Tax tips for Family Businesses

Family Businesses

Find out how family businesses can reduce their tax burden with some practical forward thinking.

Owners and managers of family-owned businesses rightfully spend the vast majority of their time ensuring that the business runs well and generates profits. In the midst of such a demanding task, it can be easy to overlook some tax considerations that can potentially be significant.

The topic of tax in the context of family-owned businesses is a large one – however, there are a few key considerations to bear in mind:

Sections

 


How is your business set up?

Most family-owned businesses are set up as companies, but some do run as partnerships. These two structures differ in terms of tax, and it is worthwhile for business owners to consider which structure could be most beneficial for their business.

Companies may pay lower rates of tax initially, but further tax (including National Insurance Contributions in the case of salary/bonuses) is often due when higher profits are extracted. Partnerships however are tax transparent, so profits are taxed as they arise, even if they are not extracted (but are taxed only once). It is generally easier to convert a partnership into a company than the other way around.


How are you extracting funds?

The business has a choice, broadly speaking, of paying dividends or paying salary/ bonuses. However, recent legislation has attempted to narrow the tax difference between companies and sole trader/partnerships.


What’s New?

The Finance Bill 2016, published on 24 March 2016, contains the new rules for dividends.

Changes:

  • From 6 April 2016, the notional 10% tax credit on dividends will be abolished
  • A £5,000 tax free dividend allowance will be introduced
  • Dividends above this level will be taxed at 7.5% (basic rate), 32.5% (higher rate), and 38.1% (additional rate)
  • Dividends received by pensions and ISAs will be unaffected
  • Dividend income will be treated as the top band of income
  • Individuals who are basic rate payers who receive dividends of more than £5,001 will need to complete self assessment returns from 6 April 2016
  • The change is expected to have little impact upon non-UK residents

Impact

The proposed changes raise revenue despite the so-called “triple lock” on income tax. Perhaps aimed to tax small companies who pay a small salary designed to preserve entitlement to the State Pension, followed by a much larger dividend payment in order to reduce National Insurance costs. It appears that the government is anti-small companies, preferring workers to be self-employed.

These changes will affect anyone in receipt of dividends: most taxpayers will be paying tax at an extra 7.5% p.a. Although the first £5,000 of any dividend is tax free, in 2016/17:

  • Upper rate taxpayers will pay tax at 38.1% instead of an effective rate of 30.55% in 2015/16
  • Higher rate taxpayers will pay tax at 32.5% instead of an effective rate of 25% in 2015/16
  • Basic rate taxpayers will pay tax at 7.5% instead of 0% in 2015/16

This measure will have a very harsh effect on those who work with spouses in very small family companies. For example, a couple splitting income of £100,000 p.a. could be over £5,000 p.a. worse off.

Businesses should therefore consider these tax issues when using either of these methods to extract funds.

There can be benefits in various family members being involved in the business, particularly if they, for example, perform smaller roles and are not paying taxes at the higher rates. Care is always required here to ensure that any salaries are commensurate with the job performed.

There can also be complexities in giving away shares to spouses to enable them to capture dividends at the lower rates.


How are you incentivising your staff?

Clearly, the retention of key staff is of critical consideration for businesses of any size. With cash flows being restricted in these difficult times, consideration can usually be given to granting share options to employees. Certain tax-approved options schemes (such as Enterprise Management Incentives) are potentially very tax-efficient and a good incentive for key workers.


Are you thinking of an exit?

It is never too early to contemplate what would happen if the business were sold. The headline rate of capital gains tax is not good as it once was but there are potentially reliefs available which may minimise the tax burden on exit. With the right structuring, valuable relief can potentially be opened up to various family members through tax planning.


Tax Planning with pensions

Pensions are all the rage now, given the recent changes.

In certain instances, an appropriate pension plan for a family-owned business can lead to substantial tax efficiencies. Also the use of SIPPs and SASSs can be used a valuable tax planning tool to extract funds from otherwise taxable business profits.


What about the next generation?

Succession planning is a key strategic matter for any family-owned business. Where the business is a trading concern, it is often possible (depending on the particular circumstances) to give away shares without adverse tax consequences.

But care is required here to avoid certain pitfalls that can exist if even a few investment assets are located somewhere within the business.

It may also be the case that a trading business qualifies for inheritance tax relief (under the business property relief regime); therefore, founders may not be worried about inheritance tax now. If the business is sold however, this relief will be lost, potentially generating a significant inheritance tax bill in the future. Fortunately, planning options do exist here, such as transferring the business into a trust before an exit.

Needless to say, the above gives only a taste of some of the relevant tax considerations where family-owned businesses are concerned. The important point is to remember the significant impact that tax can make, and to take advice early and regularly.

Latest news & blogs…

CHANGES TO THE NHS PENSION ANNUAL ALLOWANCE

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In the Summer Budget 2015, the Chancellor announced changes to the pensions annual allowance that are likely to have an effect on NHS Pension Scheme members.

Measures to restrict pensions tax relief will be introduced from 6 April 2016 with the introduction of a tapered reduction of the annual allowance for individuals with income over £150,000. The key points that you should be aware of include:

  • The provisions reduce the annual allowance by £1 for every £2 that an individual’s adjusted net income exceeds £150,000, up to a maximum reduction of £30,000, resulting in only £10,000 of pensions annual allowance at income levels of £210,000 or above.
  • Further restrictions can apply subject to timing of the drawing of multiple pension funds.
  • As the NHS Pension Schemes are defined benefit schemes, individuals have to take into account the increased value of their pension over a period of time and not the superannuation paid into the NHS Pension Scheme. Doctors with relatively modest earnings may be caught under the new regime as the levels of income attributed to the calculations include amounts after employee pension contributions, the growth in the pension scheme, and all other income including investment income.
  • Doctors in both the 1995/2008 Scheme and the new 2015 Scheme will have even further complexities to their calculation than previously and it is important the pensions annual allowance position continues to be reviewed on an annual basis.
  • The use of estimated figures may be needed in order to ensure that individuals are made aware of any impending tax liabilities.

Threshold income – this is all earned and unearned income on which income tax is charged. It is at this point that relief for employees’ contributions is given. If the threshold income is more than £110,000 (ie £150,000 less the maximum annual allowance of £40,000), a second calculation will be required, adjusted income.

Adjusted income – this is threshold income plus adjustments for occupational personal pensions and includes the actual pension input amount for the year less any member contributions paid in the tax year.

 The inclusion of a pension charge in the tax liability also 125,000 increases the taxpayer’s payments on account in the following tax year, although there is an option to request that the pension scheme pays the tax, subject to certain limits, conditions and deadline dates for the elections needed, (31 July 125,000 following the tax return deadline submission date).

This change in legislation will have a impact on large numbers of NHS Pension Scheme members. As a result, income tax planning is more important than ever. Consideration of the effects of your personal circumstances is necessary to ensure you plan accordingly.

BREXIT – What next?

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Key tax issues for businesses to consider

The decision has been made. The aftermath has created panic and hysteria both politically and economically. The fall-out from Brexit will take some time to play itself out, however, what should businesses consider in these spectacularly uncertain times?

Short term, the vote for Brexit will have little immediate impact beyond increased volatility in the currency and stock markets given that an emergency Budget has been ruled out. The new PM Theresa May may well look to bolster the UK’s attraction as a business location as one of her first duties.

Longer term, the effects on some sectors will be more fundamental and unlikely to make it easier to do business within the EU. Clearly this will depend on the terms the UK can agree for Brexit, something which may not become clear for some time possibly years. There may also be significant impacts on businesses with little direct EU trade.

In the meantime, uncertainty over the UK’s relationship with the EU will continue for months or years creating a drag on the economy as businesses and consumers take a wait and see approach to investments and major purchases.

As with all major economic shocks, businesses that remain engaged and adaptable will be best placed to trade profitably and make the most of the opportunities that they offer.

Some key issues to consider:

  • VAT – sales of goods to and from the UK become imports and exports (no acquisitions), which would need to clear customs and incur import charges triggering a cash flow disadvantage (the delay between paying customs charges and entitlement to recover the input VAT). This can be mitigated by using deferment and customs warehousing arrangements.
  • Customs Duty – on Brexit the UK will no longer be part of the EU’s Customs Union. As a result, EU customs duties could apply to imports from the UK, making it less attractive for EU companies and consumers to source goods from UK companies. Similarly, the UK Government may extend the current UK customs duty tariff to imports from the EU, adding costs for UK companies reliant on raw material and finished goods from EU suppliers.
  • Repatriating profits and withholding taxes – withholding taxes on dividends from EU subsidiaries or payments of interest or royalties to or from companies located in the EU will be problematic. Currently, EU legislation allows subsidiary companies to pay dividends up to a UK parent company without the need to account for withholding tax. Similarly, companies often rely on the interest and royalties directive to make interest or royalty payments free from either UK or local withholding taxes. If the benefit of this legislation is withdrawn, companies would be relying on existing double taxation agreements in order to reduce or eliminate withholding tax rates.

While the majority small UK business will be directly unaffected, these are some of the changes certain businesses need to consider in order to find a path of least resistance in this volatile climate.

Should you require further information regarding the above, please contact us on +44 (0)114 275 62 92 or info@shipleystax.com.

HMRC backtracks on APN’s

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HMRC has backtracked on hundreds of Accelerated Payment Notices (APN) after admitting defeat following an application for Judicial Review. This affects the notices it  has issued to hundreds of taxpayers as a result of a Judicial Review lodged on their behalf.   This is not the first time that HMRC has undertaken a withdrawal of APNs that they had previously issued.

APNs were challenged on a number of grounds including the argument that the Employee Benefit Trust arrangements under consideration were not ‘notifiable’ to HMRC, under the DOTAS regime.  HMRC has now admitted that it did not have the right to issue the APNs in relation to these arrangements.

Shipleys Tax Planning partner, Shabeer Yousuf CTA, says “this case demonstrates, that a taxpayer in receipt of an APN should not automatically assume that HMRC has followed the correct processes and exercised its powers lawfully, the taxpayer should seek specialist advice.”

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