a due-diligence process. If there are issues that need explaining – one-off costs and non-recurring fees, for example – this needn’t be a problem, as long as you are prepared to answer questions and place your business in the best possible light.  Using an advisor in this process can add significant value.

CHANGE THE WAY YOU WORK

In the event of a valuation being lower than your expectations, which doesn’t seem like the right level of recognition for all the years you’ve put into the business, why not spend that little bit longer with the company making some changes? Brainstorm with your accountant particular ways of adding extra value.

At the same time, it can often be a good idea to separate yourself from the day-to-day running of the business, as if you’re integral to the operation, the buyer may not pay a premium when they know you’ll be gone shortly after a sale. You might want to devolve operational responsibility to second-tier managers. This could involve an up-front cost, but may prove a good investment in the long run.

BE REALISTIC ABOUT TIMESCALES

Six months is often considered as a realistic time for the process from start to finish. There are all the documents and financial information to pull together before the negotiation even gets under way. The process could stretch out for 18 months if you need to make internal changes to the business in advance of the sale.

THINK ABOUT TAX

This is an area all of its own, of course. You need to thinking about this more than a year in an advance, as certain reliefs will only apply if you have been a director or officer of the business in the 12 months prior to the sale. The way you structure the sale needs to be tax efficient, so take professional advice, particularly if you have kids you want to pass benefit to.

In conclusion, selling a business can be a complex process with lots of parties involved. Meanwhile, you still have a business to run. That’s why it’s critical to get the right team of advisers and partners in place to make the sale as successful as possible.

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