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…
How to get up to £5k off accounting software with new Govt scheme
A GOVERNMENT SCHEME launched 20 Jan 2022 gives businesses up to £5,000 saving on accounting and customer relationship management software.
What it is it?
The scheme, called “Help to Grow: Digital”, is an attempt by the government to give support to small businesses by helping them improve their digital systems and processes:
- scheme provides businesses with discounts of up to £5,000 on approved Digital Accounting and Customer Relations Management (CRM) software
- dedicated website providing free, impartial support now open to boost businesses’ digital skills.
Who is it for?
To qualify for the financial discount, businesses from any sector must meet all 4 of the following criteria:
- be a business based in the United Kingdom registered with Companies House or be a registered society on the Financial Conduct Authorities Mutuals Register
- be employing between 5 and 249 people.
- have been actively trading for over 12 months, and have an incorporation date of at least 365 days prior to application
- be purchasing the approved software for the first time
What do you get?
Eligible businesses will receive one financial discount towards the purchase of one approved software product up to a maximum of £5,000 (not including VAT) in Customer Relationship Management and Digital Accounting software product categories.
- additional software product categories will be available with the discount soon, including e-Commerce software
- the financial discount covers 12 months’ worth of approved software product core costs, exclusive of VAT
How do I apply?
Businesses can also access the support through a new online platform.
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.
HMRC to retrospectively recoup Child Benefit charges
THE GOVERNMENT has confirmed that the upcoming Finance Bill will include changes to discovery assessments, allowing HMRC to recoup unpaid high income child benefit charges going back almost ten years.
In todays Shipleys Tax brief we look at this concerning development.
What’s the High-Income Child Benefit charge (HICBC)?
The unpopular High-Income Child Benefit Charge (“HICBC”) was introduced in 2013 and is a tax charge paid by so called “higher earners” which claws back up to 100% of any child benefit received by the earner or their partner. A high earner for this purpose is when the income of the child benefit claimant or their partner exceeds £50,000 p.a. The charge is collected via the annual self-assessment tax system and taxpayers affected by these rules are required to register for self-assessment and pay their HICBC by 31 January following the end of the tax year.
What is happening now?
Despite HMRC administering the collection of child benefit payments from high earners, it is still finding taxpayers that have not declared the benefit in previous years. In a recent case, it was found that HMRC did not have the specific legal powers to recover the HICBC even where the charge remained unpaid for a few years. The decision in Wilkes v HMRC found that HMRC did not have the power to impose the HICBC by means of “discovery assessment” (a form of enquiry into a tax return) as there was no income which ought to have been assessed. As a result, the child benefit claimant Mr Wilkes did not have to pay the tax charges.
If you can’t beat it – change the law…
As a consequence of losing the case, the government has confirmed that the upcoming Finance Bill will include changes to tax investigation powers, allowing HMRC to recoup unpaid high income child benefit charges going back almost ten years.
Once the Finance Bill is enacted, HMRC will be able to open tax investigations (“discovery assessments”) to collect any unpaid child benefit tax charges from as far back as 2013. However, the rule change will not apply to those that have already appealed against such assessments.
What does this mean?
Individuals with income over £50,000, where either they or their partner receives child benefit, could soon receive a large unexpected tax bill from several years ago.
This could have drastic consequences on unsuspecting child benefit claimants. For example, complications around relationships where parents are separated or where a relationship ends, or those who are not married are not properly accounted for. At Shipleys Tax we advocate paying the correct amount of tax, however where the collection system is flawed there are many instances where injustices will occur and individuals will be faced with large tax bills that they were genuinely unaware of, or don’t have the finances to meet the liability due to the pandemic, or the amount has been incorrectly assessed due to inherent flaws in the system.
If you are affected by any of the issues above and would like more information, or need help with tax investigations please call 0114 272 4984 or email info@shipleystax.com.
Please note that Shipleys Tax do not give free advice by email or telephone.
Electric car charging points – is it tax free?
AS PART OF the UK Government’s climate change initiative to encourage drivers to ‘go electric’, the Transport Secretary, Grant Shapps, announced an extension to a £50 million Government fund to install electric charge points. The fund aims to help small business to gain access to the workplace charging scheme and provide grants to meet up to 75% of the cost of installing electric charging points at domestic premises.
Whilst we know tax advantages are available where employees opt for an electric company car (see LINK), is there a tax charge if an employer provides a charging point to enable employees to charge their own cars at work?
In today’s Shipleys Tax brief we take a summary look at whether a tax charge arises in these circumstances if you’re planning to help your employees go electric.
Workplace electric vehicle charging
A tax exemption applies to remove the charge that might potentially arise where an individual charges the battery of a vehicle that is used by the employee.
Private vehicles
The exemption means that an employee is able to charge their own car, or one that they are driving or a passenger in, using a workplace charging free of any associated benefit in kind tax charge. There is no requirement that the electricity provided is used for business journeys; the exemption applies regardless of whether the charge powers business or private journeys.
The exemption covers:
- the cost of the electricity;
- the cost to the employer of providing the charging facilities; and
- any connected services.
However, the exemption only applies if the following conditions are met:
- the charging facility is provided at or near the employee’s place of work;
- charging must be available to all the employees generally or those at the particular workplace should they wish to use the facilities; and
- the vehicle which is charged is one in which the employee is the driver or a passenger.
Company vehicles
Likewise, no tax charge arises if an employee uses a workplace charger to charge an electric company car. There would, in any event, be no tax charge in respect of electricity provided for business journeys. However, as electricity is not treated as a ‘fuel’ for company car purposes, the use of a workplace charging facility does not trigger the fuel benefit charge if the charge provided powers private journeys.
Offsite charging
The tax exemption does not apply to the reimbursement or payment of an employee’s personal expenditure in respect of charging a battery in a private vehicle away from the employer’s premises, for example, at a motorway service station. Where the vehicle is used for business journeys, mileage allowances may be paid tax-free up to the approved amount.
However, no tax charge arises in respect of the provision of electricity for a company car for private mileage as electricity is not treated as a fuel for the purposes of the fuel benefit charge.
Capital allowances
A first-year capital allowance of 100% of the expenditure is available for expenditure on electric charge-point equipment. The allowance is available for expenditure incurred before 1 April 2023 for corporation tax purposes and before 6 April 2023 for income tax purposes.
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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