Tax tips for Family Businesses

AS LOCKDOWN eases with small business owners looking to re-open and beginning to trade again, companies have to be very careful about making sure their dividends are legal.

The Companies Act 2006 requires that a dividend, amongst other things, can only be paid only if there are sufficient distributable profits. In todays Shipleys Tax brief we go through the basics of what you need to know.

Dividend Payments

Changed business conditions in light of the Coronavirus pandemic have caused many companies to review their dividend policies not least because the company’s financial position may have deteriorated significantly from that shown in its last annual accounts.

The Companies Act 2006 requires that a dividend be paid only if there are “sufficient distributable profits”. Even if the bank account is in credit the company will need to have sufficient retained profits (reserves) to cover the dividend at the date of payment. ‘Profit’ in this instance is defined as being ‘accumulated realised profits’.

What is an “illegal dividend”?

If a dividend is paid that proves to be more than sufficient profits, or is made out of capital or even made when there are losses that exceed the accumulated profits, then this is termed ‘ultra vires’ and is, potentially, ‘illegal.’

What steps can you take to avoid this?

Essentially, the financial status of the company needs to be considered each time a dividend payment is made. In practice without management accounts this can prove difficult with the payment of interim dividends unless the company is VAT registered and the accountant does the VAT return calculations. However, the test must be satisfied “immediately before the dividend is declared” and this is generally interpreted to mean that the ‘net assets’ test must be satisfied immediately before the company’s directors decide to pay the dividend. If the directors correctly prepare basic interim accounts and a dividend is paid based on those accounts then that will be deemed lawful, even if, when the final annual accounts, prepared at a later date, show that there was an insufficient amount for distributable profits.

For private companies there is no need for full accounts to be prepared to prove sufficient profits in the calculation for an interim dividend but they will be needed for the declaration of a final dividend. HMRC’s guidance states that the accounts need only to be sufficiently detailed enough to enable ‘a reasonable judgement to be made as to the amount of the distributable profits’ as at the payment date.

If regular amounts have been withdrawn then the amounts are deemed ‘illegal’ if at the date of each payment the management accounts or other accounts information show a trading loss or the profit cannot support the payment. HMRC will argue in the majority of such cases that the director/shareholder of a small company will be aware (or had reasonable grounds to believe) that such a payment as dividend was not out of profits and therefore ‘illegal’.

Consequence of illegal dividends

A significant consequence of paying an ‘illegal’ dividend could arise if the company goes into liquidation when the liquidator or administrator routinely reviews the director’s conduct over the three years before insolvency. If it is found that a dividend has been paid ‘illegally’ then under the Companies Act 2006 rules the shareholders will be expected to repay the amount withdrawn (or the ‘unlawful part’). HMRC will actively pursue this route being as they are often the largest unsecured creditor. Furthermore, under the Insolvency Act a director can be held personally liable for any breach of his or her fiduciary duty to the company.

However, it is not only in liquidation that HMRC could open an enquiry into the treatment of a dividend. HMRC treats a dividend that it perceives to be illegal as being equivalent to a loan and, for a small company, this means being a loan to a participator and as such it must be declared on the company tax return. If such a ‘loan’ is not so declared and the financial statements filed online show that the company’s reserves are in deficit at the end of the relevant period then HMRC may raise enquiries. Likewise where the opening balance next year is in deficit but dividends are still paid.

HMRC have also been known to argue that the repayable amount is an interest-free loan and for a director employee could result in a taxable benefit-in-kind should the loan be less than £10,000 triggering income tax and NIC complications.

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.

THE GOVERNMENT’S ‘Super-deduction’ tax relief hopes to boost business investment and productivity.

In today’s Shipleys Tax brief we look at the basics of this new temporary deduction regime and why timing and good record-keeping are essential for businesses to take full advantage.

What is the 130% super-deduction?

From 1 April 2021 to 31 March 2023 expenditure on qualifying on “new and unused” plant and machinery will get an enhanced temporary 130% “first-year allowance” for main rate assets, and a 50% first-year allowance for special rate assets. This means for the 130% tax deduction every £1 spend on qualifying items will get you 25p off your corporation tax bill.

What are the conditions?

• Only plant and machinery qualifying as “main pool” expenditure will be eligible for the 130% super-deduction.  Other plant and machinery qualifying as special rate pool expenditure will be eligible for the 50% “Special Rate” allowance.

• These new allowances are only available to companies subject to corporation tax (not individuals, partnerships or LLPs) and only where the contract for the plant and machinery (including fixtures installed under a construction contract) was entered into after 3 March 2021.

• These allowances are uncapped and are in addition to the Annual Investment Allowance (‘AIA’) which is still also available to businesses and groups until 31 December 2021.

• Second-hand assets, even if expenditure is incurred after 1 April 2021, will be excluded.

• Plant and machinery expenditure which is incurred under a Hire Purchase or similar contract must meet additional conditions to qualify for the super-deduction and special rate relief.

• These new allowances do not apply to expenditure on long life assets, cars or for plant and machinery acquired for leasing, including plant and machinery leased with property.

• Companies using finance/hire-purchase type arrangements to invest in plant and machinery would be able to access the super-deduction, provided payments are being made to acquire the asset and there is an expectation that legal ownership will pass at some point to the lessee on it exercising an option or another event occurring. 

• Software developed in-house that has been treated as an intangible fixed asset in the accounts could potentially qualify.

What should you do?

The new allowances could provide a big cash flow incentive for investment, if claimed correctly. Given the limited lifespan of the tax break and the timings involved in decisions on expenditure on plant and machinery, businesses should start planning now. If you’re thinking of making any investments in plant and machinery, think about bringing it forward or delaying until after 1 April 2021 to take advantage of this regime.

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.

AS THE ROLL out of the vaccine continues apace, UK Chancellor Rishi Sunak held back on the promised heavy taxation changes but instead opted for a light touch.

In today’s Shipleys Tax note we look at the highlights and what it means for you.

At a glance Budget 2021 announcements:

• Furlough extended until September 2021 and extra Self Employment Support grants made available with potentially more qualifying.

• Personal Allowance frozen for 5 years – this means that for tax years ended 5 April 2022 until 5 April 2026, you will be able to have an annual income of £12,570 before paying any tax, and you will be taxed at the higher 40% rate (32.5% for dividends) once your income exceeds £50,270. This will effectively push more and people into the higher tax rates as earnings increase.

• Corporation tax increase from 19% to 25% – the 25% rate will apply to companies whose profits are above £250,000. Where a company’s profits falls between £50,000 and £250,000, a (complex) tapering calculation will apply, thereby allowing companies to grow gradually without paying at the top rate.

• 2 Year “Super Tax Deduction” on business investments – a new “super deduction” of 130% of capital expenditure on new qualifying plant and machinery will apply from 1 April 2021 to 31 March 2023 (when the 25% rate of CT starts). The 130% deduction applies to business assets which would be eligible for the main capital allowances. Businesses which are able to invest heavily in plant and machinery within the next two years will benefit from the business tax cut before the increased corporation tax rate of 25% kicks in. 

• Extension of losses being carried back against tax – many companies will have made losses during the Covid-19 pandemic, therefore relief is provided for loss-making business to carry back losses by up to 3 years for up to £2m of losses per group in each of the financial years 2020/21 and 2021/22.  This £2m cap applies only to the extended carry back, so there is no change to the unlimited carry back of losses to the previous 12 month accounting period. 

• Stamp Duty holiday extended – the current Stamp Duty nil rate band of £500,000 for residential property acquisitions in England and Northern Ireland will be extended from 31 March to 30 June 2021, with a reduced nil rate band of £250,000 for acquisitions between 1 July and 30 September, after which it will revert to £125,000.

• Restart grants – https://www.shipleystax.com/2021/03/restart-new-grants-for-small-businesses/

• VAT 5% extended for 6 months then 12.5% thereafter – an extension to the temporary 5% rate of VAT until 30 September 2021. A new reduced rate of VAT of 12.5% will then be introduced from 1 October 2021 until 31 March 2022 after which the standard rate of VAT (20%) will apply

• Freeports – eight new freeport sites have been announced. Expenditure within designated freeports will attract the following reliefs:

1. Enhanced Structures and Building Allowances at 10% for buildings brought into use by 30 September 2026;
2. 100% enhanced capital allowances for companies incurring qualifying expenditure on plant and machinery within Freeport sites until 30 September 2026.

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.