You intend to transfer your business to a company. You’ve read that any resulting tax charges can be legitimately avoided. However, your accountant says there will be tax to pay. Who’s correct?
Tax and other advantages
One of the main motives for transferring a sole-trader business to a company in which you own shares is tax saving. You’ve probably read articles about the process, and how it’s possible to legitimately avoid paying capital gains tax (CGT) through the use of special claims. However, what’s almost invariably overlooked is the possible stamp duty and stamp duty land tax (SDLT) charges which can apply and are far more difficult to shake off.
Transfer to a company
When you transfer land, buildings or other assets (and even liabilities) to a company you’re connected to it’s treated by HMRC as purchase at market value. Your company is therefore liable to pay SDLT if the value exceeds the nil rate band.
Example. John runs a business from a retail unit located in England. He owns the freehold which is valued at £300,000. He transfers his business to Jcom Ltd; he owns all the shares. Jcom is liable to SDLT of £4,500 (£150,000 x 0% + £100,000 x 2% + £50,000 x 5%). This was a tax bill John hadn’t bargained for, but is there anything he could have done to avoid or reduce it?
Don't transfer the property
The simple solution would have been for John to retain personal ownership of the property and transfer only the other business assets. He can still use a special tax claim to avoid any CGT. The trouble is he may miss out on other possible tax advantages that go with company ownership of the property.
Different for partnerships
An oddity of the SDLT rules is that a partnership which transfers land or buildings to a company can make use of a relief that reduces the chargeable amount in proportion to which the partners are connected to the company.
For example, if 50% of the partners are connected with the company to which the property is transferred (director shareholders are connected to their companies), then their share of the property will not be subject to SDLT.
Tip. Spouses and close family members are connected persons for tax purposes. Therefore, where one spouse is connected to a company, say because they are a director, the other spouse is also connected. This means that where a married couple are in partnership and property is transferred to a company, only one of them needs to be connected to the company to obtain SDLT relief.
Therefore, full relief from SDLT is given whenever a family partnership transfers property to a company and at least one of the partners owns all the shares in the company.
Watch for anti-avoidance
HMRC has tough anti-avoidance rules which allow it to disapply the relief where the creation of a partnership was for the purpose of dodging SDLT.
Therefore, if you want to rely on the relief, the longer your business operates as a partnership the less likely it is that HMRC will be able to successfully challenge you.
There’s no better time to reward staff and customers than at Christmas. But the tax man is less generous than Santa and there are certain clauses you need to be aware of before you start popping £50 notes into envelopes to hand out over mulled wine round the office tree.
. Christmas parties:
the cost of these or another annual function is an allowable tax deduction for businesses. This doesn’t however apply to sole traders or business partners of unincorporated organisations (but it will apply to their employees). There will be no chargeable taxable benefit for the employee as long as:
2. Client entertaining
- The ‘do’ is open to all employees, or all at a particular location if you are a multi-site operation
- The cost per head isn’t more than £150 (the average cost per head mustn’t exceed that amount throughout the year) to include transport or accommodation provided. If the £150 limit is exceeded, staff will be taxable in full on total cost per head.
- VAT is recoverable on staff entertaining expenditure but not for partners so input VAT will need to be apportioned.
is never an allowable deduction for business tax purposes and input VAT cannot be recovered on it.
3. Business gifts
to customers are only allowable as a tax deduction if the total cost to one individual per year is less than £50, the gift bears a conspicuous advert for the business and it isn’t food, drink, tobacco (unless they’re samples of your products) or exchangeable vouchers.
4. Gifts to staff:
HMRC will consider a benefit exempt if it is deemed to be a trivial benefit. For it to be considered a trivial benefit, it must cost £50 or less, and not be part of the employees contract or a reward for performance. It must also not be cash or a cash voucher. Therefore seasonal gifts such as a turkey, bottle of wine or box of chocolates are likely to be exempt.
Cash vouchers are subject to tax and National Insurance. Non-cash vouchers up to £50 may be considered a trivial benefit and therefore exempt.
6. Christmas bonuses:
these are subject to PAYE and NI as additional salary.
7. Inheritance tax issues:
All individuals have an annual exemption of £3,000 for gifts. Gifts of less than £250 a year to each individual are exempt. Any gift above these amounts could be considered a Potentially Exempt Transfer which is exempt from Inheritance Tax provided the donor survives for seven years. All gifts to spouses are exempt for Inheritance Tax purposes.
1. If you set up as a sole trader, you can claim against your profits for items used in your business even if you bought them before you began trading.
2. Think about incorporating your business – lower corporation tax rates may make it worthwhile to become a limited company, although recent changes have made this less attractive than previously.
3. The current capital allowance scheme (tax deductions that you can claim for spending on business equipment) allows you 100% allowance on the first £200,000 spent on eligible capital items. If you’re thinking about buying plant and machinery, committing to buy before your year-end can allow the entire cost against profit for that year.
4. Consider how you extract profits from the business. If you set up a limited company, paying a small salary up to your personal allowance and the rest as dividends could still save some tax and national insurance. It may also be beneficial to pay your spouse for the work they undertake, dependent upon their other income.
5. Put your mobile phone in the name of the business then all phone costs are tax deductible.
6. It’s usually best to run your own vehicle and claim mileage using HMRC authorised mileage rates. If you have a limited company, in most cases this will also avoid higher tax on company cars.
7. If you work from home you can claim a tax deduction to cover part of your home running costs. HMRC allows (a modest) £4/week without asking for any evidence. If you think the actual cost is higher (based on proportion of home used for work purposes) then a bigger claim may be made, but be prepared to justify it.
8. If you’re married or in a civil partnership, make the most of each personal allowance (£11,500 for 2017/18) and basic rate tax bands (£33,500 for 2017/18). It might be sensible to transfer income-producing assets (such as rental income) to a spouse to take advantage of their lower tax rates.
9. Make contributions into a pension scheme. Pension contributions tend to be deductible expenses for the company, and individuals do not pay tax on the benefit of having the company pay them. If your net income for 2017/18 is more than £100,000, your personal allowance (£11,500 for 2017/18) will be reduced by £1 for each £2 of income in excess of £100,000. Consider making individual pension contributions or a transfer of income-producing investments to a spouse to make the most of personal allowances.
10. If you employ people, use a salary sacrifice scheme to pay for employees’ childcare costs. Childcare voucher schemes are tax-free for the employee (there are some restrictions) and the business doesn’t have to pay employer’s National Insurance.
For more tax saving advice please do not hesitate to get in touch with our experts.
HM Revenue & Customs (HMRC) has the authority to investigate the tax affairs of all taxpayers and seems increasingly willing to use this power to raise money for the government.
The latest figures show that the number of enquiries launched by HMRC in the year 2011-12 doubled to 237,215 with the receipts of HMRC’s compliance efforts totalling £16.7 billion.
HMRC’s primary line of enquiry is by way of a compliance check, which despite its name is a formal tax investigation. The opening of the investigation is by way of an Information Notice, which requires the taxpayer to provide answers to the questions raised by HMRC. A compliance check is separate to an enquiry into a tax return submitted by a tax payer.
To start a compliance check HMRC must have reason to suspect that tax has been underpaid. A compliance check cannot be a ‘fishing expedition’.
Why the increase in compliance checks?
Part of the reason for the increase in compliance checks is that HMRC have improved their analysis of the data they receive from third parties – such as banks with details of the accounts held by an individual. HMRC are also now collecting more information on property sales, so more checks following the sale of a property can be expected.
A considerable amount of the information received by HMRC will not have all the necessary details to determine whether tax has been underpaid.
For example a bank account may be in the name of a grandparent but the money is held for the benefit of a grandchild. From the initial information held by HMRC it seems that the grandparent has undeclared income and therefore it would be reasonable to launch a compliance check. The compliance check may then be dealt with quite quickly by responding to HMRC that the interest received on the bank account in fact belongs to the grandchildren and providing evidence to support the answer.
What happens if a compliance check finds that tax has been underpaid?
If a compliance check does result in a finding that tax has been underpaid then HMRC will collect the tax by raising an assessment. In addition to any tax payable the taxpayer may also face penalties for late payment. In addition, HMRC can charge additional penalties for non-disclosure of taxable income or gain. The non-disclosure penalties are reduced for co-operating with HMRC and providing the reason why the income or gain was not originally reported to HMRC.
The late payment and non-disclosure penalties can exceed the actual tax payable.
If tax should have been paid on an income source for the tax year ended 5 April 2014 the time limit for raising an assessment will only expire on 31 January 2015.
The normal time period during which tax may be assessed under a compliance check is 5 years and 10 months after the end of the tax year concerned.
The time limit can be extended up to 20 years in cases where there is negligent or fraudulent conduct by the taxpayer.
What to do if you receive an Information Notice from HMRC:
1. Keep calm
2. Decide whether you need professional assistance before you reply to HMRC.
3. Gather the information needed to provide a full answer to HMRC before replying to them.
4. Only provide HMRC with the information they need to deal with the questions they have raised.
5. If when reviewing your papers you do notice that tax has been underpaid consider whether a payment on account of tax due should immediately be sent to HMRC.
6. If you are not able to meet a deadline set by HMRC for you to provide an answer then contact them in advance and agree with them a revised deadline.
Q. I have recently started a new job and, for the first time in my career, I have been provided with a company car. I have to pay for fuel for private use but my employer says I can claim mileage for business journeys. Will I have to pay tax on fuel payments?
A. In addition to the company car benefit charge, employees have to pay tax on any fuel their employer provides that is used for private mileage. For 2016-17 you would calculate this amount by multiplying the car's CO2 percentage by £22,200. So, if the percentage is 28, the tax charge for petrol is £6,216. For a basic rate taxpayer, the after-tax cash equivalent is £1,243 and for a higher rate taxpayer £2,486. The charge is the same regardless of whether you use 2 litres or 2,000 litres of fuel.
However, this tax charge can be avoided if you pay all the private fuel costs back to your employer. You need to keep accurate records (mileage logs and fuel receipts) to support such a claim to HMRC.
Your employer can give you a tax-free fuel allowance if you pay for fuel used for business travel in your company car. HMRC publish new advisory fuel rates four times a year. The most recent rates, apply from 1 September 2016.
Rates currently range from 11p per mile for smaller petrol cars (under 1400cc); 13p for those with engines between 1401cc and 2000cc; and 20p per mile for larger petrol cars (over 2000cc). Lower rates apply for cars using cheaper liquid petroleum gas (LPG), ranging from 7p (1400cc or less); 9p (1401cc to 2000cc); and 13p (over 2000cc). Rates for cars with diesel engines currently range from 9p per mile for cars with engines of 1600cc or less; 11p per mile for those with engines of 1601cc to 2000cc; and 13p per mile for those with engines larger than 2000cc. Petrol hybrid cars are treated as petrol cars for this purpose.
HMRC accept that, where an employer reimburses an employee for the cost of fuel for business mileage in a company car at the above rates, no taxable benefit arises.
A full list of past and current mileage rates can be found on the HMRC website https://www.gov.uk/government/publications/advisory-fuel-rates.
Q. I am a director of a limited company, which is registered for VAT. I have recently formed a limited partnership, with my limited company being the only general partner and another business being a limited partner. HMRC have written to me advising that I am unable to register the limited partnership for VAT as my limited company is already VAT-registered. Is this correct?
A. Yes. In a limited partnership there must always be at least one general partner with unlimited liability. A limited partnership, composed of individual limited partners, and a corporate general partner, offers a combination of total limited liability and the advantages of the partnership structure.
If a limited partnership is registered with the Registrar of Companies, then HMRC will only allow the registration in respect of the general partners, not any of the limited ones. This is because a limited partner cannot be held liable for any debts or obligations of the limited partnership. If the limited partnership goes into debt, the limited partner is liable to lose only the contribution he made to the partnership, the remaining debt will fall to the general partners.
In your case, because the limited company is already VAT-registered and is the only general partner of the limited partnership, you would be treated as the same legal entity for VAT registration purposes and would not be able to obtain separate VAT registrations.
Q. Having been an employee of a company for many years, I was appointed to the board of directors from 1 March 2016. I understand that Class 1 National Insurance Contributions (NICs) are calculated differently for directors. Can you please explain how it works and let me know what will happen for the rest of the current tax year?
A. NICs for directors are calculated by reference to an annual, rather than weekly or monthly earnings period. You became a director in week 44 of the 2015/16 tax year, which means that the primary threshold and upper earnings limit are calculated for the rest of the tax year by multiplying the weekly values by 9 (the earnings period starts with the week of appointment). So, from your date of appointment in 2015/16 to the end of the 2015-16 tax year, you will pay Class 1 NICs at the main rate of 12% on your director's earnings between £1,008 (9 x £112) and £7,353 (9 x £817) and at the additional 2% rate on all earnings above £7,596 paid up to 5 April.
For 2016/17 you will pay Class 1 contributions evenly throughout the year. If, for example, your monthly salary is £9,000, you will pay Class 1 contributions as follows:
April (month 1) - salary £9,000 - NICs payable £112.80 (£9,000 - £8,060 (being the primary threshold) x 12%)
May (month 2) - salary £9,000 - NICs payable £1,080.00 (£9,000 x 12%)
June (month 3) - salary £9,000 - NICs payable £1,080
July (month 4) - salary £9,000 - NICs payable £1,080
August (month 5) - salary £9,000 - NICs payable £840.00 (£7,000 x 12% plus £2,000 x 2%: upper earnings limit of £43,000 reached)
September (month 6) to March (month 12) - NICs payable each month: £9,000 x 2% = £180.00
Total NICs due for tax year: £5,452.80
Q. I am a VAT-registered sole trader, owning a cycle shop in my local town. I am thinking of opening a second shop in another town and am wondering how I will deal with this for self-assessment and VAT. Will I need to register the new shop for VAT separately and complete two VAT returns - one for each business?
A. I presume you are going to be selling similar goods and providing similar services in the new shop. If that is the case, you will be able to do one self-assessment for the two businesses by amalgamating the figures for both shops. For VAT purposes, the HMRC state that it is the 'person', not the business, who is registered for VAT. A person can be either an individual or a legal person or entity and each VAT registration covers all the business activities of the registered person. This means that even if your new business has a different name, you will only need one VAT registration number.
Q. I own a rental property and let it out on a fully-furnished basis. Can I claim a tax deduction for the cost of replacing items as and when needed?
A. The government withdrew the 'renewals basis' capital allowance for furnishings in rental properties from April 2013, which means that currently only the 10% wear and tear allowance for a fully furnished rental property is available to you. Note that the wear and tear allowance is not available to those property businesses that rent part-furnished or unfurnished property.
The good news, however, is that in the Summer 2015 Budget the government announced that, as from April 2016, the 10% wear and tear allowance will cease and will be replaced with a new 'replacement allowance'. Broadly, the new relief will enable all landlords of residential dwelling houses to deduct the costs they actually incur on replacing furnishings in the property. The relief will apply to landlords of unfurnished, part-furnished and furnished properties (but not to 'furnished holiday lettings' (FHLs) or commercial properties).
Under the new replacement furniture relief, landlords of all non-FHL residential dwelling houses will be able to claim a deduction for the capital cost of replacing furniture, furnishings, appliances and kitchenware provided for the tenant's use in the dwelling house, such as:
movable furniture or furnishings, such as beds or suites,
fridges and freezers,
carpets and floor-coverings,
crockery or cutlery.
The new replacement furniture relief will only apply to the replacement of furnishings. The initial cost of furnishing a property will not be included.
Q. I am a higher-rate taxpayer. My wife currently works part time and pays tax at the basic rate. We have a second property that we rent out but the deeds are held in my sole name. Is it worth putting the property into joint names, or even transferring it to my wife outright, so that we pay tax on the rental income at the basic rate?
A. If you live with a spouse or civil partner and have income from property you jointly own, you will normally be taxed on an even split of the income between you. In your particular circumstances there are two options available:
1. Under what is known as the '50:50 rule', you can simply make your wife a partial owner of the property, which means you will each be taxed on 50% of the rental income. For the purposes of these rules, the actual amount she owns is not relevant - it could be 99%, 50% or even 1%, as long as she is a partial owner.
2. You can make your wife a partial owner of the property and notify HMRC of the proportion she holds accordingly. You do this by submitting Form 17 to HMRC to record your actual shares of ownership. You will both then be taxed on the rental income according to the proportion you both actually own in the property (known as the 'actual basis'). You will need to provide HMRC with evidence that your beneficial interests in the property are unequal, for example a declaration or deed. You can complete Form 17 online here. https://public-online.hmrc.gov.uk/lc/content/xfaforms/profiles/forms.html?contentRoot=repository:///Applications/SpecPersTax_iForms/1.0/17&template=17.xdp
Q. I have realised that I made a mistake on my most recent VAT return. What should I do?
A. You can adjust your current VAT account to correct errors on past returns if the error:
was below the reporting threshold (broadly, less than £10,000, or up to 1% of your box 6 figure (up to a maximum of £50,000);
was not deliberate; and
relates to an accounting period that ended less than 4 years ago.
When you submit your next return, add the net value to box 1 for tax due to HMRC, or to box 4 for tax due to you. Make sure you keep good accurate records relating to the adjustment.
Q. A friend has told me that I may be entitled to a larger state pension if I pay Class 3A national insurance contributions. What are they and how do I know if paying them is worthwhile?
A. Class 3A is a new voluntary type of national insurance contribution (NIC) that is being introduced from 12 October 2015. Broadly, between then and 5 April 2017 certain people will be able to make a contribution to top up their state pension by up to £25 per week. Men born before 6 April 1951 and women born before 6 April 1953 will be eligible to make top up payments. The cost of the contribution will depend on how much extra pension the applicant wants to qualify for (between £1 and £25 per week), and how old they are when they make the contribution. A top up calculator is available on the GOV.uk website at www.gov.uk/state-pension-topup/y. The calculator will help you work out whether it is worthwhile you making Class 3A contributions.
Q. I have assets worth around £600,000, including my home. I am single, have never been married and have no children. I intend leaving my estate to my siblings. Will they qualify as 'direct descendants' and, in turn, will I qualify for the extra £175,000 family home inheritance tax allowance that was announced in the Summer Budget?
A. The draft legislation and guidance on this issue states that the relief will only be available where the family home is passed to children. This includes stepchildren, adopted and foster children, plus grandchildren. Therefore the family home allowance will not be available.
Savings income (which includes all types of interest) paid net is taxed usually at source at 20%. Dividends on UK equities carry a (non repayable) tax credit of 10%. The intention is that only higher rate taxpayers should have to pay any additional tax, although 'starting rate' and non-taxpayers may be entitled to claim a tax refund. The starting rate of 10% applies only to savings income up to £2,880. If non savings income exceeds this, no 10% rate applies.
For higher rate taxpayers, there is the question of how much of their savings income has to bear extra tax. In determining this, the general rule is that savings income is treated as the 'top slice' of income.
This is best illustrated by examples of individuals who have exactly the same savings income in 2014/15, but different other income (for simplicity, treated as being after application of all allowances). The treatment of dividends is more complicated and they are therefore excluded.
Suppose the savings income is received as follows:
Bank interest £1,600 net (£400 tax deducted) £2,000
Building society interest £3,200 net (£800 tax deducted) £4,000
Mr Black Mr Smith Mr Brown Mr Green
Other taxable income £1,000 £10,000 £31,000 £45,000
Savings income £6,000 £6,000 £6,000 £6,000
Total taxable income £7,000 £16,000 £37,000 £51,000
Mr Black's non-savings income of £1,000 utilises part of the savings income starting rate band. The remaining £1,880 is taxed at 10%, so a refund of tax is due.
Mr Smith's total taxable income is below the higher rate threshold of £31,865 and so he has no additional tax to pay. All his savings income will have been taxed at 20% only. The 10% starting rate does not apply as the non savings income exceeds £2,880.
Mr Brown's total taxable income exceeds the higher rate threshold by £5,135, and so he will have additional tax of £1,027 to pay (£5,135 at 20%).
Because Mr Green's other taxable income already exceeds the higher rate threshold, his savings income will trigger additional tax of £1,200 (£6,000 at 20%). Mr Green's savings income will therefore have been taxed at 40%.
Please contact us if you would like further information on this subject.
Q. I run a small shop, which I inherited from my father. The shop has a flat above it which is let out. I've always reported all the income from the shop and flat together as self-employed income on my tax return. Is that correct?
A. No, the income from your shop and the flat should be reported separately on your tax return. The profit or loss from the shop should be reported on the self-employed pages of your return. The net income from the flat should be reported on the UK property income pages on your tax return. Any loss from the shop can't be set off against profits from the letting, or the other way round.
Q. Back in 2010 I borrowed money from my company, and paid the corporation tax charge due. Business has now improved and my company can now pay a dividend to clear the debt I owe to the company. How can I reclaim the corporation tax charged?
A.You need to complete a form L2P to reclaim that tax charge, but that must be done online here: www.gov.uk/government/publications/corporation-tax-reclaim-tax-paid-by-close-companies-on-loans-to-participators-l2p
You need to answer all the questions on the interactive form, then print it off and sign it. The signed form should be sent to:
Corporation Tax Services
PO Box 29997
Glasgow, G70 5AB