Taxbreaks - November 2011

Welcome to taxbreaks, your update of new, interesting and topical developments and opportunities in the world of tax.

Removing your profits efficiently

As you will probably be aware the main rate of Corporation Tax is currently 26% having been reduced from 28% last year. It is currently proposed that this rate will continue to fall to 23% by 2014/15. If we compare these rates to the top rate of Income Tax on salary (50%) there is a clear discrepancy. Something that is often overlooked is that dividends are not taxed in the same manner as salary, with the top effective rate of Income Tax applicable to dividends being 36.11%. Furthermore, unlike salary, dividends are not subject to National Insurance charges (12% and 2% on the employee and 13.8% on the employer). The downside of dividends is that unlike salary, the payment of them does not reduce the profits of the company liable to Corporation Tax.

In the past, with higher Corporation Tax rates and lower Income Tax and National Insurance rates, remuneration planning for business owners often involved a very fine balancing act between salary and dividends. Now in all cases the payment of dividends will be more tax efficient than the payment of salary when looking at the company and the individual combined.

Careful planning is still required. Amongst the many things that need to be considered when putting together a remuneration plan are the share structure of the company/group, national minimum wage requirements, “non-working” shareholders, and other non-taxation considerations. Therefore, a well-rounded and considered remuneration plan is essential to today’s business owners.

Making the most of your expenditure

Following a recent case, if there are substantial construction works to a property, which would not otherwise obtain tax relief via capital allowances, a revenue deduction may be available.

The case considered the resurfacing of a car park. Despite HMRC protestation, it was considered that even though work was done to the entire car park, it was of a repair nature rather than being a renewal of the entire asset. This case shows the importance of obtaining tax advice in connection with any property refurbishment that you may undertake.

The benefits of planning in advance

As a result of recent changes to the rules governing both the tax treatment of companies disposing of shares in subsidiaries and the tax treatment of group transfers of fixed assets, in some circumstances it will now be possible to sell businesses, or parts of a trade, out of the corporate structure without giving rise to tax charges. This was not previously possible in most cases.

This opportunity has come about due to the extension of the substantial shareholdings rules, which now cover shares held in a subsidiary company that have been owned for less than one year, if the trade in that subsidiary company has been beneficially owned by the holding company in excess of one year. Furthermore, the new substantial shareholding rules may also exempt charges on fixed assets leaving the group, where previously, these charges would also have been payable on this type of transaction.  

These new rules, whilst welcome, are not all encompassing and care will still need to be taken (especially in relation to intangible assets, e.g. goodwill) hence early planning is essential.

Simple wind up of companies continues (for now!)

It continues to be possible for a company to be wound up informally rather than spending time and money on a member’s voluntary liquidation, despite HMRC issuing guidance suggesting that this would be repealed last April. However, as a result of a change of position by the Treasury Solicitor  (not HMRC!) companies with issued share capital of less than £4,000 have now been brought within bona vacantia, meaning that technically the issued share capital should be handed over to the treasury instead of distributed to the shareholders. The result of this is that companies to which this applies will now need to go through a share capital reduction prior to making the final distribution and being struck off informally.

We are expecting HMRC to make further announcements about these provisions and it is still possible that they may not be enacted. Therefore, if you have a company whose trade has ceased but still contains assets, you should consider seeking our advice about winding up this company and taking advantage of the informal wind up provisions whilst they are available.  

Salary Sacrifice Schemes - the VAT side

In 2010, in a high profile case, the European Court of Justice ruled that high street shopping vouchers provided to employees under a salary sacrifice scheme are a taxable supply on which VAT should be charged.

Whilst this case concerned the supply of vouchers, HMRC says that the principles considered must also apply to other goods and services provided under salary sacrifice schemes. For example, supplies of computers, gym memberships, provision of food and catering and the ‘Cycle to Work’ scheme. Benefits such as private medical insurance, dental plans and childcare vouchers are not affected by this case as they are exempt from VAT. Cars are still subject to the normal rules regarding the recoverability of VAT. Where input tax is blocked or restricted no output VAT is due.From 1 January 2012, businesses providing benefits which are not exempt from VAT will have to account for VAT on the amount of salary sacrificed by the employee, or on the cost of the benefit to the employer where a benefit is provided at less than its cost. Subject to normal VAT rules, the VAT incurred by the employer will be recoverable. However, any VAT incurred on the cost of providing a VAT exempt benefit e.g. childcare vouchers, will be irrecoverable.

If this will affect your business you should contact our VAT department for assistance and support.

Child Benefit – can you save it?

The government is proposing that from January 2013, child benefit will be means tested and withdrawn from any household with a higher rate taxpayer.  The higher rate tax level is currently £42,475, and is proposed to decrease annually.

This causes a great deal of disparity in the system, as a family with two people earning £42,000 will still receive child benefit, but a family with one person earning £43,000 will not. In addition, high earners could face heavy fines if they do not disclose that their spouse is receiving child benefit.  Child benefit is usually paid to mothers, so high earning fathers will have to ensure that their wives tell them if they have claimed the benefit, or they will still be liable for the fine.This new regime is still under consultation, however, those who may be affected need to either plan for the loss of such a valuable benefit, or if possible take planning measures to preserve it.

Even if you are not in the UK, you still might be

Mr Gaines-Cooper claimed to be non-resident in the UK in the tax years 1993–94 to 2003–04, on the basis that HMRC’s non-residency booklet IR20 stated that a taxpayer would be accepted as not-resident and not-ordinarily resident in the UK if he went to live abroad for at least three years and did not return to the UK in excess of 182 days per year, and 90 days per year on average over four years. Mr Gains-Cooper was held to have been UK resident throughout the period in question on the basis that his personal, family and business relationships in the UK were sufficient for him to have retained his UK residency status. Mr Gains-Cooper’s case was based around the premise that he thought that IR20 gave a binding assurance to him that he would be treated as not resident and not ordinarily resident in the UK if he remained outside the UK for the prescribed number of days per year. This was rejected by the special commissioners, and eventually made its way to the Supreme Court, where the appeal was dismissed by a majority.

Individuals who believe themselves to have lost their UK residency status should seek professional advice if they have retained any links in the UK (family, personal or business), as they may be affected by this judgement.

This case also highlights the dangers of relying solely on HMRC guidance booklets.  

New Penalty regime

The new penalty regime introduces an automatic fixed £100 penalty for online returns filed after 31 January 2012. Previously if the return was filed late, the penalty would be restricted to the amount of tax due, if this was less than £100. If a taxpayer had paid his/her tax on time, there would be no penalty even if the return was filed late. This is no longer the case and the £100 penalty will apply to all late returns irrespective of the tax position.

 For extremely overdue tax returns the penalty position remains the same as before and is as follows:

• 3 months late: additional penalties of £10 per day that the return is late, up to a maximum of £900 will be charged,
• 6 months late: the penalty is an additional 5% of the tax due or £300, whichever is the greater,
• 12 months late: the penalty is a further 5% of the tax due or £300, whichever is the greater.

There are also penalties of 5% of the amount due for paying tax late at the following points:

• 30 days late
• 6 months late
• 12 months late.