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…
Tis the season to be scammed
Tips on avoiding tax scams
AS THE FESTIVE SEASON draws nearer, HMRC is warning millions of Self Assessment customers to be aware of fraudsters in the run up to the 31 January tax deadline. Cyber criminals are taking advantage of “reminder” SMS messages and bogus emails during the festive season to trick taxpayers out of their money.
Just in the last year, HMRC received nearly 900,000 reports from the public about suspicious HMRC contact – phone calls, texts or emails. More than 100,000 of these were phone scams, while over 620,000 reports from the public were about bogus tax rebates.
Cyber criminals are taking advantage of “reminder” SMS messages and bogus emails during the festive season to trick taxpayers out of their money.
At Shipleys Tax we look at some of the most common techniques fraudsters use to entrap taxpayers and what you should do if you suspect foul play.
Faking it
Probably the most common methods we come across that fraudsters use includes:
- Phoning taxpayers offering them a fake tax refund
- Leaving a voicemail message threatening enforcement action or imprisonment if a bogus tax bill is not paid immediately
- Pretending to be HMRC by texting
- Emailing a link which will take customers to a false page, where their bank details and money will be stolen.
…taxpayers should never give out private information, reply to text messages, download attachments or click on links in texts or emails, even if it looks like a message from HMRC…
Taxpayers need to recognise the signs to avoid becoming victims themselves. HMRC, like other genuine organisations and banks, will never contact customers asking for their PIN, password or bank details. HMRC also do not email taxpayers direct.
Needless to say, but taxpayers should never give out private information, reply to text messages, download attachments or click on links in texts or emails which they are not expecting, even if it looks like a message from HMRC complete with logo and branding.
What should you do if you suspect a scam?
- Number one rule: do not respond. Always check with your professional adviser (or HMRC direct) regarding the status of your tax affairs.
- HMRC operates an inbox for people to report suspicious emails to, at phishing@hmrc.gov, while SMS messages should be forwarded to 60599.
- If you have suffered financial contact your bank immediately and report it to Action Fraud online at actionfraud.police.uk or by calling 0300 123 2040.
As always, if in doubt check and check again before taking any action.
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 we do not give free advice by email or telephone.
Tax Tip: How businesses can get cash-back upfront on losses
FOR MANY BUSINESSES, COVID-19 has caused a massive shock and presented previously healthy companies with a terrible set of challenges. With no income and losses mounting, managing cash flow to stay afloat is vital.
One way to boost cashflow is to tap into tax previously paid by a business. There is a little-known way in which businesses can claim tax back from HMRC even before the losses have been realised. Known as a “provisional loss carry-back claim”, businesses that were previously profitable but are now potentially loss-making, can apply for this to get cash back. This could significantly help cashflow and may even help the business survive.
In today’s Shipleys Tax brief, we look at this valuable mechanism and how it works.
One way to boost cashflow is… a little-known way in which businesses can claim tax back from HMRC even before the losses have been realised
What is a provisional loss carry-back claim?
A “provisional loss carry-back claim” is a claim by which a business, in exceptional circumstances and set to make a loss, can reclaim tax back for corporation tax paid to HMRC on profits made in a previous accounting year. COVID-19 qualifies as such an exceptional circumstance.
HMRC has updated its company tax guidelines detailing how businesses who wish to make claims for repayments of corporation tax based on anticipated losses can make the claim.
…a business can reclaim tax back for corporation tax paid to HMRC on profits made in a previous accounting year.
How do you qualify?
Any submission to HMRC requesting an early claim to carry back of losses will need to show
- there is sufficient evidence that losses will be incurred; and
- that it will be included in the company tax return for the loss making year when it is eventually submitted.
In the current climate this should not be too difficult to do. For example, the business will need to show evidence of the following for the current period:
- Significant losses – that would exceed other income
- Management accounts showing losses
- Accurate forecasts
- Board minutes where financial performance was noted
- Consideration of whether performance could improve over the remainder of the accounting period
Providing an acceptable form of evidence is therefore critical to the timely success of a repayment and liaising with your professional adviser is crucial.
Providing an acceptable form of evidence is therefore critical to the timely success of a repayment and liaising with your professional adviser is crucial.
What are the next steps?
Businesses would need to look to prepare and finalise their accounts to quantify any losses that could be claimed by the company. It is possible, together with the aforementioned supporting evidence, to agree a provisional loss carry-back claim with HMRC, potentially enabling a business to claim anticipated losses immediately rather than having to wait for years thereby boosting cashflow now when its most needed.
If you require any assistance compiling and submitting an early loss carry back claim to HMRC in order to try and aide cash flow, please contact us 0114 272 4984 or email info@shipleystax.com and we would be delighted to help you with your claim.
Please note that we do not give free advice by email or telephone.
Taxi drivers to face HMRC checks before licence renewals
IN A BID to tackle the hidden economy, taxi and private hire drivers will need to undergo tax checks for applications to renew their licences the Government has published.
The new rules will target individuals, partnerships (including LLPs) and companies applying for licences in England and Wales to either drive taxis or private hire vehicles (PHVs), or both, operate a PHV business or deal in scrap metal.
In todays tax note, Shipleys Tax assesses the potential wide ranging impact this will have on individuals, their businesses and families.
The new rules will target individuals, partnerships and companies applying for licences in England and Wales to either drive taxis or private hire vehicles (PHVs), or both, operate a PHV business…
What is being proposed?
Licensing authorities will introduce a “tax check” on registration for renewed applications in England and Wales for licences to:
- drive taxis and private hire vehicles (PHV)(for example, minicabs)
- operate a PHV business
- carry on the business of a scrap metal dealer on a site
- carry on business as a mobile collector of scrap metal.
Licensing authorities will introduce a “tax check” on registration for renewed taxi/PH applications in England and Wales for licences…
What does this mean?
This means an applicant who wishes to renew a licence will need to undergo a tax check before the licence is renewed. The licensing body (typically a local authority) will have to obtain confirmation from HMRC that the applicant has completed the check before being able to consider their renewed licence application. This in effect means that the licence holder will have to hope for a clean bill of health from the taxman before any licence renewal application will be considered.
Licensing bodies will be required to:
- signpost first-time applicants to HMRC guidance about their potential tax obligations
- obtain confirmation that the applicant is aware of the guidance before considering the application
- where the application is not a first-time application (a renewed application) the licensing body must obtain confirmation from HMRC that the applicant has completed a “tax check”.
Why is the government doing this?
This is a small but significant step as part of a wider programme to tackle the so called “hidden economy.” The government believes there are individuals and businesses with sources of taxable income that are entirely hidden from HMRC which is depriving the government of funding for vital public services.
They believe people operating in the hidden economy do so because they are perhaps unaware of or confused about their tax obligations. Or if they have been hiding their income for a long period, they are also likely to find it harder to come forward and tell HMRC that they are, or should have been, chargeable to tax (‘registered’).
This is a programme to tackle the so called “hidden economy.” The government believes there are individuals and businesses with sources of taxable income that are entirely hidden…
By making access to the licences taxi/PHV drivers need conditional upon completing a tax check, the government believes the rules above will help applicants for certain public sector licences better understand their tax obligations.
Impact on individuals, households and families
At Shipleys Tax we support any well thought out measures which help people meet their tax obligations. However, the use of a blunt instrument to target what could be complicated tax affairs seems grossly unfair. Experience has shown HMRC are underfunded, understaffed and prone fatal inaccuracies resulting in the taxpayer being unduly penalised and ultimately being forced to into defending themselves, sometimes through no fault of their own.
The measures will have a material impact on employed drivers and on drivers, PHV operators and scrap metal dealers who are self-employed. All of these will need to complete a tax check when applying to renew licences. If individuals do not complete a tax check the licensing body will be unable to consider their application to renew their licence and their current licence will expire.
… the use of a blunt instrument to target what could be complicated tax affairs seems grossly unfair.
This could have an impact on family formation, stability or breakdown if individuals will no longer be licensed and individuals and their families would have less disposable income.
When are the measures expected to be introduced?
Budget 2020 announced that the government will legislate in Finance Bill 2020-21. The technical consultation for hidden economy conditionality will run until 15th September 2020 with changes taking effect from April 2022.
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 we do not give free advice by email or telephone.
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