Tax N2K

Summer Budget 2015: Key tax changes for entrepreneurs

Listen to an audio version of this Summary Budget 2015 round up of the key tax changes impacting on entrepreneurs or read the text version below:

An audio download link is available at the end of this post!

Reduction in Corporation tax

Continuing George Osborne’s pledge to make the UK one of the single most attractive places to do business in the G20 he continued with his downward pressure on the UK corporation tax rates. Not content with reducing the main rate to 20% from 28% not too many years ago, he pledged to reduce it further to 19% by 2017 and down to 18% by 2020.

Before we get too excited about the CT rate reductions, it was once again a “give and take budget” as Mr Osborne announced some far reaching changes to the dividend tax regime that will impact on many entrepreneurs and increases to the minimum wage – the now so called “Living Wage”.

Dividend tax changes

It has long been the case that entrepreneurs could extract profits from their companies as dividends rather than salary – the key advantage being NIC savings as dividends are not (currently) subject to NIC. The income tax suffered on dividends is lower than salary as dividends are only available from retained profits that have been subject to corporation tax – so a tax credit system is applied to dividends that, in essence, results in 0% income tax payable by basic rate tax-payers (so broadly up to £42,000 – £43,000); 25% of the net dividend payable for higher rate tax payers and 30.6% for additional rate tax payers.

Seemingly forgetting about the double taxation impact on dividend payments, the Chancellor announced that there will be a £5,000 dividend allowance from 6 April 2016 (whoop whoop!) and then a 7.5% additional tax applied to dividend income – so our rates now become basic rate: 7.5%; higher rate: 32.5% and additional rate: 38.1%.

Looking at the HMRC projected figures, they are looking to net quite a windfall on this change that is a tax grab via the back-door – I don’t think many entrepreneurs have quite grasped this change as it was positioned as a change that might impact on those with substantial quoted shareholdings and contractors.

Will we see larger dividend payments pre 5 April 2016 with founders leaving credit loan balances to draw down over the foreseeable future?

Employment allowance increase

We should see the £2,000 NIC allowance for employers increase to £3,000 from 6 April 2016

Annual investment allowance

The annual allowance for investment into capital equipment (e.g. PCs, servers, desks, chairs, machinery etc) was set to fall to £25,000 pa by the end of this year but this was increased and pegged at £200,000 for the next five years.

EIS restrictions

There were some further changes to EIS building on proposals from the Autumn Budget Statement that include proposals to cap the total amount that can be raised under EIS at £12m (£20m for ‘knowledge intensive’ companies).
Also, a new limit on companies raising EIS making it available only to those companies that have been trading for less than 7 years (10 years for knowledge intensive companies) – this change seems unreasonably harsh for longer more established companies that might want to access capital. The requirement for 70% of the SEIS cash to be invested before shares can be issued under EIS will also be removed as originally noted in the March 2015 Budget. Finally there was reference to ensuring that EIS funds are directed toward developing companies so there will be restrictions on using EIS monies for buyouts and acquisitions and more of a need to demonstrate that the funds are being employed to develop and grow trading companies.

There were no changes announced to the SEIS regime.

R&D tax credits

No significant changes announced for R&D tax relief aside from a restriction aimed at Charities and Universities to prevent them from claiming the R&D tax relief on work subcontracted to them. This restriction takes effect from 1 August 2015.

Buy to let landlords

Many entrepreneurs will have diversified their risk with potentially one or more buy to let properties within their portfolio. These were also hit with some quite serious changes to the tax regime with the most hard hitting being the reduction in interest relief on buy to let mortgages being reduced to the basic rate of tax only. Currently, landlords can offset the mortgage interest at their marginal rate of tax (so potentially up to 45%). These new rules will be phased in to ease the pain of potential deleveraging for some landlords but the writing is on the wall for many – and who’s to say that this is the end with potential for 0% interest relief in the future….?

There will also be the removal of the 10% wear and tear allowance from 6 April 2016. Yet more pain for landlords.

Pension changes

On the downside, there were announcements that those with total income over £150,000 would be hit with reductions in the amounts they can put into their pension with the £40,000 annual allowance being tapered away with it hitting just £10,000 for those earning £210,000 or more. This is a admin headache all round and it comes into force from 6 April 2016.

On the plus side, there was a consultation announce to explore the best ways for pensions to be saved and a seemingly open approach to considering alternative finance in line with improvements to ISAs – this is great news for our thriving Fintech sector.

Inheritance tax changes

Long discussed and unsurprising was the pledge to increase the inheritance tax level to £1m to allow homes to be passed on without incurring IHT. Slightly odd in that the £325,000 nil rate band remains in place for the next 5 years but we have this additional £175,000 especially for the family home. Inflation may start to dig a hole into that £325,000 allowance rendering this less beneficial over time than the headlines suggest.

It was a shame that we didn’t see any changes to the VAT MOSS / (#VATmess) regime and I think the changes to dividends and pensions will add to uncertainty for many entrepreneurs and their advisors as the goalposts keep moving which is disappointing.

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How to calculate your company car tax benefit for 2014/15

Although having a company car can appear to be a ‘perk’, if you delve a little deeper the tax rules are becoming increasingly onerous for those directors and employees who are ‘lucky enough’ to have them….

A ‘Benefit in Kind’ tax charge is levied on the ‘lucky’ director / employee under the company car tax benefit rules and this charge is now based on the Co2 emissions with those cars (as you might expect…) emitting the lowest C02 emissions having the lowest benefit in kind charge with a sliding scale upwards to hammer those driving the ‘dirty cars’!

HM Revenue & Customs has recently updated their online calculator to take into account the scale charges for the year ahead from 6 April 2014 to 5 April 2015.

You can find the HMRC company car tax benefit calculator for the tax year 6 April 2014 – 5 April 2015 here (or copy and paste the following link into your browser: http://www.hmrc.gov.uk/calcs/cars.htm).

So if you’re contemplating getting a new car (and you’re not sure which route to acquire it? e.g. company car or personally) then this calculator could prove helpful for you in making that decision.

 

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EIS Funding Catch

A key requirement of EIS (Enterprise Investment Scheme) relief is that the funds invested are ’employed’ within the investee business within the requisite time. The current requirement is that 100% of the funds must be invested within 2 years in the qualifying trade.

But how can a company ensure that it can demonstrate that it has fulfilled this requirement?

It is commonly advised that companies maintain a separate bank account for the EIS funds received. This way the company can maintain a record of both the timing and nature of the expenditure to which the EIS funds have been employed. There has never been a problem with EIS funds being used for working capital requirements – in fact, advisers have often recommended that funds be utilised for working capital requirements in priority to other funds if there was a risk that the funds might not otherwise be invested in time – however, a recent court case has added a layer of complexity to this commonly accepted advice.

The recent Skye Inns case was decided against the taxpayer on the grounds that a proportion of the funds was not invested within the required time limit. This was despite the fact that a separate bank account was maintained. The company was faced with a difficult decision in that a particular investment fell through shortly before the time limit for investment of the EIS funds was set to expire. The company therefore tried to argue that the funds had (largely) been utilised in servicing working capital demands instead. The appeal court decided, however, that the ongoing trading income of the investee business should be considered for servicing working capital in priority to any EIS funds. On this basis, HM Revenue & Customs won the appeal and the EIS relief was denied for the taxpayer.

It is key therefore that EIS subscription monies are earmarked in the relevant period for a specific current or future trading requirement rather than simply dipping into the EIS account, as necessary, and relying on a first in / first out (FIFO) basis to favour EIS funds over subsequent trading income. As ever, the paper trail will be key in ensuring that relief is not denied.

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HMRC offers R&D tax credit help for small companies

HMRC has announced today a pilot scheme to assist small companies in making their first Research and Development (R&D) tax credit claim.

Small companies for these purposes are companies with fewer than 50 employees – so still fairly sizeable in actual fact.

The idea is that participants will be allocated an R&D tax contact from HMRC who will assist the company in putting together a claim and agree a basis for the next two years’ claims provided that they follow the same basis.

This is great news for small companies or startups who would like advance assurance before commencing work in compiling and filing an R&D claim, however, we’ll have to see how this works in practice. For example, in terms of

  • is there sufficient HMRC resource to commit to individual company claims (they are already stretched); and
  • I hate to be cynical but there has to be a question mark over HMRC’s incentive to help companies maximise claims or explore angles or more obscure claims that might not be immediately apparent.

The sorts of issues and technical matters that you would hope your accountant or tax advisor is already doing for you.

R&D tax credit “production” confusion!

There has been this ongoing problem for companies that are solving technological or scientific uncertainties (and therefore,on the face of it, qualify for research & development enhanced tax relief) yet the product that emanates from this R&D process is ultimately sold to a customer e.g. a prototype that is sold rather than skipped.

HMRC’s view has been that if the product was sold it must represent excluded “production” activities rather than a qualifying R&D process and therefore cannot be qualifying expenditure.

The thinking here is that the R&D tax credit exists to encourage investment in the advancement of scientific or technological knowledge where there is no alternative market driver so, on the flip-side, if there are customers willing to purchase the fruits of your labour then why do you need the tax credits? But this analysis does not stand up to economic scrutiny for 99% of SMEs; in that you may not have known how to achieve what you ultimately created but, if you are successful, why on earth would you want to dump your invention or prototype in the skip if there happens to be a willing buyer?!!

The good news is that recent HMRC guidance has softened this approach. It is not a complete reversal of policy but rather an acceptance that there may be instances where costs of developing products do qualify for the R&D tax relief despite ultimate sale.

A key takeaway from this will be the heightened need for appropriate documentation to evidence when the qualifying R&D ceased and excluded “production” activities commenced.

An improvement to this tricky area – yes – but does this go far enough? How might this impact on your company’s R&D activities and future potential claims?

Don’t forget National Insurance (NIC) holidays for business startups

The National Insurance numbercard issued by th...

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If your UK business start-up was set up on or after 22 June 2010 then you may be eligible for a 12 month holiday from employer’s national insurance contributions – normally payable at a rate of 13.8% on employees’ and directors salaries in most cases.

This incentive, aimed at boosting the number of business startups in certain areas (like the north west), has been around for over a year now but many new businesses still seem to overlook it.

We are busy saving new businesses up to £50,000 so it is well worth looking into further if you think it might apply to your new business. Drop me a line if you would like to enroll for this NIC holiday or if you would like to ask any specific questions.

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Reform needed for 5% shareholding req for Entrepreneur’s Relief

Current tax rules require shareholders to be officers or employees of a company and hold 5% of the ordinary shares (and voting rights) for a 12 month period prior to sale to qualify for the holy grail of entrepreneur’s relief (ER) – ER results in a 10% personal capital gains tax rate (CGT) as opposed to a top rate of 28% CGT which is worth a potential £1.8m in tax savings.

I am currently encountering 3 common problems related to this condition in advising fast growth tech companies:

  1. Founders are seeing their equity being diluted as they approach much needed successive investment rounds and may therefore find themselves sinking below the 5% threshold – what adverse impact might this have on the funding decisions of business founders?
  2. You need to hold the 5% minimum requirement for 12 months prior to sale – what about employee shareholders who exercise share options just prior to sale (because that’s all the share option scheme permits)?
  3. What if a Founder is willing to share equity with a number of key employees (and reach the 5% threshold in each case) but is unwilling to relinquish voting rights? Especially if say 5 or more shareholders are given 5% each thereby breaching the 75% ownership limit necessary for passing special resolutions? Although this can often be managed via a shareholder agreement, some founders may be unwilling to enforce their (perceived) rights by suing for breach of contract.

Clearly, any tax incentive worth a potential £1.8m requires conditions and safeguards but it is disappointing when these conditions lead to skewed and sometimes uncommercial decisionmaking.

What changes or improvements would you like to see made to entrepreneurs relief?

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1 April is no joke for UK companies!

1st April is an important date for UK companies as it signifies the start of a new tax year (yes, the personal tax year is different running to 5 April each year) and there have been some important announcements made in recent Budgets. Here are the headlines:

1. Small companies rate of corporation tax falls from 21% to 20%.

2. Standard rate of corporation tax falls from 28% to 26% (applies broadly to stand alone companies with taxable profits of £1.5m or more).

3. R&D tax credits increased from 75p enhancement for every qualifying £1 spent to £1 enhancement. If you haven’t considered whether R&D tax credits apply to your business it is well worth considering now.

Budget 2011 supports digital, technology and creative businesses (mostly!)

Yesterday’s Budget speech provided largely good news for entrepreneurs in the digital, technology and creative sectors.

George Osborne had promised an “unashamedly” pro-business, pro-growth and pro-aspiration Budget and, although it might be over-flattering to suggest that he achieved this, he certainly made some positive inroads toward addressing some of the roadblocks facing early-stage startups and fast growth companies.

  1. The headline grabber was that the UK is set to have one of the lowest company (corporation) tax rates in the G7. To achieve this Osborne accelerated the previously promised rate cut by introducing a 26% standard rate from 1 April 2011. This will be followed by a series of 1% cuts until it reaches 23% by 2014. This is a further 1% cut to what we were expecting.  Good news if you’re a big company but of little consequence if you’re a startup or SME – as the standard rate only applies for single companies with taxable profits over £1.5m. Unfortunately there was no 2% cut for the small companies rate that applies for most startups and SMEs – the rate will be 20% from 1 April 2011 as previously promised. Still, 20% isn’t bad and if you’ve yet to incorporate your business into a company, it may well be worth crunching the number to see if tax savings could be made.
  2. R&D tax credits get a whole lot better – Research and Development Tax Credits are a key tax incentive for many companies in the tech and wider sectors so it was great news to see Dyson’s recommendations followed and in fact improved upon. Most startups and fast growth companies are already entitled to claim a further 75p tax deduction for every £1 they spend on qualifying R&D activities (primarily comprising relevant staff salary costs), however, it was announced that from 1 April 2011 companies can claim an additional £1 tax deduction for every £1 spent (i.e. a 200% tax deduction) and this set to go up to £1.25 for every £1 spent from 1 April 2012! There are also plans to remove the requirement for the company to have generated sufficient PAYE to cover the cash repayment, a requirement that has been a key roadblock for many companies, particularly start-ups, in making repayment claims. How many companies have significant PAYE bills in the early stages? Not many. There are also plans to abolish the de minimis limit of £10,000 qualifying R&D spend before you can make an R&D tax claim. These changes should open the doors to more companies being able to access cash at an earlier stage than was previously possible. All good news and if you haven’t looked at this for your business, please drop me a line.
  3. Entrepreneur’s Relief lifetime allowance doubled from £5m to £10m for sales after 5 April 2011. For all the blood, sweat and tears put into building your business it is encouraging to know that you will be able to shelter £10m of your gain at a tax rate of just 10% – that’s a potential £1.8m tax saving compared to applying the general CGT rate. I would have liked to have seen a relaxation in the qualifying criteria to assist employees with less than 5% shareholdings, but still, in theory, it will be possible to shelter gains of £200m at just 10% if structured correctly. Mouth-watering huh? At the very least, it is important that you ensure that you are maximising this relief by allocating shareholdings at the optimum levels although care must be taken as there are many pitfalls for the unwary – remember, there is potentially £1.8m of tax at stake….(a subject for another post – or drop me a line).
  4. Enterprise Investment Scheme (EIS) is made much more attractive for investors in startups and fast growth companies. Accessing funding for business has been tough of late and we are increasingly seeing the private business angel networks as well as family and friends stepping into the fray to lend financial support where possible. EIS allows investors in qualifying businesses to obtain income tax relief as well as capital gains savings in relation to investments in startups and fast growth companies. The income tax relief will be increased from 20% to 30% from 6 April 2011 and we will see further sweeping changes in 2012 to increase the amount that can be invested and the breadth and scope of the relief.
  5. The ‘Patent Box’ is on its way! As previously announced, the UK will be following other countries in introducing a lower rate of corporation tax (10%) for patent income to encourage investment in new technologies and methodologies. Although likely to be of most interest to life science and pharma companies, it will be worth keeping an eye on this relief as more details emerge in readiness for its introduction from 1 April 2013 to see if it can be applied to tech companies more generally. As currently drafted, the rules will be too restrictive for most tech companies as few derive significant income from patents but I am hopeful that there will be a widening of scope to catch broader intellectual property classes as it undergoes consultation.
  6. 21 Enterprise Zones to be introduced (including in Greater Manchester and Liverpool) and £100m investment in Life Sciences and Technology with £10m to be invested in Daresbury Innovation Park. Creating clusters of innovative businesses builds support networks and knowledge transfer leading to fast growth businesses. A win-win.

These were the headline announcements relevant to digital, technology and creative businesses – we await the draft legislation which may throw up some anomalies or slight tweaks and I’ll keep you all posted.

Please drop me a line via the contact form on the about me page or my email address is in the sidebar – otherwise, please air your views below.

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My single biggest wish for the Budget 2011

Aside from the minute detail behind likely tax changes and incentives that might emerge from today’s Budget announcement, there is one overriding wish that business owners repeat to me again and again and its a wish that I too share:

Stop tinkering and remove red-tape so that UK businesses can plan for the future with a degree of certainty

 I live in hope….