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?
- 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.
Dividends
The Finance Bill 2016, published on 24 March 2016, contains the new rules for dividends.
Summary:
- 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…
BEWARE OF STAMP DUTY SCAM 
ANYONE THAT has recently purchased a property needs to be aware of stamp duty scam doing the rounds. HMRC is warning housebuyers to be wary of cold callers, or social media ads, claiming that they are owed a refund of stamp duty land tax.
While such firms in many cases may be legitimate, they tend to charge a sizeable fee on any refunds receivable. This is almost always disproportionate to the work undertaken as such claims can be made directly by completing a simple form.
So what do homeowners need to watch out for?
HMRC has long warned taxpayers about so-called “high volume” tax repayment companies. These are companies that have a very limited purpose – usually attracting people in with the promise of large tax refunds of unclaimed allowances, e.g. for uniforms or the marriage allowance.
While such firms in many cases may be legitimate, they tend to charge a sizeable fee on any refunds receivable. This is almost always disproportionate to the work undertaken as such claims can be made directly by completing a simple form.
However, some supposed refund firms are actually fraudsters with questionable motives. HMRC is now warning about a recent spate of stamp duty tax refund claims that have not met the criteria for a refund. These usually prey on the unsuspecting public via cold calling or social media ads.
One such method that Shipleys Tax have encountered appears to be where the scammer approaches a homeowner claiming that they could be eligible for “multiple dwellings relief” for extremely spurious reasons, e.g. because a bedroom has an en-suite bathroom or a built-in wardrobe which “could be used as a kitchen” etc. While these claims may simply be rejected outright, the worry is that in some cases the refund is initially processed, the scammer takes their “fee”, and the homeowner then receives a demand for repayment of the refund, with interest and possibly even penalties. Naturally, by then the potential scammer has then disappeared.
Anyone receiving such a letter or being approached should refer it to the professional that handled their conveyance to ensure nothing has been missed. We also advise them to contact a tax specialist for guidance. We would also reiterate that are also many legitimate firms who genuinely work to recover tax refunds and provide a thoroughly professional service.
If you are affected by any of the issues above and would like more information, please call 0114 272 4984 or email info@shipleystax.com.
Please note that Shipleys Tax do not give free advice by email or telephone.
Getting VAT back on Electric Cars
CLIMATE CHANGE and sustainability are currently on everyone’s agenda, with society being encouraged to take steps to reduce its carbon footprint wherever possible.
As part of this, the Government has introduced various tax reliefs and favourable treatments for electric cars, encouraging business owners and individuals to opt for the new Tesla or Porsche Taycan as opposed to the petrol or diesel alternatives.
In today’s Shipleys Tax blog, we consider one of the most frequently asked VAT question: whether VAT can be reclaimed on the purchase or lease of electric cars. Note, the comments below are intended only to be a general guide and not advice on a VAT reclaim.
…we consider one of the most frequently asked VAT question: whether VAT can be reclaimed on the purchase or lease of electric cars.
VAT reclaim on electric vehicles
From a VAT perspective there are no special reliefs relating to electric vehicles. So currently, electric vehicles are subject to the same rates of VAT as their diesel or petrol counterparts, i.e. 20%. Further to this, the rules for reclaiming VAT incurred on an electric vehicle depends on whether it is purchased or leased and is the same as for non-electric vehicles:
- Leased cars – where an electric car on lease is available for any private use, only 50% of the VAT paid can be recovered. This is to take into account the private element of the vehicles use. Note however, VAT paid on any servicing or maintenance charge can be recovered in full. As such it is more tax efficient to ensure that a service contract is taken separately to the lease.
- Purchased cars – where an electric car is purchased but available for private use (e.g., has private insurance, is kept at home over night etc) no VAT is reclaimable. This includes cars purchased outright, hire purchase cars and generally personal contract purchases.
- Commercial vehicles – commercial electric vehicles such as vans, lorries etc with incidental private use are entitled to full VAT recovery. It is worthwhile noting that for VAT purposes commercial vehicles also include certain types of pick-up trucks and modified cars.
…where an electric car on lease is available for any private use, only 50% of the VAT paid can be recovered. This is to take into account the private element of the vehicles use.
How to reclaim all the VAT on electric cars
This is a complex area and quite beyond the scope of this blog. However, in some very specific circumstances, businesses may be entitled to recover full VAT on electric cars. This is where businesses can show that the car is used wholly for business and NOT available for private use. Typically this applies only to “pool cars” and cars use in a trade (e.g., taxi or vehicle leasing business). Whilst in theory it may be possible to argue 100% recovery on other cars under the “wholly for business” case, in practice it is a different matter altogether. Detailed evidence would need to be maintained proving the car is only available strictly for business and no private use is allowed. This could be for example ensuring the car is only insured for business journeys, or the car is only kept overnight at business premises, or contractual restrictions provide that the business only journeys are allowed. There is no standard process here and HMRC would certainly look to challenge the VAT treatment, as such this is an exception rather than the rule and would need careful planning.
…in some very specific circumstances, businesses may be entitled to recover full VAT on electric cars. This is where businesses can show that the car is used wholly for business and NOT available for private use.
Charging electric vehicles: Reclaiming VAT
HMRC currently allow recovery on VAT on electric charging costs on the following basis:
Home charging
VAT incurred on charging an electric vehicle at home for sole traders and or partners in a business can be recovered on the business miles only. As such, HMRC expect detailed mileage records to be kept showing the private use.
This does not apply to employees of a business as the supply of the electricity in this case is made directly to the individual employee and not the business, therefore does not meet the business test.
Public charging
Business miles incurred by sole traders, partners and employees can reclaim the VAT they incur when charging their vehicles at a public charging point. Mileage records detailing the business usage should be kept supporting the reclaim.
VAT incurred on charging an electric vehicle at home for sole traders and or partners in a business can be recovered on the business miles only.
Charging at a business premises
Where vehicles are charged at the business’s premises, and are used for business and private mileage, a record detailing business and private use should be kept.
The business has two options in this case as follows:
- The business can restrict the VAT it claims on electricity and reclaim VAT only on the electricity used for business purposes; or
- Reclaim all VAT on the cost of electricity and pay output VAT to HMRC on any electricity used privately.
HMRC to ease VAT burden?
Currently, these methods for VAT recovery involve significant amount of record keeping and administration for what is potentially small amounts of VAT recovery. HMRC have taken note of this and are considering simplifications which may reduce the burden of evidence on currently imposed – so watch this space.
If you are planning on purchasing or leasing an electric vehicle and would like to know whether you can recover the VAT, please call 0114 272 4984 or email info@shipleystax.com.
Please note that Shipleys Tax do not give free advice by email or telephone.
Business Asset disposals tax investigations
SELLING PART or all your business can be fraught with tax and legal issues. One aspect which many get wrong is the extremely valuable tax relief on disposal of a business asset. The relief, known as business asset disposal relief (“BADR”), has a lifetime limit of £1 million – an amount which was reduced in 2020. Now, HMRC is sending letters to individuals who claimed this relief in 2020/21, warning that they may have underpaid tax.
In today’s Shipleys tax brief we look at what’s going on and what should you do if you are unfortunate to receive a letter.
Now, HMRC is sending letters to individuals who claimed this relief in 2020/21, warning that they may have underpaid tax.
What is business asset disposal relief?
Business asset disposal relief was previously known as Entrepreneurs’ relief (ER). This was revamped in 2020 and, aside from being rebadged as BADR, there was no change to the underlying mechanics of the relief. However, the primary change was that the cumulative lifetime limit for gains (i.e., “profits”) on disposal of qualifying assets was slashed from £10 million to £1 million. This did not affect gains arising before 11 March 2020. So, for example, if a gain of £8 million had been realised on 10 March, it could qualify in full, but the unused £2 million disappeared the next day!
…the primary change was that the cumulative lifetime limit for gains (i.e., “profits”) on disposal of qualifying assets was slashed from £10 million to £1 million.
What’s the problem?
HMRC is seemingly concerned that taxpayers (and by extension, their advisors) may not have understood that the reduced £1 million limit had to include gains arising prior to 11 March 2020, i.e. it was a retrospective test. It is now writing to taxpayers that claimed BADR in 2020/21 that it believes fall into one of two sets of circumstances:
- more than £1 million of gains have already been subject to an ER claim prior to the change, meaning the allowance for 2020/21 was £nil; or
- where less than £1 million gains were previously subject to a claim, but the claim in 2020/21 means the limit has been exceeded, e.g. where, say, £500,000 had previously been claimed, then a claim for £1 million was made in 2020/21.
HMRC is seemingly concerned that taxpayers (and by extension, their advisors) may not have understood that the reduced £1 million limit had to include gains arising prior to 11 March 2020…
What should you do if you get a letter?
Although, this type of “nudge” letter is usually a precursor to the opening of a formal enquiry, you should not panic. Anyone receiving a letter should check their BADR/ER claim history (back to 2008) to check the position and amend their return if necessary. We recommend you promptly speak to a tax advisor to establish the position and determine the best course of action.
If you do so, although there will be late payment interest, it appears that no penalties will be charged as long as the correction is made before a compliance check is started.
What no to do would be to ignore the letter hoping HMRC will go away. They won’t. This type of “fishing” exercise conducted by HMRC is based on yielding returns and HMRC will not relent until it is satisfied there is no potential tax underpayment at stake.
If you are affected by any of the issues above and would like more information, please call 0114 272 4984 or email info@shipleystax.com.
Please note that Shipleys Tax do not give free advice by email or telephone.
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