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.


What’s New?

The Finance Bill 2016, published on 24 March 2016, contains the new rules for dividends.

Changes:

  • 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…

COVID-19: Can you furlough yourself if you are a sole director?

Family Business Shipleys Tax Advisors

*****UPDATED 6 APRIL 2020****

As anticipated, HMRC guidance has been updated to confirm that Directors can be furloughed provided they do not do any work for, or generate any revenue for the organisation.

However, whilst the guidance says that they can still fulfil their statutory duties, it does not go into any detail about what HMRC will regard as a statutory duty for this purpose.

We anticipate that HMRC will expect to see a record of a formal board resolution having been made confirming the decision to furlough specific directors if your organisation was ever questioned. Minutes from any relevant board meeting should therefore be made and retained.

Previously the Cabinet Office confirmed that the Coronavirus Job Retention Scheme (CJRS) will also apply to off-payroll contractors working for public sector organisations, including those working through a personal service company (PSC).

This means that the CJRS can now be offered to those individuals:

  • working through a personal service company,
  • for a private organisation or public sector client,
  • where the worker is unable to carry on working due to the COVID-19 pandemic.

******************

The Coronavirus Job Retention Scheme has brought much relief for many businesses and employees. For others, like one man band companies it has brought much uncertainty. Initially the guidance was unclear as to whether a sole director could claim furlough, however the Government has confirmed “furlough” will be available to sole director companies (under certain conditions) and has published updated guidance.

What is the Coronavirus Job Retention Scheme?

The Coronavirus Job Retention Scheme is a temporary scheme open to all UK employers for at least three months starting from 1 March 2020. Under the scheme Employers can use a portal to claim for 80% of furloughed employees’ (employees on a leave of absence) usual monthly wage costs, up to £2,500 a month, plus the associated Employer National Insurance contributions and minimum automatic enrolment employer pension contributions on that wage. Employers can use this scheme anytime during this period.

The Coronavirus Job Retention Scheme has brought much relief for many businesses and employees. For others, like one man band companies, it has brought much uncertainty.

The scheme is open to all UK employers that had created and started a PAYE payroll scheme on 28 February 2020. For further details please see:

Website:  https://www.shipleystax.com/coronavirus-job-retention-scheme-new-guidance-on-how-to-claim/

Facebook: https://www.facebook.com/shipleystaxadvisers/

Twitter: https://twitter.com/shipleystaxltd

HMRC guidance is constantly changing, so we recommend you monitor the links above regularly. We also recommend seeking professional advice before taking any action.

The general rule is that once the employee is on furlough they will not be able to work but they can undertake training or volunteer subject to public health guidance, as long as they’re not:

·         making money for their company/employer

·         providing services to their company/employer

The issue with sole directors

Most sole directors are paid as “office holders” (at less than the minimum wage) and not a Director, topped up by dividends up to the 40% rate band. If they were an employee then they would need to write to themselves to put themselves on furlough. This would leave the company without anyone working in it and give rise to wider company law issues. For example, does this qualify as a business? Wouldn’t a director be trying to generate new work or get new contracts, deal with invoices/receipts etc? Or make plans for when the crisis is over?

Company Directors

HMRC has eased some confusion and confirmed salaried company directors are eligible to be furloughed and receive support through the job retention scheme as office holders. Although company directors owe duties to their company which are set out in the Companies Act 2006, they furlough themselves provided they do no more than would reasonably be judged necessary for that purpose, for instance, they should not do work of a kind they would carry out in normal circumstances to generate commercial revenue or provides services to or on behalf of their company.

Furloughed directors as employees on can only claim on their PAYE element, even if they are the sole employee. Basic conditions are as follows:

  • they can qualify as normal under CJRS
  • they must not provide any services that is income generating
  • can continue to perform their statutory obligations as directors/office holders e.g. official legal filings, Company secretarial etc
  • only the PAYE element can be furloughed – not dividends

If they were an employee then they would need to write to themselves to put themselves on furlough. This would leave the company without anyone working in it and give rise to wider company law issues.

How can furlough for directors be achieved?

HMRC state that where a company (acting via its “board of directors”) considers that it is in compliance with the statutory duties of one or more of its individual salaried directors, it can decide that such directors should be furloughed. The decision should be formally adopted as a decision of the company, noted in the company records and communicated in writing to the director(s) concerned. For sole directors, this effectively means

  •  record of a formal board resolution having been made confirming the decision to furlough specific directors
  • minutes from any relevant board meeting should therefore be made and retained.
  • email to your accountant notifying of the same.

What to do now?

The new HMRC portal to make an application for the Job Retention Scheme will not be available until mid to late April. Our advice would be to wait until then and look to claim furlough once the rules are fully clarified as you are able to backdate the furlough notice.

If you need help with the tax implications of the above please call us on 0114 272 4984 or email info@shipleystax.com.

Coronavirus Job Retention Scheme – Further guidance on how to claim

Family Business Shipleys Tax Advisors

HMRC has today (15 April) published updated guidance for employers on how to claim for wage costs the on the coronavirus (COVID-19) Job Retention Scheme. We will be assisting employers on how to claim and have summarised these below.

The Coronavirus Job Retention Scheme is a temporary scheme open to all UK employers for at least three months starting from 1 March 2020. It is expected the scheme to be up and running by the end of April. It is designed to support employers whose operations have been severely affected by coronavirus (COVID-19).

Employers can use a portal to claim for 80% of furloughed employees’ (employees on a leave of absence – email us for our detailed guide on this) usual monthly wage costs, up to £2,500 a month, plus the associated Employer National Insurance contributions and minimum automatic enrolment employer pension contributions on that wage. Employers can use this scheme anytime during this period.

The scheme is open to all UK employers that had created and started a PAYE payroll scheme on 19 March 2020 (the initial cut-off was 28 February 2020).

The Coronavirus Job Retention Scheme is a temporary scheme open to all UK employers for at least three months starting from 1 March 2020. It is designed to support employers whose operations have been severely affected by coronavirus (COVID-19).

Who can claim

Any UK organisation with employees can apply, including:

  • businesses
  • charities
  • recruitment agencies (agency workers paid through PAYE)
  • public authorities

You must have created and started a PAYE payroll scheme on or before 28 February 2020 and have a UK bank account.

Employees you can claim for

“Furloughed’ employees must have been on your PAYE payroll on 28 February 2020, and can be on any type of contract, including:

  • full-time employees
  • part-time employees
  • employees on agency contracts
  • employees on flexible or zero-hour contracts

The scheme also covers employees who were made redundant since 28 February 2020, if they are re-hired by their employer.

To be eligible for the subsidy, when on furlough, an employee can not undertake work for or on behalf of the organisation. This includes providing services or generating revenue. While on furlough, the employee’s wage will be subject to usual income tax and other deductions.

This scheme is only for employees on agency contracts who are not working.

If an employee is working, but on reduced hours, or for reduced pay, they will not be eligible for this scheme and you will have to continue paying the employee through your payroll and pay their salary subject to the terms of the employment contract you agreed.

To be eligible for the subsidy employers should write to their employee confirming that they have been furloughed and keep a record of this communication.

Employers should discuss with their staff and make any changes to the employment contract by agreement. When employers are making decisions in relation to the process, including deciding who to offer furlough to, equality and discrimination laws will apply in the usual way.

To be eligible for the subsidy employers should write to their employee confirming that they have been furloughed and keep a record of this communication.

Employees hired after 28 February 2020 cannot be furloughed or claimed for in accordance with this scheme.

You do not need to place all your employees on furlough. However, those employees who you do place on furlough cannot undertake work for you.

If your employee is on unpaid leave

Employees on unpaid leave cannot be furloughed, unless they were placed on unpaid leave after 28 February.

If your employee is on Statutory Sick Pay

Employees on sick leave or self-isolating should get Statutory Sick Pay, but can be furloughed after this.

Employees who are shielding in line with public health guidance can be placed on furlough.

If your employee has more than one job

If your employee has more than one employer they can be furloughed for each job. Each job is separate, and the cap applies to each employer individually.

If your employee does volunteer work or training

A furloughed employee can take part in volunteer work or training, as long as it does not provide services to or generate revenue for, or on behalf of your organisation.

However, if workers are required to for example, complete online training courses whilst they are furloughed, then they must be paid at least the NLW/NMW for the time spent training, even if this is more than the 80% of their wage that will be subsidised.

If your employee is on Maternity Leave, contractual adoption pay, paternity pay or shared parental pay

Individuals who are on or plan to take Maternity Leave must take at least 2 weeks off work (4 weeks if they work in a factory or workshop) immediately following the birth of their baby. This is a health and safety requirement. In practice, most women start their Maternity Leave before they give birth.

If your employee is eligible for Statutory Maternity Pay (SMP) or Maternity Allowance, the normal rules apply, and they are entitled to claim up to 39 weeks of statutory pay or allowance.

Employees who qualify for SMP, will still be eligible for 90% of their average weekly earnings in the first 6 weeks, followed by 33 weeks of pay paid at 90% of their average weekly earnings or the statutory flat rate (whichever is lower). The statutory flat rate is currently £148.68 a week, rising to £151.20 a week from April 2020.

If you offer enhanced (earnings related) contractual pay to women on Maternity Leave, this is included as wage costs that you can claim through the scheme.

The same principles apply where your employee qualifies for contractual adoption, paternity or shared parental pay.

Work out what you can claim

Employers need to make a claim for wage costs through this scheme.

You will receive a grant from HMRC to cover the lower of 80% of an employee’s regular wage or £2,500 per month, plus the associated Employer National Insurance contributions and minimum automatic enrolment employer pension contributions on that subsidised wage. Fees, commission and bonuses should not be included.

HMRC will issue further guidance on how employers should calculate their claims for Employer National Insurance Contributions and minimum automatic enrolment employer pension contributions, before the scheme becomes live. We will assisting our clients to make this calculation.

At a minimum, employers must pay their employee the lower of 80% of their regular wage or £2,500 per month. An employer can also choose to top up an employee’s salary beyond this but is not obliged to under this scheme.

HMRC will issue further guidance on how employers should calculate their claims for Employer National Insurance Contributions and minimum automatic enrolment employer pension contributions, before the scheme becomes live. We will assisting our clients to make this calculation.

Full time and part time employees

For full time and part time salaried employees, the employee’s actual salary before tax, as of 28 February should be used to calculate the 80%. Fees, commission and bonuses should not be included.

Employees whose pay varies

If the employee has been employed (or engaged by an employment business) for a full twelve months prior to the claim, you can claim for the higher of either:

  • the same month’s earning from the previous year
  • average monthly earnings from the 2019-20 tax year

If the employee has been employed for less than a year, you can claim for an average of their monthly earnings since they started work.

If the employee only started in February 2020, use a pro-rata for their earnings so far to claim.

Once you’ve worked out how much of an employee’s salary you can claim for, you must then work out the amount of Employer National Insurance Contributions and minimum automatic enrolment employer pension contributions you are entitled to claim.

You can claim a grant from HMRC to cover wages for a furloughed employee, equal to the lower of 80% of an employee’s regular salary or £2,500 per month, plus the associated Employer National Insurance contributions and minimum automatic enrolment employer pension contributions on paying those wages

Employer National Insurance and Pension Contributions

All employers remain liable for associated Employer National Insurance contributions and minimum automatic enrolment employer pension contributions on behalf of their furloughed employees.

You can claim a grant from HMRC to cover wages for a furloughed employee, equal to the lower of 80% of an employee’s regular salary or £2,500 per month, plus the associated Employer National Insurance contributions and minimum automatic enrolment employer pension contributions on paying those wages.

You can choose to provide top-up salary in addition to the grant. Employer National Insurance Contributions and automatic enrolment contribution on any additional top-up salary will not be funded through this scheme. Nor will any voluntary automatic enrolment contributions above the minimum mandatory employer contribution of 3% of income above the lower limit of qualifying earnings (which is £512 per month until 5th April and will be £520 per month from 6th April 2020 onwards).

National Living Wage/National Minimum Wage

Individuals are only entitled to the National Living Wage (NLW)/National Minimum Wage (NMW) for the hours they are working.

Therefore, furloughed workers, who are not working, must be paid the lower of 80% of their salary, or £2,500 even if, based on their usual working hours, this would be below NLW/NMW.

However, if workers are required to for example, complete online training courses whilst they are furloughed, then they must be paid at least the NLW/NMW for the time spent training, even if this is more than the 80% of their wage that will be subsidised.

What you’ll need to make a claim

Employers should discuss with their staff and make any changes to the employment contract by agreement. Employers may need to seek legal advice on the process. If sufficient numbers of staff are involved, it may be necessary to engage collective consultation processes to procure agreement to changes to terms of employment.

To claim, you will need:

  • your ePAYE reference number
  • the number of employees being furloughed
  • the claim period (start and end date)
  • amount claimed (per the minimum length of furloughing of 3 weeks)
  • your bank account number and sort code
  • your contact name
  • your phone number

You will need to calculate the amount you are claiming. HMRC will retain the right to retrospectively audit all aspects of your claim. We will be assisting employers to calculate the claim.

Claim

You can only submit one claim at least every 3 weeks, which is the minimum length an employee can be furloughed for. Claims can be backdated until the 1 March if applicable.

What to do after you’ve claimed

Once HMRC have received your claim and you are eligible for the grant, they will pay it via BACS payment to a UK bank account.

You should make your claim in accordance with actual payroll amounts at the point at which you run your payroll or in advance of an imminent payroll.

You must pay the employee all the grant you receive for their gross pay, no fees can be charged from the money that is granted. You can choose to top up the employee’s salary, but you do not have to.

What happens when the government ends the scheme?

When the government ends the scheme, you must make a decision, depending on your circumstances, as to whether employees can return to their duties. If not, it may be necessary to consider termination of employment (redundancy).

Employees that have been furloughed

Employees that have been furloughed have the same rights as they did previously. That includes Statutory Sick Pay entitlement, maternity rights, other parental rights, rights against unfair dismissal and to redundancy payments.

Once the scheme has been closed by the government, HMRC will continue to process remaining claims before terminating the scheme.

Income tax and Employee National Insurance

Wages of furloughed employees will be subject to Income Tax and National Insurance as usual. Employees will also pay automatic enrolment contributions on qualifying earnings, unless they have chosen to opt-out or to cease saving into a workplace pension scheme.

Employers will be liable to pay Employer National Insurance contributions on wages paid, as well as automatic enrolment contributions on qualifying earnings unless an employee has opted out or has ceased saving into a workplace pension scheme.

Tax Treatment of the Coronavirus Job Retention Grant

Payments received by a business under the scheme are made to offset these deductible revenue costs. They must therefore be included as income in the business’s calculation of its taxable profits for Income Tax and Corporation Tax purposes, in accordance with normal principles.

Businesses can deduct employment costs as normal when calculating taxable profits for Income Tax and Corporation Tax purposes.

These are complicated issues at the best of times. We are on hand to assist employers to make the claim. Please call us on 0114 272 4984 or email info@shipleystax.com.

COVID-19: Self Employed to get £2,500 grant – but there’s a catch

Family Business Shipleys Tax Advisors

At long last Chancellor Rishi Sunak unveiled measures for Self Employed earners affected by the coronavirus epidemic. As expected, this is broadly in line with the furlough scheme for those paid via PAYE.

The summary of the package is as follows:

  • The new self-employment income support scheme will pay 80% of an individual’s average monthly profit over the last three years, up to a maximum of £2,500 a month. It will be open to all across the UK for a three month period, with an extension if necessary.
  • Those who cannot produce three years of accounts will be able to submit either one or two years.
  • It will only be on offer for those with “trading profits” of up to £50,000.
  • Applicants for the scheme must have the majority of their income from self employment.

But the catch is the bail out makes it more likely that that national insurance contributions (NICs) will be aligned so that employees and the self-employed pay the same

  • They must also have already submitted a tax return for 2019. Those who have not submitted a tax return will not be eligible.
  •  Late filers of the January tax return will have until 26 April 2020 in which to submit a return.
  • Access to the scheme no later than the beginning of June, when the department will contact those eligible directly and ask them to fill in an online form. Payments will be made directly into their bank account, and will be back dated to 1 March, meaning a self employed taxpayer will receive three months’ money in one go.

The bail out now makes it more likely that national insurance contributions (NICs) will be aligned so that employees and the self-employed pay the same. We expect to hear more in the Autumn Budget no doubt.

If you need help with any of the above, please call us on 0114 272 4984 or email info@shipleystax.com.

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