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…
VAT AND STAMP DUTY CUTS ANNOUNCED TODAY
IN A SEEMINGLY DESPERATE BID, the UK Chancellor gave his Summer economic update today in Parliament to revive jobs and the boost the ailing economy following the outbreak of COVID-19 Coronavirus.
Along with a Stamp Duty holiday (£125k to £500k), a 15% VAT reduction for the catering/leisure industry he announced new job scheme subsidies for young unemployed workers. Here at Shipleys Tax Advisers we outline some of the plans below.
Stamp Duty Land Tax (SDLT)
- The current residential SDLT threshold of £125,000 will rise to £500,000.
- This will apply from 8 July 2020 until 31 March 2021.
- First-time buyers qualify for relief, whereby they pay less, or no tax, if the purchase price is £500,000 or less.
- Applies only to property purchased in England and Northern Ireland.
VAT: Temporary VAT cuts
The rate of VAT on food, accommodation, entry fees etc is cut from 20% to 5% for the next six months.
VAT on food and non-alcoholic drinks
- From 15 July 2020 to 12 January 2021, to support businesses and jobs in the hospitality sector.
- The reduced (5%) rate of VAT will apply to supplies of food and non-alcoholic drinks from restaurants, pubs, bars, cafés and similar premises across the UK.
- Further guidance on the scope of this relief will be published by HMRC in the coming days.
VAT on accommodation and attractions
- From 15 July 2020 to 12 January 2021, to support businesses and jobs.
- The reduced (5%) rate of VAT will apply to supplies of accommodation and admission to attractions across the UK.
- Further guidance on the scope of this relief will be published by HMRC in the coming days.
New Jobs Retention Bonus
- A new bonus of £1,000 will be paid to employers for bringing back and retaining furloughed employees until January 2021.
- Employees must be paid at least £520 per month.
Job Retention Scheme (JRS)
- The Employee Job Retention Scheme (JRS) is due to wind down and it will end in October 2020. The Chancellor has said “It is a false hope to keep furloughing open forever”.
Kickstart scheme
- The Kickstart scheme will pay employers who take 16 to 24-year-olds for a minimum of 25 hours per week at the National Minimum Wage (NMW).
- The grant will pay the wages or around up to £6,000 for the first six months.
- No cap on the number of places available.
Training places
- Pay employers £1,000 to take on new trainees.
- Apprentices: pay employers to create new apprenticeships, £2,000 per place.
- £1,500 payment for taking on apprentices aged over 25 years old.
Eat Out to Help Out
- The ‘Eat Out to Help Out’ scheme aims to encourage people to return to eating out.
- Every diner will be entitled to a 50% discount of up to £10 per head on their meal, at any participating restaurant, café, pub or other eligible food service establishments.
- The discount can be used unlimited times and will be valid Monday to Wednesday on any eat-in meal (including non-alcoholic drinks) for the entire month of August 2020 across the UK.
- Reclaimed by the business which must apply to participate.
If you need help with the issues above, please call Shipleys Tax Planning on 0114 272 4984 or email info@shipleystax.com – we are ready to assist.
Furlough fraud – HMRC to go after directors personally
The forthcoming Finance Bill 2020 proposes to give HMRC wide powers to make directors personally liable for a company’s tax liability. Under the new proposals, HMRC plans to penalise company directors who intentionally breach the rules of the furlough scheme – the so called “furlough fraud”.
What does this mean for company directors and what should you do to minimise your risk? We outline the issues below.
Identifying abuse of the furlough scheme
With the Coronavirus Job Retention Scheme (“CJRS”) in the process of being wound down towards the end of October, the government is now focussing their attention to identifying those companies who have made fraudulent grant claims for reimbursement of staff wages in this period.
Abuse of the system includes:
- forcing employees to continue to work on a part-time or ad hoc basis despite being declared as furloughed
- where employees not told that their employer was claiming reimbursement of their wages under the CJRS.
- companies claiming furlough for ‘ghost’ employees who may not actually work for the company at all.
With the Coronavirus Job Retention Scheme (“CJRS”) in the process of being wound down, the government is now focussing their attention to those companies who have made fraudulent grant claims for reimbursement of staff wages in this period.
Furlough fraud is manifestly an exploitation of employees, as well as a blatant abuse of a system set up to help companies through this period of unparalleled business turmoil. With billions of pounds paid out through this scheme, HMRC are now looking to seriously penalise those who have flouted the scheme for profit.
Joint and Several Liability of Directors – the new proposals
Legislation is currently being rushed through Parliament and is likely to become law in early July as part of the Finance Bill 2020.
The Bill proposes a new regime which will give HMRC the power to make directors and co-directors jointly liable and severally liable for the company’s tax liabilities if:
- the liability arises from tax avoidance arrangements or tax evasive conduct, repeated insolvency, penalty for facilitating avoidance or evasion; and
- where the company begins insolvency proceedings or is expected to begin insolvency proceedings so that some or all of the tax liability will be lost.
Of particular concern – and potentially worrying for some – is that these proposals include circumstances where a director did not know about a co-director’s fraudulent conduct – hence the “joint and several” liability. HMRC will seek to apply these provisions for penalties raised in relation to fraudulent furlough payments. It is understood that the penalties will apply in cases of deliberate fraud but could also catch directors who unintentionally breached the rules or who did not know that their fellow directors had made a claim under the scheme.
Of particular concern is that these proposals include circumstances where a director did not know about a co-director’s fraudulent conduct – hence the “joint and several” liability.
Penalties
Penalties for those found guilty are likely to include fines for companies, while directors of companies which have subsequently been liquidated could face personal liability for the falsely claimed furlough costs. Imprisonment for convicted fraudsters is also a possibility as exploitation of the CJRS amounts to defrauding the Treasury. The end result is directors potentially being personally liable even in circumstances where they did not personally benefit from the CJRS grants.
HMRC’s tougher approach
These new powers – indicating HMRC’s intention to take a strong approach to recovering any payments made as a result of fraud – looks to be just the start of a new wave of anti-fraud HMRC enforcement and enquiries arising out of COVID-19 crisis.
It remains to be seen exactly what form these measures will take, however directors are well advised to check whether any CJRS claims have been made on behalf of companies of which they are officers, ensure that any such claims were made in accordance with the rules and confirm that any payments received were then applied properly.
If you need help with the issues above, please call us on 0114 272 4984 or email info@shipleystax.com – we are ready to assist.
Tax Tip – mortgage payment holidays for landlords
As lockdown slowly eases across the UK, we look at some of the practical issues faced by individuals already impacted by COVID-19. One issue we are being asked about is the impact of buy-to-let landlords who have decided to take a mortgage payment holiday. We outline the impact of this and how this can affect your tax payment for the year.
In March, the Government announced that homeowners struggling to pay their mortgages due to Coronavirus would be able to take a three-month mortgage payment holiday. They confirmed that this option would also be available to buy-to-let landlords, who may suffer cashflow difficulties if, as a result of the virus, their tenants were unable to meet their rent in full when it is due. In May, the Government announced that those struggling to pay their mortgages because of the impact of Coronavirus would be able to extent their mortgage payment holiday by up to three months.
… interest continues to accrue during the period of the mortgage holiday, although the landlord will not be required to make any payments during this time.
Where a landlord opts to take a mortgage payment holiday, what impact does this have on tax relief for interest payments and, in turn, their tax payments?
Interest continues to accrue
The first point to note is that interest continues to accrue during the period of the mortgage holiday, although the landlord will not be required to make any payments during this time. This is important and will impact on the timing of the associated interest relief, which will depend on whether accounts are prepared on a cash basis or on the accruals basis.
At the end of the holiday, the missed payments and interest may be recovered by extending the term of the mortgage or by making higher payments once payments restart.
Relief as a basic rate tax reduction
From 2020/21 onwards, tax relief for finance costs (such as mortgage interest) on residential properties is given only as a tax reduction at the basic rate. This means that 20% of the allowable finance costs are deducted from the tax that is due.
As expenditure under the cash basis is recognised when paid, if the landlord does not make a payment, there will be no relief for that expense until the payment is made.
Impact of a mortgage holiday – Cash basis
Most landlords whose rental receipts are £150,000 a year or less will prepare the accounts for their property rental business under the cash basis. As expenditure under the cash basis is recognised when paid, if the landlord does not make a payment, there will be no relief for that expense until the payment is made.
Where the landlord takes a mortgage, no interest will be paid during the period of that holiday. As a result, a landlord may pay less in interest in 2020/21 than in 2019/20. The interest rate reduction is calculated by reference to the interest paid in the year.
Example
Ali has a buy-to-let property on which he has buy-to-let mortgage, the interest on is £500 per month. As a result of the Covid-19 pandemic, his tenant struggles to pay his rent on time. Ali takes a three-month mortgage payment holiday. The mortgage term is effectively extended as a result.
Under the accruals basis relief is given for the period in which the expense arises rather than when payment is made.
In 2020/21, Ali only makes nine mortgage payments instead of the usual 12, paying interest of £4,500 rather than £6,000. The tax reduction for 2020/21 is £900 (£4,500 @ 20%) rather than £1,200 (£6,000 @ 20%).
Tax reduction – accruals basis
Under the accruals basis relief is given for the period in which the expense arises rather than when payment is made. As interest continues to accrue throughout a mortgage holiday, the landlord will be able to claim the full tax reduction on the interest accruing in the 2020/21 tax year, even if the interest was not paid in full in the year because the landlord took advantage of a mortgage payment holiday.
So if, in the above example, Ali prepared his accounts for 2020/21 on an accruals basis, he would be able to claim a tax reduction of £1,200, whereas under the cash basis his deduction will only £900, the higher deduction will of course reduce any rental profits (or increase a loss) subject to tax and thereby reduce any tax payable in the year.
If you need advice regarding your rental properties please call us on 0114 272 4984 or email info@shipleystax.com.
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