Tax tips for 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:
- How is your business set up?
- How are you extracting funds?
- What’s New?
- How are you incentivising your staff?
- Are you thinking of an exit?
- Planning with pensions
- What about the next generation?
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.
The Finance Bill 2016, published on 24 March 2016, contains the new rules for dividends.
- 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
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…
The Government today (29 May) announced in what seemed like the final countdown further details about the extension of the Coronavirus Job Retention Scheme (CJRS) and the Self-Employment Income Support Scheme, we’ve outlined these below for you.
The Chancellor announced three changes to the job retention scheme:
- From 1 July 2020, the scheme will be made more flexible to enable employers to bring previously furloughed employees back part time and still receive a grant for the time when they are not working.
- From 1 August 2020, employers will have to start contributing to the wage costs of paying their furloughed staff and this employer contribution will gradually increase in September and October.
- The scheme will close to new claimants from 30 June.
Part time furloughing
From 1 July 2020, businesses using the CJRS scheme can bring previously furloughed employees back to work part time.
- The government will continue to pay 80% of wages for any of the normal hours they do not work up until the end of August. This flexibility comes a month earlier than previously announced to help people get back to work.
- Employers will decide the hours and shift patterns their employees will work on their return and will be responsible for paying their wages in full while working. This means that employees can work as much or as little as the business needs, with no minimum time that they can furlough staff for.
- Any working hours arrangement agreed between a business and their employee must cover at least one week and must be confirmed to the employee in writing.
- When claiming the CJRS grant for furloughed hours, they will need to report and claim for a minimum period of a week. They can choose to make claims for longer periods such as on monthly or two weekly cycles if preferred.
- Employers will be required to submit data on the usual hours an employee would be expected to work in a claim period and actual hours worked.
If employees are unable to return to work, or employers do not have work for them to do, they can remain on furlough and the employer can continue to claim the grant for their full hours under the existing rules.
From August, the CJRS grant will be slowly tapered with contributions made by employers as follows:
|Month||% of wages CJRS||Max CJRS wages cap||Who pays NIC & Pension?||Employer contribution|
|June & July||80%||£2,500||Govt||NIL|
Note that many smaller employers have some or all of their employer NIC bills covered by the Employment Allowance so will not be significantly impacted by that part of the tapering of the government contribution.
It’s important to note that the scheme will close to new claimants from 30 June. From this point onwards, employers will only be able to furlough employees that they have furloughed for a full three-week period prior to 30 June.
This means that the final date by which an employer can furlough an employee for the first time will be 10 June for the current three-week furlough period to be completed by 30 June. Employers will have until 31 July to make any claims in respect of the period to 30 June.
Self-Employment Income Support Scheme
The Chancellor also announced plans to extend the Self-Employment Income Support Scheme (SEISS) for those people whose trade continues to be, or is newly, adversely affected by COVID-19 (coronavirus). Eligible self-employed people will be able to claim a second and final SEISS grant in August; this will be a taxable grant worth 70% of their average monthly trading profits for three months, paid out in a single instalment and capped at £6,570 in total.
The eligibility criteria for the second grant will be the same as for the first grant. People do not need to have claimed the first grant to claim the second grant: for example, their business may have been adversely affected by COVID-19 more recently.
Claims for the first SEISS grant, which opened on 13 May, must be made no later than 13 July. Eligible self-employed people must make a claim before that date to receive the first SEISS grant (a taxable grant of 80% of their average monthly trading profits, paid out in a single instalment covering 3 months’ worth of profits, and capped at £7,500 in total).
If you need help with the issues above, please call us on 0114 272 4984 or email email@example.com – we are ready to assist.
The Bounce Back loan scheme is fast, attractive and gives small businesses easy access to money. But many unsuspecting SME companies are unaware of a potential 32.5% tax charge if used incorrectly. We look at how this arises and what you can do.
The government introduced Bounce Back Loan scheme on 4 May 2020 to help small businesses get access to a injection of cash up to £50K. As loans, the Bounce Back terms are very attractive: no interest or repayments for the first year, a low interest rate afterwards, and no penalties if you pay them back before the six years are up.
What is the loan used for?
The problem arises when the money is taken out as cash withdrawals to fund private expenses even though the Bounce Back Scheme terms specifically states that it is not for personal purposes.
In these circumstances, as a company, you essentially have two basic options: treat the withdrawal as dividends or treat the withdrawal as a loan owed to the company by the shareholder/director.
In a Coronavirus riddled world, many small companies will not be in a profitable place and hence may not be able to legally declare dividends. In such scenario, to avoid the prospect of “illegal” dividends, the second option kicks in and you are faced with treating the monies withdrawn as a “loan”. Specifically, they become what is known as directors’ loans which is a loan from the company to the director/shareholder. The upshot of this is that you must repay the loan balance to back the company at some point in the future.
Corporation tax charge on loans: 32.5%
And this is where the problems kick in. The Bounce Back loan has very attractive repayment terms, so it is tempting to leave it outstanding beyond the first 12 months. However, loans to directors can be subject to a corporation tax charge at 32.5% if not repaid within a certain time period. This 32.5% tax charge becomes due if you do not repay the director’s loan back to the company within 9 months of the company’s year-end passing. For those withdrawing the full £50,000, the tax charge can amount to an eye watering £16,250! This tax is payable by the company and will no doubt severely impact cashflow.
Can you avoid the 32.5% tax charge?
If you’re planning on taking a loan and repaying it within 9 months of your company accounting year-end (the date in which you actually applied for the BBL loan does not matter here for tax), no corporation tax charge will arise. But, if you end up having to pay the 32.5% tax charge, there is some relief as you can reclaim the tax back from HMRC at a later point when the loan is cleared and under certain circumstances.
Personal tax issue
Also, as if paying 32.5% corporation tax wasn’t enough, there is a potentially a further additional tax on the loan when borrowing money from your company. This occurs when a director’s loan exceeds £10,000 at any point during the year; HMRC treat this as receiving a “benefit in kind”. This can have personal tax implications, including a National Insurance charge for your company. However, to avoid this, the company can charge you interest on the loan at HMRC’s official rate for the duration of the “loan”.
Paying a salary instead
The more straightforward option is to pay yourself a salary. But by doing so you will be essentially taxing the loan via PAYE. This may or may not be cheaper than paying the £16,250 above depending how it is structured.
But remember, Bounce Back Loans are not for personal purposes, and insolvency practitioners (who would presumably act on behalf of banks should you fail to repay the loan) have warned that increasing salary payments after receiving Bounce Back Loans may be treated as a being for personal purposes, although we feel this interpretation may be open to challenge.
If you are considering taking out a Bounce Back Loan and need help with the issues above, please call us on 0114 272 4984 or email firstname.lastname@example.org.
If your business pays VAT, you can defer it until 31 March 2021. To defer, you do not need to tell HMRC – but make sure you remember to cancel your direct debit.
To help businesses struggling with their cashflow during the COVID-19 pandemic, VAT registered businesses can opt to defer the payment of VAT that becomes due between 20 March 2020 and 30 June 2020. This will cover returns for the quarter to 28 February 2020 (due by 7 April 2020), quarter to 31 March 2020 (due by 7 May 2020) and the quarter to 30 April 2020 (due by 7 June 2020).
Businesses do not have to take advantage of the option to defer – they can instead choose to pay their VAT as normal. Where they have sufficient income and have received payment from their customers, this may be a preferable option to prevent running into debt later. The VAT will still be due – the payment date is simply delayed.
HMRC will not charge interest where VAT is paid later as a result of this measure.
Businesses that wish to take advantage of the option to defer paying their VAT do not need to tell HMRC – they simply delay paying the VAT over to HMRC.
Cancel direct debits
Where a business has set up a direct debit to pay their VAT, they will need to cancel the direct debit if they wish to take advantage of the deferral option. If they forget to do this, the VAT payment will be taken automatically.
Paying deferred VAT
Any VAT that is deferred must be paid over to HMRC by 31 March 2021.
File returns on time
Deciding to defer payment of VAT does not affect the obligation to file a VAT return. VAT returns that fall due within the deferral window should be filed as normal and on time.
Where a VAT returns shows that a repayment is due, HMRC will make the repayment as normal.
After the deferral period
When the VAT deferral window comes to an end, VAT for periods outside the window must be paid as usual.
If you need help with VAT deferral or any COVID-19 financial or tax issue please call us on 0114 272 4984 or email email@example.com – we are ready to help.