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?

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…

Tax on Cryptoassets – HMRC’s new disclosure service

Family Business Shipleys Tax Advisors

HMRC’s new Cryptoasset disclosure service – what it means for you

IN THE FAST-moving landscape of digital finance, HMRC has taken a significant step by issuing new guidance for individual to voluntarily disclose unpaid taxes on income or gains derived from cryptoassets. This development is crucial for taxpayers in the UK as it has significant implications for those not self-declaring any potential tax due on cryptoassets.

In today’s Shipleys Tax brief we look at HMRC’s new voluntary disclosure service for cryptoassets and why it’s important for taxpayers to consider their crypto tax affairs as timely disclosure can mitigate penalties and interest.

What is the new HMRC voluntary disclosure service?

Much like other voluntary disclosure campaigns (such as the Liechtenstein Disclosure Facility (LDF) and the Buy-to-Let campaign) HMRC’s new voluntary disclosure service for cryptoassets is designed to encourage taxpayers to come forward and disclose any unpaid tax on cryptoassets, providing an opportunity to settle their affairs while potentially facing lower penalties than if the underpayment were discovered by HMRC. It underlines the importance of being proactive in “fessing up” and looks to offer taxpayers more favourable terms compared to regular HMRC investigations.

https://www.gov.uk/guidance/tell-hmrc-about-unpaid-tax-on-cryptoassets

Key Aspects of the Disclosure Service

  1. What cryptoassets are covered? The voluntary disclosure service covers a range of cryptoassets for tax purposes, which typically includes exchange tokens like Bitcoin, utility tokens, and non-fungible tokens (NFTs). This encompasses assets used as a means of exchange, for investment, to access particular goods or services, or those representing ownership of a unique asset or content.
  1. Reasons for Underpayment: HMRC categorises underpayment reasons into three distinct sections:
    • Innocent Error: This implies that reasonable care was taken, but an error still occurred. In such cases, the look-back period for underpayment is limited to four years.
    • Carelessness: If underpayment is due to carelessness, the look-back period extends to six years.
    • Deliberate Behaviour: This is the most serious category, involving intentional underpayment, and can lead to a maximum look-back period of 20 years.

Much like other voluntary disclosure campaigns… HMRC’s new voluntary disclosure service is designed to encourage taxpayers to come forward and disclose any unpaid tax on cryptoassets

  1. Penalties and Reductions: In HMRC’s framework, penalties for inaccuracies in tax returns and failure to notify can be reduced depending on the quality of disclosure. If taxpayers proactively disclose with a high level of transparency and detail, they may be eligible for reduced penalties. The reduction is based on the principle of how much assistance the taxpayer provides to HMRC: telling them about the error, helping HMRC understand the disclosure, and giving access to additional information if required. The more forthcoming and cooperative the taxpayer is, the greater the potential reduction in penalties.
  1. White Space Notes: A crucial recommendation by HMRC is the inclusion of “white space notes” in disclosures (i.e. in their personal tax returns pages). These notes should detail the taxpayer’s reasoning and calculations, providing transparency in their self-assessment process.
  1. Payment Procedures: Lastly, HMRC has introduced comprehensive information on how and when to pay the owed taxes, simplifying the payment process for taxpayers.

Why This Matters for Taxpayers

Understanding HMRC’s new guidance is critical for individuals dealing in cryptoassets to ensure compliance before errors are discovered by the authorities. The advantages include potentially reduced penalties for disclosure, and the opportunity to rectify one’s tax affairs voluntarily.

However, it also implies increased scrutiny and a possible signal of stricter enforcement moving forward. Taxpayers must weigh the immediate costs of disclosure against the risk of higher penalties and interest if discrepancies are found later by HMRC. The service highlights the increasing focus on cryptoassets by HMRC and the importance for taxpayers to stay abreast of their obligations and take professional advice.

How Can We Help?

As a premier UK tax advisory firm, we specialize in guiding clients through the intricacies of tax laws, especially in emerging areas like cryptoassets. Our expertise lies in:

  • Assisting in accurate self-declaration based on HMRC’s categories.
  • Advising on potential penalties and how to minimize them.
  • Helping clients understand the implications of their crypto transactions on their tax liabilities.

Understanding HMRC’s new guidance is critical for individuals dealing in cryptoassets to ensure compliance before errors are discovered by the authorities

Conclusion

HMRC’s new guidance on voluntarily disclosing unpaid tax on cryptoassets marks a significant step towards clearer tax compliance in the digital age. For individuals engaged in crypto transactions, it is essential to understand these guidelines and consider seeking professional advice to navigate this complex area.

Although the process offers an opportunity to correct past oversights with potentially reduced penalties, the complexity of disclosure and the evolving tax landscape for cryptoassets demand professional guidance to navigate effectively. Individuals are encouraged to assess their circumstances, utilise the service if necessary, and seek expert advice to optimise their tax position.

For further assistance or queries, 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 content of this article is for general guidance only and should not be considered as tax or professional advice. Always consult with a qualified professional before taking action.

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Autumn Budget Statement 2023

Family Business Shipleys Tax Advisors

IN A LARGELY uninspiring speech and, amidst declining inflation rates, the Chancellor’s Autumn Statement delivered some fairly unspectacular tax cuts.

In today’s Shipleys Tax note we give you a snapshot of what you need to know as an employer, self-employed or business.

National Insurance Takes Centre Stage

Following much vaunted speculation post-October’s inflation report, expectations were high for potential reductions in corporation tax, inheritance tax, and National Insurance (NI). The final decision primarily impacted NI, affecting both employees and self-employed individuals. However, the effective dates for these changes vary.

Employee NI Rate Cut from January 2024

Effective from 6 January 2024, the Primary Class 1 main NI rate will decrease from 12% to 10%. This alteration, reminiscent of the mid-year modifications in 2022/23, necessitates payroll software updates. It’s crucial for businesses to ensure these updates are implemented before processing January’s payroll. Note: The rate for earnings above the Upper Threshold remains at 2%.

Significant Changes for Self-Employed NI Contributions from April 2024

Starting 6 April 2024, Class 2 NI contributions, mandatory for the self-employed, will be abolished. Self-employed individuals with profits between £6,725 and £12,570 will maintain access to contributory benefits like the state pension through NI credits without paying contributions. Voluntary Class 2 payments remain an option.

Additionally, the main Class 4 NI rate will be reduced from 9% to 8%.

Extended NI Incentive for Hiring Veterans

The beneficial NI incentive for recruiting veterans is now extended until 2025.

Expansion of Cash Basis Accounting for Self-Employed Businesses

The Autumn Statement also brought some good news for self-employed businesses using cash basis accounting. The turnover limit for this accounting method has been removed. Previously, businesses had to switch to the accruals basis after exceeding £300,000 turnover

Business tax

  • Capital allowances – permanent full expensing – Full expensing is now a permanent tax break for companies. The Spring Budget 2023 introduced two new temporary first-year allowances. For expenditure on plant or machinery incurred on or after 1‌‌‌ ‌‌April 2023 but before 1‌‌‌ ‌‌April 2026, companies can claim a 100% first-year allowance for main rate expenditure – known as “full expensing” – and a 50% first-year allowance for special rate expenditure. Today’s announcement makes full expensing and the 50% first-year allowance permanent by removing the expiry date of March‌‌‌ ‌‌2026.
  • The EIS and VCT schemes are extended for another decade.
  • The tax reliefs for Investment Zones and Freeports are extended to ten years.

More to follow.

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When are Directors liable for unpaid company taxes?

Family Business Shipleys Tax Advisors

IN THE UK’s corporate realm, the concept of limited liability shields directors from personal accountability for company debts, including tax obligations. However, there are specific instances where HMRC can pierce this corporate veil, seeking recompense directly from directors.

In today’s Shipleys Tax note we outline these rare yet significant circumstances and the potential legislative defences that may be available to company directors.

The Principle of Limited Liability Status

Limited liability maintains a distinct legal separation between the company and its directors. Nevertheless, this shield is not impervious. There are certain situations, often involving serious misconduct or negligence, where directors can find themselves personally liable for the company’s unpaid taxes.

Where Might Directors Face Personal Liability?

Director’s Personal Guarantees

When a director provides a personal guarantee for a company’s debt, they pledge their own assets as security for the loan. This guarantee means that if the company cannot repay its debts, the director’s personal assets can be targeted to recover the amount owed. Similarly, if a director has an outstanding balance in their director’s loan account, which is not settled before the company enters insolvency, they may become personally liable to repay this debt.

There are certain conditions, often involving serious misconduct or negligence, where directors can find themselves personally liable for the company’s unpaid taxes.

Wrongful or Fraudulent Trading

Directors must act responsibly with regard to the company’s financial status. Under insolvency rules, if directors continue to trade when they know the company is insolvent, or if they incur debts without a reasonable prospect of the company being able to repay them, they can be held personally liable for wrongful trading.

Fraudulent trading goes a step further, where directors deliberately set out to defraud creditors. In such cases, the courts can hold directors personally responsible for the company’s debts, resulting in serious legal and financial repercussions.

Tax Evasion or Avoidance

Tax legislation gives HMRC additional powers to hold directors accountable for tax evasion or avoidance. If a director is found to have a history of corporate insolvency, particularly if insolvency has been used as a means to evade or avoid tax liabilities, HMRC can pursue them personally. This legislation aims to deter directors from using insolvency as a tax evasion strategy, ensuring that corporate tax liabilities are met.

Personal Liability Notices (PLNs)

HMRC uses Personal Liability Notices to hold directors personally liable for the non-payment of PAYE or National Insurance Contributions (NIC). These notices are issued when HMRC believes that the non-payment was a result of the director’s neglect or fraudulent behaviour. Once a PLN is issued, directors can face significant personal financial liabilities, which HMRC will actively seek to recover.

…where directors deliberately set out to defraud creditors… the courts can hold directors personally responsible for the company’s debts, resulting in serious legal and financial repercussions.

Possible Mitigating Factors

When facing action from HMRC for liabilities such as PAYE, NIC, VAT, or Corporation Tax (CT), directors can employ several defences to potentially mitigate or challenge personal liability:

  1. Lack of Intent: Demonstrating that there was no intention to evade tax payments, that any underpayment was a result of genuine error or misinterpretation of complex tax laws, can be a defence. Evidence seeking clarification or rectifying mistakes as soon as they were discovered needs to be maintained.
  2. Reliance on Professional Advice: reliance on the advice of competent tax advisors or accountants might provide a shield against liability. However, reliance on professional advice is not absolute and usually requires proof that the advice was professional, based on correct accurate information, and reasonable.
  3. No Direct Involvement: A director may argue they were not involved in the day-to-day management of the company or in the financial decisions that led to the unpaid taxes. This could apply in situations where there is a clear division of responsibilities among multiple directors.
  4. Procedural Errors by HMRC: If HMRC fail to follow proper procedures or meet certain legal requirements when issuing a Personal Liability Notice (PLN) or taking other actions, this may invalidate their claim.
  5. Unforeseeable Circumstances: Events beyond the director’s control, such as sudden market changes, natural disasters, or other external shocks that impact the company’s ability to pay, might be used as a defence, especially if these events can be clearly shown to correlate with the period of non-payment.
  6. Active Engagement with HMRC: Demonstrating that there was active engagement with HMRC regarding any payment issues, attempts to negotiate payment plans, or voluntary disclosures of potential underpayments can act in the director’s favour.
  7. Economic Reality: In some cases, directors can argue that, despite their best efforts, the company was unable to meet its tax obligations due to economic conditions affecting the company’s liquidity.

It is crucial for directors to maintain accurate records and documentation to support these defences. They should engage with legal and tax professionals as soon as they are aware of potential tax liabilities or HMRC actions, to ensure their case is as strong as possible.

In conclusion, while the UK legislation primarily places the burden of unpaid taxes on the company, directors can be made personally liable in certain circumstances. If a director finds themselves facing a PLN or potential liabilities for unpaid taxes, it’s essential to seek advice from an tax expert or professional adviser.

For further assistance or queries, 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 content of this article is for general guidance only and should not be considered as tax or professional advice. For advice on tax matters, always consult with a qualified professional.

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