Company Buy-Back Shares


Key points

• The procedure for a company to purchase its own shares is strict and complex, and legal advice should always be obtained.
• Buy-backs are useful to return cash to shareholders or to restructure the balance sheet of a company.
• Companies Act 2006, s 694 permits private limited companies to buy back their own shares if their articles do not prohibit them from doing so.
• A company must usually use all of its distributable profits and the proceeds of any fresh issue of shares made for the purpose before it can use its share capital and share premium accounts to fund a buy-back.
• The shares that are bought back must be paid for in full at the time of the buyback (CA 2006, s 691(2)).
• In general, the amount a shareholder receives over the sum paid for originally subscribed shares is a distribution chargeable to income tax.
• If the onerous conditions in CTA 2010, s 1033 et seq are satisfied, however, the full amount can be treated as subject to capital gains tax.
• Multiple completions allow the seller to comply with company law but technical conditions must be satisfied from a tax perspective.

Reasons for a Share Repurchase

A share repurchase reduces the total assets of the business so that its return on assets, return on equity, and other metrics improve when compared to not repurchasing shares. Reducing the number of shares means earnings per share (EPS) can grow more quickly as revenue and cash flow increase.
If the business pays out the same amount of total money to shareholders annually in dividends and the total number of shares decreases, each shareholder receives a larger annual dividend. If the corporation grows its earnings and its total dividend payout, decreasing the total number of shares further increases the dividend growth. Shareholders expect a corporation paying regular dividends will continue doing so.

Why consider a buy-back?

There are several reasons why a buy-back may be considered. Most relevant is its usefulness for returning cash to shareholders, whether because the company has cash on its balance sheet for which it has no foreseeable use in the near future and which it is unable to distribute as a dividend, or because the company is to be sold on a ‘debt-free, cash-free basis.

Alternatively, a buy-back can be an appropriate way of restructuring a company’s balance sheet, for example, by increasing the earnings or net assets per share or increasing the company’s gearing ratio such that the rate of return for equity shareholders is improved.

Buy-backs are also commonly used to provide an exit opportunity for shareholders. It is common that parties who have established a company together in the past later wish to go their separate ways. This may be because one of them wishes to retire or to start a new career; it may also arise where there are irresolvable disagreements between shareholders as to how the company should develop. In cases where neither shareholder has the financial resources to enable the purchase of the shares of the other shareholder, a buy-back can be a practical and tax-efficient solution.

In some shareholder disputes, a minority shareholder may choose to bring a claim under CA 2006, s 994 that the company’s affairs are being or have been conducted in a manner that is unfairly prejudicial to the interests of its members generally or of some part of its members, or that an actual or proposed act or omission of the company (including an act or omission on its behalf) is or would be so prejudicial. A common order of the court in such cases is to require the company to purchase the relevant shareholder’s shares using the buy-back procedure.

Similarly, where a director or employee has left the company, the articles may provide that they are required to sell their shares, sometimes – depending on the circumstances of their leaving – for their fair market value. A buyback is often the best way to achieve this sale, particularly where the other shareholders (or some of them) do not have access to adequate funds to enable them to buy the shares themselves.

Finally, buy-backs are common in family-owned companies, as part of the succession planning between generations and to enable the older generation to access some of the value in the company without having to sell the company to buyers outside the family.

EMI Share Options Scheme

What is an EMI Scheme?

  • EMI Share Options Scheme is an initiative HMRC implemented to allow UK businesses to give share options to their employees with significant tax benefits.
  • The scheme is intended to help smaller independent businesses realise their potential by attracting and retaining the best employees for long-term success.
  • The key difference between EMI and unapproved schemes is that HMRC will approve a valuation and fix a certain strike price. And of course, there are other conditions for businesses and employees to meet.
  • The EMI valuation is something that you propose to HMRC via the VAL231 Form. You’ll need to calculate two key numbers for this proposal: the Unrestricted Market Value (what the shares are worth), and the Actual Market Value (what the shares are worth, discounted for restrictions, e.g., the fact that the shares are vesting over time). Remember, you’ll want a low valuation because the profit will then be greater for your employees when the value of the shares increases over time.

 

The Benefits of an EMI Share Options Scheme

What are the benefits of Share Options for employees?

  • Options don’t attract tax until they’re exercised – no Income Tax or National Insurance. This lack of upfront payment generally makes them an appealing way to secure equity in the business they work for.
  • The holder is subject to Capital Gains Tax (CGT) on their disposal, but EMI option holders can claim Entrepreneurs’ Relief – reducing the rate to just 10%.

What are the benefits of Share Options for business?

  • Financially – enjoy a Corporation Tax (CT) deduction equal to the difference between the market value of the shares at exercise and what your employee pays for them
  • Attract Talent – Offering a rewarding option scheme will attract the best talent in the jobs market, which is especially important for start-ups and early-stage businesses battling to grow in competitive industries. Indeed, options are fast becoming a must-have and expected “perk” in the tech start-up world.
  • Retain Talent – keeps your employees focused on medium-to-long-term growth and sustainable success. The options must be exercisable within 10 years, and most businesses allow exercise far sooner. Making it exercisable after a time delay keeps staff within a company and motivates them in the long run as they would like to increase their shares worth by working harder for the company.
  • Rewarding Employees – EMI options can be offered as a reward for meeting certain individual or company targets. This provides an incentive for staff to go the extra mile.

Example:

EMI Options Scheme:

John is offered the same equity for the same value within a different EMI-qualified business, and he also acquires his shares worth £10,000. However, exercising his options incurs no tax bills whatsoever, and when he later sells his shares for £125,000, he is entitled to Entrepreneurs’ Relief; the reduced rate of 10% on Capital Gains Tax. This means that John will now pay CGT on the £115,000 value increase between what he paid for the shares and what she sold them for 10% = £11,500.

So, John will pay £11,500 total tax (when he has the cash), while Sarah pays £41,000. The EMI Share Options Scheme would therefore save more than 112% for the employee in this circumstance. This shows why EMI is so popular, and why it is a must-do for growing start-ups and small businesses.

Important note: As we mentioned earlier, John would also benefit from an HMRC valuation which is as low as possible. This allows her to get the options at a lower strike price, thus maximising his profit when the company shares are eventually sold.

Eligibility conditions for EMI

Employer:

  • The business must be actively trading and have a permanent establishment in the UK
  • The business must have fewer than 250 employees when the EMI options are granted
  • The business’s total assets must not be worth more than £30 million
  • The business must have allocated less than £3 million in EMI shares
  • The business mustn’t be a subsidiary or be externally controlled
  • The business must notify HMRC within 92 days of granting the options

Employee:

  • The person must be a legal employee of the business
  • The person must use a minimum of 25 hours per week or 75% of their time as an employee or director of the company
  • The person cannot hold more than 30% of all company shares

Options:

  • The market value of the options mustn’t exceed £250,000 per employee
  • The options must be granted within 90 days of HMRC’s valuation
  • The options must be able to be exercised within 10 years of being granted
  • The options must be non-transferrable

All terms and conditions for your options scheme must be placed in writing. Aside from the HMRC rules, all other terms are flexible and can be designed by your company. These include vesting periods – i.e. when the options can be exercised (events, achievements, or timescales within 10 years).

 

If you need assistance in applying for the EMI share scheme, please contact us at 02082271700 or info@wimaccountants.com

Charitable giving and tax relief for companies and individuals

Charitable giving and tax relief for companies and individuals

Defining ‘charity’ for tax purposes

A charity is a body of persons or trust that broadly meets all the following conditions:

  • It is established for charitable purposes only.
  • It is subject to the control of a UK court or any other court in an EU member state or in Iceland, Norway, or Liechtenstein (any impact of Brexit remains to be seen)
  • It is registered with the Charity Commission or has complied with any registration requirement on a corresponding register in a territory outside of England and Wales.
  • It is managed by a fit and proper person.

Companies:

A qualifying charitable payment made by a company, whether or not resident in the UK, is deductible from total profits, subject to certain restrictions. There is no need for the company to make a claim for this treatment.

Individuals:

INTRODUCTION TO GIFT AID

The gift aid scheme is designed to reduce the incidence of taxation on gifts to charity both by providing tax relief to the donor and by enabling the charity to top up the gift by reclaiming tax from HMRC.

Under the scheme, the amount of a ‘qualifying donation’ is treated as a net amount from which basic rate income tax has been deducted at source. Higher and additional rate relief is then given by extension of the basic rate and higher rate bands by reference to the gross equivalent of the amount donated. Provision is made for cases where the donor pays tax other than at the main UK rates, for example at the Scottish or Welsh rates.

Basic rate tax relief is dependent on the donor having sufficient tax liability for the year to cover the amount treated as deducted at source. The donor may elect for a qualifying donation to be relieved as if it had been made in the preceding tax year.

Relief for donations under the gift aid scheme may be denied under the ‘tainted donations’ rules

Payroll giving

It is possible to make regular donations to a charity via PAYE. The donations are made from gross income before tax is collected. For example, a donation of £5 a month costs an employee £4 from their take-home pay, where they pay 20% tax, or £3 if they pay 40% tax. Individuals who donate to charities using payroll giving are not required to make any further disclosure to HMRC, including working out the adjusted net income for personal allowances and married couples’ allowance. The charity is not required to apply for gift aid on the payroll gifted amount. Under gift aid the donations can only be increased by 25% for the charity regardless of the donor’s tax bracket, but payroll giving allows charities to receive the full tax relief.

International charities

The availability of UK tax reliefs for charitable donations made to non-UK charities has had a complex history, and there is still some uncertainty over the position of some international charities.

With effect from 1st April 2012, Charity can only include one that meets the definition above, broadly qualifying UK, EU, Iceland, Norway, or Liechtenstein charities.

This means that tax reliefs will not be available for gifts and legacies to non-qualifying EU charities, such as those that do not meet the Charities Act 2011 definition of charitable purposes. They will also not be available for donations to charities that are not established in the UK, an EU member state, Iceland, Norway, and Liechtenstein.

Non-residents

A non-UK resident is entitled to claim gift aid relief regarding donations made to qualifying charities or for gifts of qualifying investments to charity. However, non-residents are the only subject to UK tax on UK source income, some of which may be excluded from UK tax under the ‘disregarded income’ provisions. Limited capital gains (primarily those on UK property-related assets), there is a risk that they may not be paying sufficient income tax and capital gains tax to cover the tax which the charity will reclaim on any gift aid donations. If there is a shortfall, the taxpayer will need to make an additional tax payment.

Non-residents should review their expected UK tax exposure and plan they’re giving accordingly.

Individuals planning to leave the UK and become non-UK residents should review the gift aid declarations that they have in place and revoke these if they do not expect to pay sufficient UK income tax and capital gains tax to cover any tax charity may reclaim.

Remittance basis users

Remittance basis users who have foreign income and gains that remittance basis claims have protected may wish to make charitable donations out of these funds. Unlike the position for qualifying business investments, where business investment relief permits foreign income and gains to be brought to the UK tax-free for a permitted purpose, there is no general exemption that allows a remittance basis user to remit mixed funds to the UK for charitable purposes. Therefore, foreign income and gains that are transferred to the UK bank account of a charity or otherwise gifted to the charity in the UK will be treated as a taxable remittance.

However, a remittance basis user can avoid a taxable remittance by donating to an overseas bank account of the charity or by gifting a foreign qualifying investment to the charity outside the UK. If the charity then brings the funds to the UK, this will not be taxable remittance for the donor unless the charity is a relevant person to the donor.

If a donor wishes to give to a specific UK charity that does not have an overseas bank account, they could explore whether it is possible to make the gift overseas through an organisation.

Payments made regarding the £30,000 or £60,000 remittance basis charge can be considered when calculating if the taxpayer has paid sufficient income tax and/ or capital gains tax to cover the tax reclaimed by the charity on a donation.

US connections

The US has its own tax relief regime for charitable giving, so particular care is needed when planning for individuals who have tax exposure in both the UK and the US. Donations to US-based charities are unlikely to qualify for relief in the UK, so taxpayers will need to consider alternative options if they wish to claim relief in both the UK and the US.

Some charities are set up on a ‘dual-qualified’ basis so that donations qualify for relief in both the UK and the US. Where this is not an option, then it may be possible to obtain relief in both jurisdictions via a dual-qualified donor-advised fund (DAF). Donors will need to explore the possibilities for themselves, but some organisations may be able to help.

Care is needed when selecting the charities to receive legacies from an individual who is likely to be liable to both estate taxes in the US and inheritance tax in the UK. As with income tax reliefs, donations to US charities are highly unlikely to qualify for an inheritance tax charitable exemption, so options such as dual-qualified charities and DAFs should be considered as an alternative.

Inheritance tax trap

With effect from 6th April 2017, individuals have been deemed the UK domiciled for tax purposes where:

  • They were born in the UK with a UK domicile of origin
  • They have acquired a domicile of choice outside the UK
  • They are currently UK resident
  • They were UK residents in one or both previous two tax years (this only applies to inheritance tax and not the other taxes).

Such individuals are at particular risk of having prepared a will under the law of another jurisdiction and potentially have provided legacies to overseas charities. Where this is the case, their worldwide estate will be within the scope of UK inheritance tax, subject to any treaty reliefs, and there will be no exemptions for legacies to overseas charities which do not qualify for UK tax reliefs.

If you have other questions or need more understanding, please contact our team at WIM Accountants at 02082271700 or email us at info@wimaccountants.com.

Insight to R&D eligible cost

Insight to R&D eligible cost

What costs qualify for R&D tax credits?

You can claim Research and Development (R&D) tax credits on revenue expenditure, i.e., day-to-day operational costs. But usually, capital expenditure (money spent on fixed assets such as land and buildings) is not eligible for R&D Expenditure within the claim.

Eligible R&D Expenditure

Revenue expenditure includes the following costs, which can be included in your R&D claim:

Staffing costs

For SMEs and large companies, the category can include:

  • Gross salaries (including wage, overtime pay and cash bonuses)
  • Employer NI contributions
  • Employer pension contributions
  • Certain reimbursed business expenses

Any benefits in kind, such as private medical cover and company cars, are specifically excluded from the staff costs category. You cannot include director dividends. And this can affect the value of your claim quite substantially if your directors spend time at work on the R&D activities.

Some employees or directors may be wholly engaged in R&D activities. However, it’s more common for staff to be partially involved in R&D. you should therefore determine the appropriate apportionment to their total staffing costs to include in your R&D claim.

Subcontracted R&D

The costs that you can include for subcontractors also differs between the Research and Development Expenditure Credit (RDEC) scheme and the SME R&D tax credit scheme. If you make an RDEC claim, money spent on subcontractors does not usually qualify for tax relief, but some exceptions are explained below. If you make an SME claim, you can include 65% of payments made to unconnected parties.

SME R&D tax credits and subcontracted R&D

If you are an SME, you can include expenditure on subcontractors involved in R&D projects in your R&D tax credit claim. For ‘unconnected’ subcontractors, payments linked to R&D activities are restricted to 65% for the claim. For ‘connected’ subcontractors, the rules are more complex and based on the nature of the subcontractor’s expenditure.

R&D Expenditure Credits (RDEC)

Through the RDEC scheme, companies can only claim for expenditure on subcontracted R&D if the subcontractor is:

  • An individual
  • A partnership, where all partners are individual
  • A qualifying body (including charities, universities, and scientific research organisations).

The expenditure does not need to be restricted to 65% in the same way as SME claims.

Externally Provided Workers (EPWs)

Staff costs are paid to an external agency for workers engaged in the R&D project. Relief is restricted to 65% of the payments made to the staff provider. Special rules apply if the company and staff provider are connected or elect to be connected.

Consumable

The cost of items that are directly used and consumed in qualifying R&D projects may form part of the claim for R&D relief. This category includes materials and the proportion of water, fuel and power consumed in the R&D process.

Software

You may claim the cost of software directly employed in the R&D activity. Where software is only partly employed in direct R&D, an appropriate apportionment should be made.

It can be complicated to submit an R&D tax credit claim to HMRC’s exacting standards. Get in touch with our Tax Team at WIM accountants for guidance for your R&D claims on info@wimaccountants.com or call our offices on 02082271700

What do you know about Corporate Intangibles Tax Treatment

What do you know about Corporate Intangibles Tax Treatment

 

Corporate intangibles tax treatment

The corporate tax treatment essentially follows the treatment of intangibles in the accounts. There are, however, restrictions on the deductibility of debts about goodwill and other customer-related intangible assets depending on the date of acquisition or creation.

The corporate intangibles regime has gone through several iterations since its introduction in April 2002, most recently in July 2020, mainly about goodwill and other customer-related intangible assets.

The regime is complex and requires detailed recording keeping by companies and their advisers, particularly about acquisition dates, relationships between companies, and the asset’s market value at the time of the first acquisition under the new rules. Therefore, advisers need to confirm the history of an intangible fixed asset when it is being acquired from a related party.

Corporate intangible regime

Most intangible assets are within the corporate intangible’s regime, but some types of expenditure are excluded completely or excluded apart from royalties derived from the intangible asset. The corporate intangible regime also interacts with other corporate tax regimes where the same expenditure qualifies for both regimes.

Debits and credits on intangible assets are generally treated for tax in the same way as they are included in the accounts. Still, tax adjustments follow similar rules for other expenditure items. Alternatively, a company can write down an intangible asset at a fixed rate instead of following the accounts.

What is an intangible fixed asset?

Intangible assets include operational assets that lack physical substance. For example, goodwill is a fixed asset, patents, copyrights, trademarks, and franchises. A company’s intangible assets are often not reported on its financial statements, or they may be reported significantly less than their actual value. This is because assets are accounted for at their historical cost.

Unlike tangible fixed assets such as a building or machinery, intangibles are often developed internally without any direct, measurable cost that can be capitalised. When an intangible is purchased, however, or when costs can be directly traced to the development of the asset, the cost is recorded as an intangible asset on the balance sheet.

Date of acquisition or creation

Generally, an asset is treated as created or acquired on or after 1 April 2002 when expenditure on its creation or acquisition is incurred on or after that date. Where expenditure is incurred partly before and after this date, it is possible to apportion the expenditure on a just and reasonable basis.

This general rule is amended if the asset:

  • Was acquired from a related party
  • Is internally generated goodwill

For assets acquired from related parties before 1 July 2020, the relevant date to consider is the first date a related party acquired the asset from an unrelated party. For acquisitions made on or after 1 July 2020, the relevant date is simply the date of acquisition, unless the related party is a company within the same capital gains group (in which case, the pre-1 July 2020 rules still apply). If the relevant date is on or after 1 April 2002, the asset will fall within the corporate intangible’s regime.

Which assets fall within the corporate intangible’s regime?

After determining the date of acquisition or creation, broadly, an intangible fixed asset is within the corporate intangibles regime if it was:

  • Created by the company on or after 1 April 2002
  • Acquired by the company on or after 1st April 2002 from a person who is not a related party
  • Acquired by the company between 1st April and 30th June 2020 from a related party but only where:
  • the party is a company, and the asset was already within the corporate intangible’s regime for the related party.
  • That related party acquired the asset from a third party on or after 1st April 2002, and the third party is sufficiently unrelated
  • The asset was created (by any person) on or after 1st April 2002
  • Acquired on or after 1st July 2020 from a related party (but not from the same capital gains group company)
  • Owned immediately before 1st July 2020 by a company that was not within the charge to UK corporation tax in respect of that asset.

Which assets do not fall within the corporate intangible’s regime?

  • Created by a company before 1st April 2002 (and ownership has not changed since)
  • Acquired by a company before 1st April 2002
  • Acquired by a company between 1st April 2002 and 30th June 2020 from a related person where that related person created or acquired the asset before 1st April 2002
  • Acquired by a company on or after 1st April 2002 from a company where both companies are in the same group and the related company disposing of the asset created before 1st April 2002.

Assets that fall outside the corporate intangible’s regime require different tax analyses depending upon the type of asset in question. However, most will be treated as capital assets under the chargeable gain’s legislation.

Intangible fixed assets – common mistakes

HMRC highlighted five of the most common mistakes around the intangible’s regime:

  • Asset identification – it is important that companies and their advisers undertake a detailed analysis to support any asset identification
  • No business acquisition – where a company has not acquired a business, relief for goodwill is not available under the intangible fixed asset regime
  • Date of acquisition – any IFAs acquired should be correctly identified so that the correct tax treatment can be applied – especially when the acquisition falls close to the date of one of the regime legislative changes. Companies should keep contemporaneous documents to evidence the date of acquisition.
  • Valuation – companies must obtain at least one professional independent valuation of all assets to ensure that the correct assets are valued on the proper basis, mainly if the acquisition is from a related party.
  • Documentary evidence – related parties are expected to document transactions and agreements as if they were with an unrelated third party. Records should be kept for six years from the end of the financial year to which they relate.

How we can help

We can advise on the impact of the IFA rules ahead of any significant acquisition or disposal or about the purchase or sale of a business. We can also advise you on the potential benefits of making one of the claims or the interaction between accounting treatment and tax implications.

For more information, please contact us at WIM Accountants at info@wimaccountants.com or call us on 02082271700.

New VAT Penalties regime

New VAT Penalties regime

 

Penalties for late payment and interest harmonisation

  • For VAT taxpayers from periods starting on or after 1 January 2023.
  • For taxpayers in Income Tax Self-Assessment (ITSA), from the tax year beginning 6 April 2024 for taxpayers with business or property income over £10,000 per year (that is, taxpayers must submit digital quarterly updates through Making Tax Digital for ITSA).
  • For all other ITSA taxpayers, from the tax year beginning 6 April 2025.

First penalty:

The taxpayer will not incur a penalty if the outstanding tax is paid within the first 15 days after the due date. The taxpayer incurs the first penalty if the tax remains unpaid after day 15. This penalty is set at 2% of the tax outstanding after day 15. If any of this tax is still unpaid after day 30, the penalty will be calculated as 2% of the tax due after day 15 plus 2% of the tax outstanding on day 30. In most instances, this will amount to a 4% charge at day 30.

Second penalty:

If the tax remains unpaid on day 31, the taxpayer will begin to incur an additional penalty on the tax that remains outstanding. It accrues daily, at 4% per annum on the outstanding amount. This additional penalty will stop accruing when the taxpayer pays the due tax.

Time-to-Pay arrangements:

HMRC will offer taxpayers the option of requesting a Time-to-Pay (TTP) arrangement. This enables a taxpayer to stop a penalty from accruing further by approaching HMRC and agreeing on a schedule for paying their outstanding tax. A TTP arrangement, if agreed, has the same effect of paying the tax and stops penalties accruing from the day the taxpayer approaches HMRC to agree on it, as long as the taxpayer continues to honour the terms of the TTP agreement. The examples below illustrate how TTP work and the effect of a TTP is shown in this chart:

Days after payment due date Action by customer Penalty
0-15 Payments made or TTP is proposed by day 15 and then agreed No penalty is payable
16-30 Payments made or TTP is proposed by day 30 and then agreed The penalty will be calculated at half the total percentage rate (2%)
Day 30 Some tax is still unpaid; no TTP agreed. The penalty will be calculated at the total percentage rate (4%)

If tax is still unpaid on day 31 a second, an additional penalty will start to accrue at 4% per annum.

Where HMRC might not assess a late payment penalty

HMRC has discretionary power to reduce or not charge a penalty for late payment if it considers that appropriate in the circumstances. This will include special circumstances that cause a taxpayer to pay their tax late.

HMRC recognises that moving to the new system of late payment penalties is a significant change for some customers, especially those who might have more difficulty getting in contact with HMRC within 15 days of missing a payment to begin agreeing on a Time-to-Pay arrangement. HMRC will therefore take a light-touch approach to the initial 2% late payment penalty for customers in the first year of operation of the new system under both VAT and ITSA.

A taxpayer is doing their best to comply; HMRC will not assess the first penalty at 2% after 15 days, allowing taxpayers 30 days to approach HMRC in the first year before HMRC charges a penalty. However, if a taxpayer has not approached HMRC by the end of day 30 and there is still an amount of tax outstanding, the first penalty will be charged 2% of the amount outstanding at day 15 plus 2% of what is still outstanding at day 30. In most instances, this will amount to a 4% penalty.

Additionally, there is no penalty if the taxpayer has a reasonable excuse for late payment. If HMRC is satisfied, a taxpayer has a reasonable excuse, HMRC will agree not to assess. This will prevent the taxpayer from unnecessarily having to appeal.

How the new late payment and repayment interest charges work

HMRC will charge late payment interest on tax outstanding after the due date, irrespective of whether any late payment penalties have also been charged. The late payment interest will apply from the date the payment was due until the date on which HMRC receives it. Late payment interest will be calculated as simple interest at a rate of 2.5% plus the Bank of England base rate.

Where a taxpayer has overpaid tax, HMRC will pay Repayment Interest (RPI) on any tax due to be repaid (the difference between the amount owing and the amount paid) either from the last day the payment was due to be received or the day it was received, whichever is later, until the date of repayment. RPI will be paid at the Bank of England base rate of less than 1% (with a minimum rate of 0.5%).

Late payment interest and Time-to Pay arrangements

Late payment interest is charged when tax is paid late. HMRC will always try to help taxpayers in temporary financial difficulty manage payment of their debt. Late payment interest will continue to accrue on amounts not paid on time, even if those amounts are included in the Time-to-Pay arrangement.

If you need any advice on the late payment changes by HMRC, please get in touch with us by calling 02082271700 or email info@wimaccountants.com

 

Does HMRC have too` much power or not enough?

Does HMRC have too` much power or not enough?

The taxes collected by HMRC – £584.5bn in 2020-21 – run the UK and, as such, the right amounts must be managed.

To this end, HMRC has myriad powers to review returns and check taxes have been correctly calculated and paid. For civil cases, these powers include the ability to:

  • open and close enquiries.
  • request information and documentation.
  • inspect business premises; and
  • raise assessments for up to 20 years.

Most people will agree that the powers are not ‘bad’, but how they are used affects how they and HMRC are perceived. Unfortunately, many tax investigations practitioners have experienced HMRC misapplying its powers or abusing them.

Legal interpretation

For the past few years, HMRC has been pushing a narrative that ‘anyone who completes a tax return incorrectly is deliberately depriving the general public of essential services to further its agenda. Increasingly the department uses the phrase ‘tax avoidance and evasion’ in various marketing and other initiatives, with avoidance and evasion being grouped. Speaking to the man on the street, it is common to see that individuals do not understand the difference between avoidance and evasion (let alone ‘aggressive tax avoidance). HMRC is partly to blame for propagating the idea that they are the same.

Further highlighting this is HMRC’s interpretation of the ‘tax gap’. HMRC says: ‘The tax gap is the difference between the amount of tax that should, in theory, be paid to HMRC, and what is paid.’ The causes of the tax gap, other than taxpayers making errors on their returns, are stated as ‘legal interpretation, evasion, avoidance and criminal attacks on the tax system’ as per the most recent tax gap estimates for 2019-20. Technically, tax avoidance is legal (let’s not go into ‘morality’ just now), and tax legally avoided should not be paid to HMRC. Therefore, it should not form part of the tax gap. However, lumping avoidance and evasion together and saying that they both contribute to a tax loss is misleading at best.

‘Legal interpretation’ is the tax due should taxpayers interpret the legislation differently from HMRC. If there is any disparity until the courts have defined the interpretation, I would argue that the tax gap resulting from legal interpretation should not exist. After all, if HMRC loses at the tribunal, the tax gap disappears.

Erosion of taxpayer safeguards

The reduction of safeguards for taxpayers indirectly contributes to HMRC’s powers and directly increases the perception of the department being omnipotent when it comes to tax affairs. Since the loan charge, we have seen more retro action in HMRC’s arsenal.

When HMRC becomes aware through losses at the tribunal that its interpretation of tax legislation is incorrect, it changes the legislation with retrospective effect. This has the dual effect of preventing people with open inquiries from having their day in court concerning the legislation in force when the potential tax loss arose and without any recourse to claiming back costs sunk in legal fees.

Examples include the legislation on:

  • TMA 1970, s 8 notices and penalties issued by computers – any open appeals against automated penalties or appeals on the basis that notices to file were invalid because they were automated is now subject to debate; and
  • HMRC’s new policy that the high-income child benefit charge is (and has now permanently been) assessable as income (unless the taxpayer appealed HMRC’s assessment on or before 30 June 2021). This will be legislated for in the next Finance Bill.

Does HMRC need more powers?

Unsurprisingly, our answer to this question is ‘no’ – because of how the current powers are being used. We would suggest better training for the enquiry staff in the first instance.

The people at the top of HMRC management and the Treasury also need to be selected independently of the government. For example, the financial secretary to the Treasury should not be an MP as well. HMRC can then request powers, and if independent of government, the lens through which these requests are made may be more objective.

If taxpayers could rely on HMRC, particularly those on a budget, their finances would not limit the quality of the advice. If we look at those caught by the loan charge, many individuals say they spoke to HMRC, which told them the arrangements were not subject to the disclosure of tax avoidance schemes regime. Raising standards of advice given by HMRC would significantly reduce the tax lost due to taxpayers being duped into using schemes. We would respectfully suggest that before accusing tax advisers of poor-quality work, HMRC should perhaps consider the quality of customer service it provides.

WIM Accountants

Charities – What we can do for you

Charities – What we can do for you

We are often approached by charities for guidance on a range of financial and advisory matters. For example, what needs to be included in our annual reports? Do we need to be audited? What are the deadlines for our accounts, are they the same as a normal company? What are restricted and unrestricted funds? This article will aim to provide an answer for these questions and also clarify the tax position of charities that are structured as a Charitable Incorporated Organisation (CIO).

Let’s start from the beginning, what’s a CIO?
Usually, when organisations wish to gain protection via limited liability they opt to structure as a limited company. This process however can be time-consuming due to initial registration with both Companies House and with the Charity Commission. The company is also expected to comply with company law, which may not be ideal for a charity. As a result, the CIO was introduced in the Charities Act 2006.

The CIO structure seeks to provide charities with select benefits of being a company, but without having the need to perform additional reporting and legal duties required of charitable companies. As the name gives away, a CIO is only available to charities and can be further split into two distinct models. The first constitution states that charities can be set up as a corporate body and allow voting members other than trustees. Otherwise, the charity can set up a foundation CIO, so long as the only members of the charity are trustees.

 

Does your charity need to be audited?

The reporting criteria for charities can be sophisticated, but can be condensed as follows:

Gross Income for the year more than £1,000,000? If YES to any of these –

An audit is required

Gross Income exceed £250,000 and Gross Assets exceed £3,260,000?
Do trustees (or a trustee) wish to have financial statements audited?
Does the governing document require an audit?
Has the Charity Commission asked for an audit?
Does the funder need audited accounts?
Otherwise, also consider the following:
Gross Income between £25,001 and £1,000,000? If YES –

An independent examination is required

Do trustees (or a trustee) wish to have financial statements independently examined?
Does governing document require independent examination?
Does the funder need audited accounts?

 

Why choose a CIO structure in the first place?
The Charity Commission recommends a CIO structure to small and medium-sized charities that employ staff, with the following advantages:

  • Fewer requirements for accounts preparation
  • Single registration with the Charity Commission (free) and not with Companies House. CIO is registered in the register of charities
  • One annual return (but does need to file a separate return under charity law). Annual returns must include changes in trustees, objects etc. in the last 12 months. Furthermore, annual returns need to be filed within 10 months from end of accounting year
  • Trustees receive greater protection as they are not liable to charity debts
  • The charity has their own legal personality, can conduct business under own name and not trustees
  • Expanded merger and restructuring provisions
  • Able to use one of two constitutional models (see above), which have fewer government provisions

 

How do I convert to a CIO structure?
An existing charity can convert to a CIO structure by choosing the correct CIO model constitution – the association model or foundation model. In the event that the original charity was an unincorporated association or a charitable trust, the charity can apply for the conversion using the online service.

 

What are the accounting implications arising from the conversion?
Old entities in an unincorporated charity will need to have cessation accounts prepared which are not on a going-concern basis. The new entity should be able to apply merger accounting once the necessary criteria are met. Unlike when companies convert to CIO, following the above process ensures that the conversion process does not affect the accounts.

The accounts of a company and CIO have few differences between them, such as a CIO statement of assets and liabilities needing to include a note of any guarantee given by the CIO (as well as details of debts on CIO assets). A separate income and expenditure statement is not required if evidence of endowment is on the statement of financial activities.

Tax implications from loans to participators made by close companies

Tax implications from loans to participators made by close companies

 

The Autumn Budget 2021 confirmed that the increased dividend upper rate will apply on tax charged under Corporation Tax Act 2010, s.455, which details new anti-avoidance measures in addition to those already in place for loans to participators in close companies. Let’s take a look at what this all really means.

 

First things first, what are close companies?

A company that is owned and controlled by no more than 5 individual participators (or controlled by any number of directors only). Key terms to note here are:

  • Participator: A person who has the right to be a company shareholder or ‘loan creditor’.
  • Control An individual has control if they own (or have the right to) more than 50% of company shares or voting powers.
  • Loan Creditor: A person who has lent the company money but does not include a normal trade creditor.

These definitions are interesting because it allows participators to enjoy tax-free funds which can be taken out of the company as loans. These loans can also remain for an indefinite amount of time, which is precisely why anti-avoidance rules were put into place under CTA s.455

 

Who do these rules apply to?

The rules apply to:

  • Loans to participators who are individuals or trustees, but not companies
  • Loans to associates of participators
  • Loans to partnerships (including limited partnerships, LLPs)
  • Companies that lend to an employee’s benefit trust

If a loan qualifies under these rules, the close company must pay tax equal to 25% (of loan made before 6 April 2016), or tax equal to 32.5%* (of loan made on or after 6 April 2016) directly to HMRC. The close company is exempt if the loan was repaid within nine months and one day from the end of the accounting period where the loan was made. The close company can also claim to recover the tax paid to HMRC when the loan is waived by the company.

It is important to note that this tax is classed as a liability under CTA s.419, so it should be included in the company CT self-assessment. Additionally, the individual who received the loan is liable to income tax on it.

*From April 2022 this rate will increase to 33.75%.

 

What about indirect loans?

Suppose two or more close companies arranged to transfer a loan via a third party (say, a bank), are they also affected by these anti-avoidance rules?

The same rules still apply provided that:

  • A close company makes a loan that does not result in tax under participator provisions
  • An individual (other than the close company) makes a payment, property transfer, or releases or fulfils a liability of a participator or associate in the company

Interestingly, this rule seems to work against arrangements made by any person. However, it does not apply to arrangements made in what would otherwise be considered ‘ordinary’ business and does not apply if the relevant recipient has the loan included in their total income. ‘Ordinary business’ implies that a company must make loans as part of its day-to-day trading.

HMRC illustrates this example very well:

Company H is a close company. Instead of making a loan directly to Mr A (an individual participator), they make a loan to an associated company, Company J. Company J then loans the money to Mr A.

In this case, the loan by one company to the other is treated as if it had been made direct to Mr A.

 

Loan aggregation

It is not too uncommon to see companies opt to have separate loan accounts for the same participator in the interests of admin work or commercial ease. HMRC hold the position that the close company liability on loans follows each of the loan accounts – hence it cannot be aggregated.

Any account showing a debit balance will incur liability under the rules. HMRC advise that credit balance can be used to repay the debit, but book entries have to be made for relief to be awarded. A company can also choose to have a singular loan account for all participators given that they are all separately recorded in the account, meaning that the close company loan charge and repayment relief would apply to each separate account.

 

Have any more questions?

Feel free to contact us for professional advice and guidance on how these rules can affect the cash flow of your company.

HMRC ramping up anti-abuse measures for R&D claims

HMRC ramping up anti-abuse measures for R&D claims

 

If you have been following the Autumn Budget announcement you may have noticed that the government highly values UK Research and Development (R&D) . After all, the UK surpasses its international peers in R&D investment at 1.1% of GDP. R&D spending is also set to rise to £22 billion in the next decade, a clear indicator of the UK commitment to cultivating and promoting homegrown innovation. But at the same time adding more incentives will inevitably bring about the increased risk of abuse which HMRC has recognised.

We take a look at the measures HMRC will be enforcing, why they’re needed in the first place and what repercussions can be expected.

 

What’s going to happen?

HMRC have announced that they have hired 100 R&D compliance officers to help tackle the abuse present within the system. It is a welcome action and an indication of firmness from HMRC to ensure that R&D tax credits are available to those who actually have an eligible claim for it.

 

Why are these measures being put into place?

Unfortunately, R&D service providers are unregulated and it comes as no surprise to see many businesses being promised money for an R&D claim but never actually see it because their claim was not eligible. From our own industry experience and reviews, we found that there was an alarming number of submissions made which completely misunderstood the scope of eligibility for an R&D claim. As a result, businesses are losing crucial money paying niche providers for a service that doesn’t exist or simply has no hope in qualifying for an R&D claim. Trust and competency are key elements here, and there are many R&D businesses that do not live up to the bill.

The current state of the R&D market is in need of proper structuring, which HMRC hopes to solve through increased scrutiny.

 

What consequences are there for R&D abuse?

Potential penalties arising from abuse of the incentive will be damaging, financially and legally. HMRC enquiries can last a long time, and they have full right to open enquiries going back 20 years for R&D submissions in that period. Businesses will face high legal costs from defending themselves, and in the event the claim is found to be inauthentic (at best) businesses can expect to have to pay the full claim back, on top of up-front penalties and interest.

Just to give an idea of the scale of the financial damage these penalties could incur, the average R&D claim in the UK is around £60,000 – so a company making fraudulent claims for over 10 years would be penalised for a staggering amount.

 

WIM Accountants are here to help you

We have a thorough understanding of the processes and standards required to stay compliant with HMRC, as well as ensuring our clients are always provided with the best technical knowledge to help them make the most of their R&D claim.

With over 10 years working with R&D tax credit claims, our team of qualified and trained tax specialists are amongst the most reputable to handle your research and development tax affairs.

Autumn Budget 2021: Big changes incoming for R&D

Autumn Budget 2021: Big changes incoming for R&D

 

The Chancellor announced a number of changes, policies and reforms as part of the Autumn Budget – most notable among these for us were the incoming changes to the R&D Tax Credit structure.

 

The Chancellor made sure it was well known that the underlying theme of the announcement was the cultivation of a highly skilled and productive UK economy, so it was almost no surprise to see a vow to increase UK R&D spending to £20 billion annually from 2024/25. Those following the government R&D plan may notice that this is lower than the £22 billion promised last year. Instead, the £22 billion target will be hit by 2026/27, two years later than originally planned. In any case, this is an encouraging sign of growth in the UK innovation and technology sector with the current R&D investment sitting at 1.1% of GDP and forecasted to grow by 1.3% by 2027. In this regard, the UK has shown to be far ahead of its international competition, namely France, Germany and the United States.

The current R&D tax credit scheme is also set to see a shakeup in its qualifying criteria. As expected, cloud computing and data costs were added to the scope of qualifying expenditure for R&D relief. Although more guidance is required from the government on the items defined under the above costs for example, how HMRC defines cloud computing which in itself is a broad concept. The changes are set to be implemented at the start of the 2023/24 tax year, but we can expect further guidance in late autumn.

Brexit meant that the UK was no longer bound by EU non-discrimination requirements, a fact the Chancellor alluded to:

“The second problem is this, companies claimed UK tax relief on £48bn of R&D spending. Yet UK business investment was around half of that, at just £26bn. We’re subsidising billions of pounds of R&D that isn’t even happening here in the UK.”.

Whilst the exact intricacies of the proposal are unknown, it is reasonable to assume that most (if not all) R&D expenditure will have to be domestic in order for it to qualify for the tax relief incentive. There is a clear correlation between this proposal and the government vision for ‘high-skill, high-productivity’ individuals to propel the UK above its international peers. A very optimistic outlook from Mr Sunak, but immediate concerns are to be raised over the feasibility of such a proposal. Consider core science sectors (e.g. life sciences) that often carry out R&D activity outside the UK, especially when conducting clinical trials which may not be able to gain the needed licencing approvals in the UK. Limiting the industry pool will no doubt result in an increase in R&D activity costs.

A review of the R&D tax relief incentive was launched in Spring 2021 with the goal of ensuring that the UK continues to compete as a location for cutting-edge research and evolving into a “science and technology superpower”. The government is expected to respond to the consultation paper published after the review in the following months.

Capital Allowance Super-Deduction: Explained

Capital Allowance Super-Deduction explained

 

The Treasury announced on 3 March 2021 the introduction of a 130% Capital Allowance super-deduction as well as 50% first-year allowance (FYA) on special rate (SR) assets. These are just one of many incentives the UK government has used to improve business investment, so let’s take a comprehensive look at how businesses can take advantage of this.

 

What’s the rundown?

The new allowances, active from 1 April 2021 to 31 March 2023, are of immense benefit to businesses investing in qualifying equipment by giving them a high tax deduction in the tax year of purchase. They can also be used alongside the Annual Investment Allowance (AIA), which provides 100% relief on qualifying plant and machinery costs – which can go as high as £1m per business for the 2021 calendar year.

As this is an incentive to help companies reduce corporation tax bills, the super-deduction and SR are only available to companies paying corporation tax, so individuals, LLPs and partnerships cannot expect to benefit. It is also important to note that the contract for qualifying capital assets was entered after 3 March 2021, and the expenditure was made after 1 April 2021.

 

What are the qualifying investments?
  • Super-deduction includes all new plant and machinery that would otherwise qualify for the 18% main pool WDAs
  • SR allowances cover new plant and machinery that qualify for the 6% special rate pool (inc. long-life assets and integral building features)

Assets that have their own capital allowance rates (such as cars) or second-hand assets will not qualify for inclusion in the main or special rate pool. Leased plant and machinery are excluded from the capital allowance, as well as services that arise from the provision of the leased plant and machinery, such as operators.

It could be expected then that property groups or landlords who lease plant and machinery as part of property lease would be excluded from the capital allowance relief. The installation of integral features in a let building was of a particular point of interest. The May 2021 Finance Bill rectified these concerns by ensuring that property lessors were eligible to claim the super-deduction or SR on leased plant and machinery for a building. Allowances can be claimed if property lessors lease background plant and machinery which is essential to the function of a building (e.g. heating, ventilation, electrical systems).

 

How much relief can I claim?

There is no cap on the amount of capital investment that qualifies for both new allowances. In most cases, the super-deduction will be more beneficial for companies instead of claiming AIA for main pool assets. However, there may be an exception for small companies who may find that AIA is preferable over SR, but only if the total expenditure on special rate pool assets does not exceed £1m.

The table below details the effective relief rates for the capital allowance claims:

Class Capital Allowance claim Capital Allowance rate Asset type Effective relief cost (Y1)
Main plant and machinery Super-deduction 130% New 24.7%
AIA 100% All 19%
Main pool 18% Second-hand 3.4%
Special Rate AIA 100% All 19%
SR deduction 50% New 9.5%
Special Rate Pool 6% Second-hand 1.1%

 

What impact is there on disposals?

Expenditure and disposal valuation on plant and machinery is calculated in the usual manner, with the main difference being that the amount incurred on assets claimed as super-deduction or SR allowances acts as a balancing charge. As the FYA disposal values do not affect the main and special rate pools, a 25% corporation tax (as opposed to the normal 19%) is imposed on the charge if the disposal was made after 1 April 2023.

If the disposal was made before 1 April 2023, a calculation must be made for assets under which the super-deduction was previously claimed for. This means that the disposal value is equal to 130% of the asset sale. The main takeaway is that assets claimed as super-deduction or SR allowance must be continuously tracked until disposal, even if they are excluded from the main or special rate pool.

 

Can I set deductions against my losses?

The usual capital allowance rules still apply with the super-deduction and SR, so it is still possible to carry backwards (maximum of three years) or forwards in the interests of tax efficiency.

 

If you’re planning to make use of the super-deduction or SR allowances, get in touch with our team for all help and advice on capital allowance claims.

WIM Accountants are here to help businesses with their accounting and taxation needs.

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