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…
IR35 watch – HMRC suffers another knock out
IR35 has been the bane of many self employed workers and their advisers since its controversial inception many years ago.
Recently, several high profile TV presenters have been under the spotlight in respect of whether IR35 applies to their working arrangements. The latest of these resulted in a loss for HMRC.
In today’s Shipleys Tax note we briefly look at the recent IR35 case making headlines and what it means for taxpayers.
The first half…
HMRC’s assertions that IR35 applies to certain working arrangements has been something of a mixed bag, especially for the TV industry. Alongside its successes, HMRC has suffered several high-profile defeats, including against the television presenters Kaye Adams, Helen Fospero, and Lorraine Kelly; whilst Gary Lineker’s case still seems to be languishing in extra time. The latest case to be heard was that of Adrian Chiles, most recognisable as a TV football presenter and Radio 5 host.
What is IR35?
The much maligned rule is another name for the “off-payroll working” legislation. The term ‘IR35’ actually refers to the press release that originally announced the legislation in 1999.
Simply put, the IR35 rules are designed to work out whether someone is genuinely self-employed or employed rather than a “disguised employee” and should be treated as such for the purposes of paying tax. There are multiple factors that the courts use to help determine this, e.g. control, substitution and supervision being among them.
This is because that those who set up and work through a limited company are perceived to be more tax efficient as opposed to those who are employed. HMRC attempt to argue that some taxpayers try to take advantage of this tax efficiency by appearing to be self-employed on the surface, when actually they would be an employee were they not providing their services through a limited company. Despite the fact this is patently not always the case, the off-payroll working rules are designed to tackle this, but the rules have been forever attacked for being overly complicated, causing unjust outcomes and, at times, being unworkable.
The second half comeback…
In Adrian Chiles’ (“A”) case the Tribunal disagreed with HMRC’s assertions that A was an employee (in all but name) of both the BBC and ITV. The Tribunal held that A was in business on his own account via his limited company, based on the number of clients he worked for. He had also embarked on a number of unsuccessful commercial ventures, indicating that he bore considerable financial risk. The Tribunal also downplayed the importance of a lack of substitution clause, i.e. that A did not have the right to provide a substitute if he were unable to undertake his duties.
The Tribunal took a “big picture” approach and decided that on the face of things the arrangements with both the BBC and ITV were part of A’s business, and not part of an arrangement to which IR35 would apply.
Extra time…?
Tribunal decisions are not binding, and thus it is likely that HMRC will appeal. However, it does show that these high-profile cases should not be taken at face value and the complexity of the off-payroll legislation makes it paramount that specialist advice is sought to avoid the pitfalls in this area.
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.
New year brings new VAT & Customs rules
ON THE FACE of it, the UK left the EU on 31 December 2020. From 1 January 2022 there were additional customs rules to be aware of for businesses trading with the bloc, our former partners in the EU.
In today’s Shipleys Tax brief we look at what these rules are and how Shipleys Tax can help.
What is Customs Duty?
Customs duty is payable on goods imported into the UK. The rate of customs duty payable is determined by the tariff classification of those goods.
Customs duty cannot be recovered, therefore where payable, it is a cost to businesses resulting in reduced profit margins.
Following Brexit, all imports to mainland Britain (England, Scotland and Wales) from overseas may be subject to import duties. Certain processes, mainly regarding paperwork, were not initially required in order to allow affected businesses time to get used to the new relationship with their customers. These have now taken effect:
Customs duty cannot be recovered, therefore where payable, it is a cost to businesses resulting in reduced profit margins.
- full customs import declarations are needed for all goods at the time a business or the courier/freight forwarder brings them into Great Britain
- customs controls at all ports and other border locations
- the possible need for a suppliers’ declaration proving the origin of your goods (either UK or EU) if using the zero tariffs agreed in the UK’s trade deal with the EU
- commodity codes, which are used to classify goods for customs declarations, are changing.
As such, it is now pivotal for importers to proactively consider their customs duty position.
How can Shipleys Tax help? Can your business benefit from customs duty planning to make tax savings?
Shipleys Tax can provide guidance to importers on many aspects which drive the duty rates payable on imports, using our experience to identify opportunities to optimise the duty position as follows:
- Tariff Classification – The commodity code used for imports drives the import duty payable on those goods to HMRC. Establishing which code to use can be a complex task and can result in significant variations of duty paid to HMRC. Using our expertise, we can identify saving opportunities by using appropriate tariff codes and where necessary, obtain rulings from HMRC to confirm the treatment.
- Preference – Preferential trade agreements (i.e. the EU trade deal with the UK post Brexit) exist between the UK and its key trading partners. What this means is that where goods are imported from trade partners (i.e. the EU), preferential duty rates can be claimed, resulting in savings. We can establish where and how preference can be claimed to make tax savings for your business.
- Valuation – We can advise on the appropriate customs valuation method used for goods imported into the UK.
- Customs Special Procedures – Customs special procedures allow businesses to suspend, relieve, reduce or defer customs duty payable on imports. We will establish whether these special procedures offer customs duty or cash flow savings for your business and use our experience to assist in their implementation.
Shipleys Tax can provide guidance to importers on many aspects which drive the duty rates payable on imports, using our experience to identify opportunities to optimise the duty position.
HMRC claims
Our reviews often result in opportunities for three-year backdated claims for overpaid customs duty. We will manage the claim process for your business, liaising with HMRC to obtain the duty refunds your business is due!
Get in touch
With wholesale changes impacting importers following the UK’s departure from the EU, now is the ideal time to ensure you are seeking advice from the experts, to ensure you pay no more customs duty than is due, whilst remaining compliant with HMRC rules.
At Shipleys Tax we have experienced indirect tax advisers and are well placed to ensure that your business is operating as effectively as possible, while remaining compliant with the duty regulations in this area.
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.
Business rates loophole for second home owners to close
MANY SECOND home owners use a loophole to avoid council tax on the property. However, the government has announced that new rules will apply to prevent abuse from April next year.
In today’s Shipleys Tax brief we look at how this works and what you can do about the changes.
What’s going on?
Under the current system, owners of second properties in England can avoid a council tax bill if there is an intention to let the property to holiday makers. This brings the property into the business rates regime and, as a result, small businesses rates relief can be claimed. The problem is that many second home owners are declaring an “intention” to let their property, when in reality they just remain empty for most of the time.
New rules
From April 2023, the rules will change so that only genuine holiday lettings will qualify for the relief, bringing non-qualifying properties back into the charge to council tax. A property will only be assessed under the business rates regime if the owner can provide evidence that:
- it will be available for letting commercially, as self-catering accommodation, for short periods totalling at least 140 days in the coming year
- during the previous year, it was available for letting commercially, as self-catering accommodation, for short periods totalling at least 140 days; and
- during the previous year, it was actually let commercially, as self-catering accommodation, for short periods totalling at least 70 days.
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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