Tax N2K

Budget 2011 must support entrepreneurs

With a little less than 30 minutes to go until the Budget speech, I am looking forward to a pro-entrepreneur business set of proposals and actions to support growth for the future.

Looks like the Institute of Directors (IoD) are too with some of their proposals – here’s one in particular that I like:

Introducing an exemption from future capital gains tax for entrepreneurial investments. If a new company starts in business between now and 5 April 2012 then the people who subscribe for shares in it within that period would be exempt from capital gains tax when they sold those shares, whenever they sold them. This would encourage the injection of fresh equity capital into businesses (only shares subscribed for would qualify, not shares bought from existing shareholders).

If we want more private sector jobs then we need more private sector businesses.

How do you encourage entrepreneurs and business owners to take that capital risk? This is one good idea. Let’s hope George has plenty more up his sleeve!

Budget 2011: How to inform (and engage?) businesses

Hmmh, so its this time each year (more than once per year in recent years) that accountants / tax advisers, like myself, scratch our heads and wonder how best we can inform our clients on issues relevant to them that emerge from the Budget speech.

This approach is constantly evolving – my plan for tomorrow’s Budget speech is to:

  1. Tweet points of interest as they emerge during George Osborne’s Budget Speech on Twitter. I’ve used CoveritLive! in the past but fail to see exactly what this adds over and above using Twitter directly. Tweeting comments as the speech unfolds in realtime also allows me to take notes ready for blog posts to be drafted post speech.
  2. Set up the hashtag #budget11 on Twitter to check for interesting conversations (and of course to keep an eye on the competition :)) Also set up RSS feeds for “Budget 2011” on Google for emerging news and commentary.
  3. Download the Treasury Budget Notes from the HM Treasury website as soon as George sits down – the devil’s always in the detail! Usually, lots to digest.
  4. Extract the key points relevant to my clients and targets and draft short commentaries as blog posts and separate client briefings. Post links to blog posts on Twitter and keep an eye out for feedback, comments, questions etc.

Then of course cascade and discuss points of interest directly with our clients – normally via a meeting or call.

This approach is a lot different to the approach in the past in which it was largely a ‘fact race’ to be 1st to clients and targets with a summary of the key points. The internet has blown this approach out of the water for all but the biggest and bravest. This, in my view, is no bad thing as the prize is now more about contextualising the issues relevant to clients and in looking at new ways of sharing this information with clients and prospects in ways that not only informs but also engages (both them and us).

Any thoughts, comments or observations on how we can better engage with businesses on issues emerging from the Budget speeches would be gratefully received…

Budget 2011 wishes for fast growth digital and tech companies

With George Osborne promising an “unashamedly pro-growth, pro-enterprise and pro-aspiration” Budget tomorrow at 12.30pm, I am looking forward to hearing these words turn into solid, workable solutions for UK entrepreneurs.

Giving Budget predictions is almost as much fun as delving into the actual Budget announcements afterward so please allow me to indulge myself for just two minutes!

Here are the tax changes I would like to hear announced tomorrow:

  1. An increase in the enhanced R&D tax credit deduction from 175% to 200%. I’ve seen so much benefit brought to hi-tech companies from the UK R&D tax incentives but I still see a ‘brain-drain’ in talented technical or scientific entrepreneurs and workers leaving the UK to build businesses where more attractive tax breaks are on offer. Dyson has called for similar changes and we should act now to encourage and retain these export-rich companies.
  2. Introduction of specific tax reliefs for video-game companies. TIGA has been calling for such changes for a while and despite squeaks of support from the previous Chancellor, these plans got shelved by the Coalition government. Canada, South Korea and France are busy supporting their games developer industry so we should likewise support our £1bn UK videogames industry.
  3. A reduction in the 5% shareholding requirement in order for entrepreneur’s relief to be available. Company employees are rarely offered the opportunity to acquire shareholdings of 5%+ let alone have the financial capacity to fund share acquisitions of this quantum so it seems harsh for them to be taxed at a likely 28% tax rate whilst those with a small percentage more could get down to a tax rate of just 10%.
  4. A change in the EMI rules to allow for the 12 month shareholding clock to start ticking from the date of grant of the option – in the same way as the old taper relief rules allowed for the clock to start ticking from the date of grant – for the purposes of entrepreneur’s relief.
  5. Relaxation of the Enterprise Investment Scheme (EIS) rules to allow income tax relief for loans to smaller companies given that accessing lending from banks continues to be difficult – especially for early stage start up companies.
  6. Introduction of the ‘patent box’ for intellectual property income – other EU countries already offer this tax incentive. We need it sooner rather than later.
  7. Enterprise zones to encourage clusters of hi-tech businesses. Mini-Silicon-Valleys with tax breaks for qualifying companies operating within the EZs.

So these are my starter for 7. What have I missed? What measures, incentives or changes would benefit your business?

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EIS and EMI – Whaaaat?!!!

I don’t know if there’s something in the water around here right now but I seem to spending a huge proportion of my time advising clients on either:

  • the benefits (and potential pitfalls!) of the Enterprise Investment Scheme (EIS) aimed at tax efficient investments into fledgling fast growth companies and
  • rewarding employees under an approved HMRC tax efficient share option scheme called the Enterprise Management Incentive Scheme (EMI)

I will follow up with a more detailed analysis of the pros and cons of these UK statutory tax reliefs in future posts.

In the meantime, you know where I am if these are already on your agenda and you need some help.

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10 Year End Tax Planning Tips For SMEs

You have the opportunity to structure your business finances in ways that preserve more of the wealth that you create. This takes advance planning. Don’t miss this opportunity.

To help, here are 10 pre-year end tax planning tips that entrepreneurs should be actively considering to reduce corporation tax, income tax and national insurance costs:

  1. Don’t pay corporation tax at the highest rate of 29.75%. Calculate your full year budgeted profits as soon as possible so that you plan around this rate. If you are a standalone company and your estimated taxable profits exceed £300,000 (but are less than £1.5m) then you fall into what’s called the corporation tax ‘marginal rate.’ This is not a good place to be. This rate is higher than the rate of tax applied to large companies (with profits in excess of £1.5m) who pay tax at 28% and much higher than the 21% rate your company would otherwise pay if you kept profits below the marginal band. If this applies to you, then you need to consider tax planning ideas to reduce your corporation tax payable – see further below.
  2. Make a pension contribution from your company into your (and possibly your spouse’s) pension fund. I am not going to go into the pros and cons of pensions and the detail of the recently introduced (and hideously complex) anti-forestalling provisions that currently apply for ‘super earners’ (broadly those with personal income of £130,000+), suffice to say that pensions can play an important role in year end planning for owner managed businesses. The benefit of pensions is that income tax relief is received at the individual’s highest rate of income tax. Certain restrictions apply for ‘super earners’ and new rules will be coming into force from April 2011, however, where implemented carefully, pension planning allows for a corporation tax deduction in the company and no income tax or national insurance payable by the owner managers. Pensions can also be an important lever in managing the company taxable profits e.g. if hovering above the £300,000 standalone company profit watershed. And don’t forget you must pay the pension contribution by the year end in order for it to be tax deductible in the company in that period – so don’t leave it to the last minute!
  3. Optimise the tax on your remuneration. Generally, a small salary (within the personal allowance – so no income tax or national insurance is due) will have been paid during the year with regular dividends to cover living expenses. Spouses, who ideally take an active role in helping run the business, can receive a small salary and dividends (subject to shareholdings) to maximize the use of both husband and wife personal tax allowances. With the year end approaching, now is the time to consider whether a final bonus or dividend should be awarded depending on available distributable profits, taxable profits and how much needs to be left in the business for future reinvestment etc. There are normally a number of factors to consider in making final awards of cash from the company, therefore it is important to crunch the numbers. Normally, a dividend will be the most tax efficient means of extracting profits for most business owners (up to the £150,000 personal income limit and 50% additional tax rate – see further below). Care should be taken in awarding dividends to spouse shareholders as HM Revenue & Customs still have their eye on husband and wife companies despite having lost a landmark case on this issue related to maximising both spouse’s income tax allowances. Some demonstrable activity in the business by both spouses is therefore recommended to mitigate this risk.
  4. Watch the 60% marginal income tax rate for income over £100,000. Total personal income of £100,000 is a new watershed for business owners as income received between £100,000 to £112,950 attracts a marginal rate of 60%! This is due to the personal allowance being phased out for income above £100,000. So if your total remuneration package is likely to be around this area, you might be well advised to limit your income to £99,999 to avoid this horribly expensive marginal rate.
  5. Watch the 50% additional rate for ‘super earners’. For those successful entrepreneurs with earnings in excess of £150,000, getting the right balance of remuneration is even more important as income tax is levied at 50% on salary or bonuses compared to 36.1% on dividends (a 25% increase in tax on salary income is matched (or not?!) by a 44% increase in dividend tax rate – work that one out?!). So rather than take a dividend from the company beyond £150,000 total income, business owners could consider taking a loan from the company and the company paying the due tax at a rate of 25% on the loan – something akin to what the shareholder would have paid on a dividend. Note that there could also be benefit in kind tax charges where no interest is paid on the loan but this could still work out to be the cheaper overall option.
  6. Optimise the timing of dividend and bonus payments for cashflow and tax rates. Dividends and bonuses are taxed on business owners on a receipts basis. If your income is already high for the 5 April 2010/11 tax year then you could defer paying out a dividend until 6 April 2011 so that it falls within the following year’s tax allowances and limits. Also, you can accrue a bonus in the 31 December 2010 accounts and don’t have to physically pay it until 30 September 2011 but you still receive the corporation tax deduction upfront. This gives a useful cash-flow advantage and the bonus timing is applicable for all employees i.e. not just business owners.
  7. Plan your spend on capital items to get tax relief quicker. Expenditure on computer equipment, desks, chairs etc attracts a write off against tax up to £100,000 spend per year. This reduces to £25,000 from April 2012. Make sure you bring forward any expenditure to reduce your taxable profits especially if the company profits are hovering around the standalone company £300,000 mark.
  8. Get tax deductions now for provisions against stock and debtors etc. Consider the valuation of any stock or debtors at the year end and make specific provisions where the likely recoverable value is less than the original amount recognised. Provisions against specific items (on a line-by-line basis) are tax deductible for corporation tax purposes.
  9. Claim loss carry backs as soon as possible to get refunds. If you have a forecast tax loss then you can carry this loss back to obtain a refund from HM Revenue & Customs of the corresponding amount of tax suffered in the preceding accounting period. You may wish to get your skates on with the year end work so that you can promptly file the accounts and tax return and get the cash back as quickly as possible.
  10. Don’t get time barred from lucrative tax incentives. Review available tax incentives such as R&D tax credits, capital allowances on fixed asset expenditure, loss carry back claims etc as the majority of such tax breaks have a 2 year time limit for you to be able to claim them with HM Revenue & Customs. So, for example,  many available tax incentives for the year end to 31 December 2008 will be time barred from 1 January 2011.

If you would like more ideas for growing your business and structuring your finances so that you keep more of the wealth you create, then please join the mailing list in the side-bar.

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Avoid a tax hangover from your Christmas office party!

So you’re probably all set for this year’s Christmas work bash? Its worth reminding yourself about the tax rules and how they apply for Christmas office parties.

As you might expect, HM Revenue & Customs aren’t quite as festive as most business owners might like to be in rewarding their team for the hard work put in over the year.

Certain limitations apply for the party to be treated as non-taxable and therefore non reportable (for income tax and National Insurance Contribution purposes) such as:

  • it must be an annual event (it could be a Summer BBQ and / or an Xmas party but a celebration party to mark a major contract win, for example, would not fall within this exemption). This is not an exemption for any work event;
  • the Christmas party must be open to all staff – not just selected employees e.g. directors. Although separate departments or offices are entitled to have their own parties within these limits;
  • a limit of £150 per head applies – this is not per employee so the total cost is divided between the number of attendees (which might include non-employees e.g. spouses);
  • the £150 limit includes VAT and other incidental costs such as transport, hotels, DJ, speakers etc. Aka the whole shebang!

Christmas gifts to staff are not included in the above exemption. HMRC generally don’t like them but in practise are generally prepared to turn a blind eye to trivial benefits such as a bottle of wine, a turkey or bunch of flowers. Anything more substantial (e.g. hampers, cases of wine etc) and you could be landing your employees with an unexpected tax bill. You have been warned.

Ho ho ho! Merry Christmas!

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Tinkering with tax simplification

Over 1,000 tax incentives have been identified and collated as part of the first stage of the Office of Tax Simplification work – tax advisers across the UK nod wearily! The next step is to review which tax incentives can be eliminated to ‘simplify’ UK tax. Target date for the first review is the next Budget scheduled for 23 March 2011.

I’m in two minds about this – on the one hand, there is little doubt that UK tax legislation has got way out of hand in terms of complexity (for many accountants lets alone business owners!). On the other, there are many targeted tax incentives which appear to have worked well to promote future growth areas e.g. R&D tax credits and the forthcoming ‘patent box’ (promising lower rates of tax) encourage innovation and enhanced capital allowances encourage investment in greener plant and machinery. There are plenty of other targeted tax incentives aimed at putting our economy on a firmer footing for the longer term future. Look at the Dyson Report on Making Britain a Hi-Tech Exporter and the recent Blueprint for Technology report for further support for targeted tax incentives.

Taxation can be effectively used as a carrot to incentivise investment (both cash and more importantly entrepreneurial zeal) in key growth areas, such as intellectual property-rich digital, tech and creative industries; those businesses and sectors that should provide longer term prospects for a healthy UK and global export economy. So why tinker?

Having said that, the relatively recent announcement to provide new start-ups with a holiday from National Insurance Contributions sounds well placed and simple enough – until you look at the detail (and this is just a summary of the detail!).

Overall, I am concerned that putting an axe to scores of these targeted tax incentives in the name of ‘simplification’ could have far-reaching and painful longer term repercussions for the UK economy. Yet we do need to plot a way through the streams of red-tape and bureacracy facing businesses so things must change.

Welcome your views.

Automate your tax alerts

This is a basic yet nifty little tool for creating a calendar of your key tax deadlines for the forthcoming 12 months.  Okay so your accountant should – and probably is – letting you know in good time about up and coming tax deadlines but this is a useful addition. You can opt for email alerts too which is good. 

Now, take this a step further – what if this could be built into an iPhone or android app? Is there already something similar out there? A first step in a series of helpful tax alerts that could be piped to business users….  

Pension contribution rules change – again!

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Not long after Labour launched its assault on higher rate tax relief on pension contributions made by ‘super earners’ (prefaced by the introduction of the hideously complex interim ‘anti-forestalling measures’) the Coalition government has confirmed today that it will repeal these tax laws and replace them with a more simplified regime:

  • £50,000 – annual pension contribution allowance for all
  • unused pension allowance can be carried forward 3 years e.g. for ‘spikes’ in contributions
  • enforced from 5 April 2011 (although it could impact on some people now depending on when the pension scheme period runs to).
  • the lifetime allowance will also be reduced from £1.8m to £1.5m from 2012.

Although simplification of the previous rules is welcomed, it does feel like yet another kick in the teeth for successful owner managers and entrepreneurs who want to do the right thing in planning for retirement yet face severe restrictions on the amount of their hard earned cash that they can tuck away tax efficiently for future years.

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12 tax advantages of using a company as a business vehicle

  1. If the UK company taxable profits are £300,000 or less, a stand-alone company will normally pay corporation tax at just 21% (‘small companies’ rate’).
  2. This small companies’ rate reduces to 20% with effect from 1 April 2011.
  3. The standard rate of corporation tax is 28%. It will be reduced to 27% with effect from 1 April 2011 and there are plans to reduce it by 1% each year until the main rate is 24% by 2014. This rate applies to ‘large companies’ or those with taxable profits of £1.5m+ if stand-alone.
  4. Company structure allows for cash to be rolled up with low(ish) rates of tax suffered –  see points 1 and 2 above.
  5. Corporation tax is not payable until 9 months after the end of the accounting period for the majority of companies.
  6. R&D tax credits and other tax incentives are available for innovative companies.
  7. Remuneration strategies can be managed to optimise the personal tax position of investors and business owners.
  8. Investors in unquoted companies can obtain income tax relief on their equity investment e.g under Enterprise Investment Scheme (EIS).
  9. Shareholding investments in unquoted trading companies can attract 100% relief (exclusion from your estate) for inheritance tax purposes.
  10. Key employees can be incentivised through HM Revenue & Customs approved share schemes such as the Enterprise Management Incentive Scheme (EMI).
  11. Income on UK patents could be subject to a lower rate of corporation tax at just 10% (although unlikely to be introduced before April 2013).
  12. Companies within a corporate group (minimum of 75% common ownership of parent company) can shelter current year tax losses against taxable profits of other group companies.

More to come…

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