Every week we take a look at what is trending in the accountancy and tax press and share items that we think will interest you. However, these are only outlines and where they relate to tax planning should not be acted upon without looking into them more completely as everyone’s circumstances are particular to them. You need to take specific advice appropriate to your own circumstances.
While every effort is made to deliver accurate, informative and balanced articles this content is general in nature and should not be used as the sole basis for making decisions.
The Not-So-Mini Budget
I don’t think anyone could have foreseen the extent of the tax measures set out by Kwasi Kwarteng in his recent speech. Despite all the clamours it appears, for now at least, that they are going to stick to their guns and implement most of the measures. The removal of the 45% tax rate seems likely to not go ahead.
So, it looks as through Corporation Tax rates are going to remain low for the foreseeable future. As Scotland does not appear to be following England into cutting personal income tax rates, the whole tax landscape would seem to be largely business as usual, in spite of all the noise around this budget.
The new Investment Zones could be quite interesting, but we will have to wait and see how many, if any, are located north of the border. However, if you are thinking of setting up new ventures that are geographically fluid you might want to hold off until the details of these plans are fully set out.
Contractors Offered Tax Avoidance Schemes
A recent survey of contractors by HMRC has disclosed some surprising results. The survey was identifying how many had been approached and offered at least one way of managing their tax which was described to them in a way that suggested it may have been a potential tax avoidance scheme.
37% of those surveyed agreed with the statement that ‘a lot of contractors think it’s ok to reduce how they pay in tax using any method that doesn’t actually break the law’.
Higher earning umbrella contractors were significantly more likely to have been offered a potential avoidance scheme than others, particularly those who earned £50,000 or more per year, with nearly half (46%) of them saying they had been made aware of the advantages of avoidance schemes.
Some contractors said that employment and recruitment agencies often directed them to specific umbrella companies that would provide benefits for the contractors, where the low rates of pay offered could be increased through ways in which they could reduce their tax liability.
Most commonly offers to increase take home pay for the same work involved payment through a loan or other type of payment claimed to be non-taxable, as well as non-payment or reduced National Insurance contributions or tax.
Most of the interviewees who had joined potential avoidance schemes described tax avoidance as a ‘grey area’ that enabled contractors to increase their take home pay.
‘Seeming too good to be true’ was the main reason contractors avoided signing up for schemes.
The research also looked at how contractors were paid, finding that 85% of PSC (Personal Service Company) contractors received income from dividends as a shareholder of their PSC and paid tax on this dividends income. Three-quarters received an income from their PSC as a director and paid tax on this director’s salary.
By contrast 80% of umbrella contractors were paid by an umbrella company on a PAYE basis.
Scotland: No Tax Cuts?
Deputy first minister John Swinney told the Scottish parliament that further time was required to consider the implications of the UK government’s tax changes and he would report the results of the review in the week beginning 24 October.
However, he ruled out adopting the tax cutting measures announced by Chancellor Kwasi Kwarteng, including the 1p cut in the basic rate of income tax to 19% and the abolition of the 45% tax rate. Scotland has control of an element of income tax and already has a separate set of rates and bands under the Scottish rate of income tax.
‘It is vital that we give proper time to consider the serious implications for Scotland of the UK mini Budget before we conclude our Emergency Budget Review. I intend to seek advice from an expert panel and also to embark on discussions with businesses and trade unions. The Scottish Fiscal Commission will incorporate the impact of the changes in their next forecasts.’
Business Property Relief and Cash Pots
Inheritance tax relief for business assets, Business Property Relief (BPR) reduces the value of qualifying assets. The relief is not capped.
BPR is given at either 100% or 50%, depending on the asset in question. Full relief is given for interests in unincorporated businesses, such as trades or a share in a partnership. It is also given for unquoted company shares.
Quoted company shares can qualify for BPR, but only if the shareholding represents a controlling interest. Relief is restricted to 50%. This rate of relief also applies to land, buildings or machinery owned by someone and used in a business in which they have an interest.
Some unquoted companies may have built up large cash pots within the company.
There can be assets owned by the company that are not for the purpose of the business and these are termed excepted assets and excluded from BPR.
Perhaps the most contentious asset type is excess cash on deposit. HMRC may argue that this is an excepted asset. It must be demonstrated that any significant cash balance, above what would normally be expected to satisfy the company’s working capital requirements, is required for future use.
To satisfy this test there should be an imperative that the cash is needed for something palpable. Holding money indefinitely ‘just in case’ is unlikely to satisfy the test.
In a family company where there are only a handful of shareholders, the effect of excepted assets can be pronounced. There are some strategies that could be adopted to reduce the cash in the company balance sheet such as:
- Firstly, bringing forward creditor payments to reduce actual cash in the business at the appropriate time.
- Use the cash to make bonus payments. Of course, there would be income tax consequences of this.
- A better option might be to use the cash to begin a secondary activity. This could even be an investment business, as long as it did not overshadow the trading activity. Rental properties could also be considered.
As always you need to take advice before adopting any of these possible strategies.
Super Deduction Balancing Charge
The super deduction gave 130% capital allowances on new and unused plant and machinery purchased in the run up to 31 March 2023. If you sold it before then you had to bring in 130% of the proceeds. This was to encourage companies to buy new equipment now and not to defer the investment until the Corporation Tax rate rise to 25% in order to get the higher tax relief.
After March 2023 you did not need to bring in 130% of the disposal proceeds because they would be caught by the higher rate of Corporation Tax. But the corporation tax rate will remain at 19% as the trailed rise to 25% will not go ahead in April 2023.
There are various considerations to be taken into account but broadly, if you bought an asset before 1 April 2023 on which you claimed super deduction, and you sell it after 31 March 2023, you keep the super deduction and only bring into account the actual proceeds for the item sold.
Budget No.2 aka Fiscal Statement
The Treasury has confirmed that the Chancellor will present a medium-term fiscal plan in November supported by costings. This will be followed by a Budget in spring 2023, where the Chancellor Kwasi Kwarteng has indicated that he will make further tax cuts.
Cabinet ministers will announce further supply side growth measures in October and early November, including changes to the planning system, business regulations, childcare, immigration, agricultural productivity, and digital infrastructure.
The government will also outline regulatory reforms ‘to ensure the UK’s financial services sector remains globally competitive, the Treasury said.
The medium-term fiscal plan is scheduled for 23 November.
Tax Issues with Corporate Partners
There can be various reasons for wanting to mix individual and company partners in a partnership. These might include:
- The partnership business was originally carried on within a company, and the company subsequently contributed the business to a partnership and then remained in place as a partner.
- Facilitating external investment to be introduced into the business.
- Facilitating deferred remuneration or partner incentive schemes.
Until 2014, it was possible to obtain significant tax savings by allocating partnership profits to a corporate member of a mixed partnership which would then only be subject to Corporation Tax. The rules changed and tax savings may now be less predictable.
In a mixed partnership the profits of the partnership will need to be calculated under income tax rules in order to determine the profits that are subject to income tax in the hands of individual partners, and under corporation tax rules in order to determine the profits that are subject to corporation tax in the hands of the corporate partners. In many cases, these profits figures will be the same.
Mixed partnership cannot claim Annual Investment Allowances.
The taxable profits of a partnership will need to be allocated between the partners of the partnership. The changes brough about in 2014 apply where:
- a partnership has taxable profits;
- an individual partner is allocated either a share of the profit or neither a profit nor a loss;
- a non-individual partner (i.e., a corporate partner) is allocated a share of the profit; and
- it is reasonable to suppose profits of an individual have been allocated to the company partner, thereby reducing the tax due, or
- an individual partner has power to enjoy the profits allocated to the company partner
The company partner can have an allocation of profit where this represents a reasonable return on capital invested.
If the company partner’s share exceeds this and the above conditions are met, for tax purposes the profits are redistributed back to the individual partner and away from the company partner.
Supporting Staff: Current Cost of Living Crisis
The sort of things you can consider are:
- A salary increase or bonus payment. If there is a contractual entitlement to a regular pay review or pay increase period, you need to make sure this happens.
- You may be able to renegotiate contractual terms and conditions, to remove or delay a scheduled pay increase or bonus payment but you need to do this withing current employment regulations.
- For some homeworkers, returning to the office may be a useful way to save on energy bills. Where this isn’t possible, you might want to consider providing a homeworking allowance, to ease the financial pressures associated with working from home, especially through the winter months.
- For other on-site workers, commuting expenses may be more of an issue. In these circumstances, providing travel ticket loans or free parking can help reduce their overall outgoings.
- The introduction of hybrid or flexible working can also reduce overall expenses. This may be done through the offering of flexi-hours, compressed hours, reducing working time or changing start and finish times to fall outside of peak hours.
- Introducing rewards and benefits programmes,
- Providing free on-site meals and refreshments,
- Providing financial literacy and education sessions.
If you have any questions about any of these, you know where to find us. If you prefer, just give me a ring on 07770 738770 or email me at email@example.com.