Your guide to EMIs

Your guide to EMIs

Enterprise Management Incentive (EMI) schemes are great for keeping and encouraging employees by awarding significant tax benefits to both company and worker. Typically, you may see EMIs being used as a tax-efficient tool to aid with a company’s internal growth (such as bringing up key workers to have a stake in the business).

The scheme itself is quite flexible in that it can be fashioned to suit the targets of a company, such as allowing companies to allow options to qualifying employees on an efficient tax basis (for example, the right to subscribe to shares). Private or small companies can take great advantage of this to gain access to select grants for selected employees or even their entire workforce.

EMIs can only be awarded to companies with a permanent establishment in the UK, but if your company has overseas shares, you can rest assured as EMI options are still available to you. There are a few other requirements to qualify for an EMI, namely the company itself must:

  • Have gross assets less than £30m
  • Operate in a qualifying trade, which does not include financial & legal activities, leasing, farming, and property development

The options available through EMI also have conditions attached:

  • Ordinary shares issued must be fully paid and not redeemable
  • EMI treatment is only applied to shares not exceeding £250,000 per individual
  • Options can be awarded at discount (even nil price) at the risk of tax consequences
  • These options must be exercised within 10 years

Employees are also subject to eligibility requirements, namely:

  • EMI options are only available to employees working more than 25 hours a week, or who spend 75% or more of their time working for the company
  • The employee must not have more than 30% of the company share capital before options are awarded to them

 

What are the benefits?

EMIs can be tailored to help a company achieve their commercial objectives, and have benefits for both employer and employee alike:

For employers:

  • No tax cost
  • No employer NIC on grant or options exercised
  • Corporation Tax Relief on the difference between the market value of shares at the time of acquisition and the price paid
  • HMRC validation of share valuation, allowing for tax certainty in the interest of the company and workers.

For employees:

  • Only tax payable is CGT arising when shares are sold
  • Lower tax costs compared to non-EMI schemes or even cash
  • No Income Tax or NIC payable on grant or options exercised
  • Reduced CGT rate – EMIs will cause a 12-month holding period for Entrepreneurs Relief to accrue, resulting in a reduced 10% CGT rate. This rate can be achieved even with minority holdings in Growth Shares

 

Disqualifying events

There are several changes or developments within a company that could lead to disqualification from EMI. Also known as “disqualifying events”, they include the following:

  • Loss of independence – Namely when a company becomes a 51% subsidiary of another company
  • No longer meeting the trading requirements – When the company’s activities become primarily focused on a non-eligible trade. It could also occur when the intent to carry out a qualifying trade was never realised.
  • Employees are no longer eligible – Usually, if they no longer work at the company or meet the required hours
  • Share capital is altered
  • If Company Share Option Plans (CSOPs) are granted – This means the amount of unexercised options exceed £250,000

You may want to heed caution to this as if your company is subject to a disqualifying event, you may be liable to a tax charge. This is usually imposed when the EMI option is exercised after 90 days of a disqualifying event, causing income tax and NICs to become payable on the increase in share value from when the disqualifying event occurred and when the option was exercised.

 

How can I register for EMI?

You can report your options to HMRC electronically within 92 days of receiving the grant. It is advised that you agree upon the share market value in advance with HMRC.

WIM Accountants can also help you in dealing with all aspects of your EMI plan and will endeavour to make sure it truly reflects the commercial objectives of your business.

Get in touch with us to find out more.

I’m a Sole Trader and I’ve made a loss in opening years; can I claim relief?

I’m a Sole Trader and I’ve made a loss in opening years; can I claim relief?

 

A sole trader or an individual in a partnership making a loss has zero taxable profit for the year. Keeping in mind that losses are calculated in the same way as profits, loss relief is an option for businesses that are run on a commercial basis and have the means of realising their profits. As a result, the relief claims available depend on the length of time the trade has been active; if it has started within the last four years, is a continuing trade or if the trade is no longer operational. This blog will focus on the opening years of the trade (ie. trading losses in the last four years).

 

Carrying back losses

Losses incurred within the opening four years of trade, in the interests of continuing trade or profession, can be relieved against other sources of income of the three tax years which precede the year of loss. For example, if trade starts 18 February 2021 (so in the 2020/21 tax year) the loss relief will be available off losses incurred in 2021/22, 2022/23, 2023/24, as well as the tax year trade commenced. Trading losses in each of these tax years can be carried back up to 3 years.

But keep in mind that the relief is not administered automatically, instead, a claim is required to be made on the first anniversary of 31 January succeeding the year in which the loss arose (ie. if a loss was incurred in the 2021/22 tax year the claim must be made by 31 January 2023).

What is HMRC’s view?

HMRC hold the stance that, when carrying back losses to earlier years the past tax returns are not amended. Rather relief is provided by calculating the tax adjustment and Class 4 NIC liability if relevant for the previous years. This figure is then included in the tax return for the year of loss.

To illustrate this case, consider a loss arising in the tax year 2020/21 which is then carried back to 2019/20 to produce a repayment of £1,500. This figure of £1,500 is entered into box 15; page TC2 of the tax return 2020/21.

A partial claim is not allowed. If a claim is desired then the carried bac loss is offset against earlier years first, which provides relief on all income for each year until the loss is exhausted. Take care as this could lead to waste of Personal Allowances or losses being offset at lower rates than usual.

 

Can I carry forward losses?

Absolutely. Trade losses incurred early on qualifies for a relief claim. Remaining losses after an opening year loss relief are permitted to be relieved in alternative methods, namely, losses carried forward.

 

For example, Serena began her trade in 2020/21 and realised a loss of £45,000. If her total income for each of the previous tax years was £10,000 Serena can make a loss relief claim. She also does not need to worry about the income tax relief cap as her total amount of tax reliefs does not exceed £50,000.

This also means that her net income for the previous three tax years is zero and her remaining loss is (£45,000 – (3 * £10,000)) = £15,000 which is permitted to be carried forward to offset future profits.

Suppose Serena then made a £50,000 profit in 2021/22 and other income of £5,000. Her net income would then be ((£50,000 – £15,000 = £35,000) + £5,000) = £40,000.

 

Are there any restrictions on claiming loss relief?

There are restrictions that may be applicable when claiming opening year loss relief, so it is imperative to be aware of such restrictions before beginning a new trade, more so if there are high upfront costs expected. The loss must arise from a trade, which is an important factor to consider as the business has only just started operation.

 

  • Commerciality test: Loss relief is only available if the business is run on a commercial basis and profits can be reasonably expected in the period or appropriate time afterwards. Holding evidence of business plans that could support the claim of profit expectation is essential, even if losses are big and can be relieved at high tax rates. This also applies to instances where a partner leaves and then rejoins a partnership at a later time.
  • Simplified cash basis: Not available for trades operating with the simplified cash basis. If losses can be utilised it is advised to not opt into this scheme.
  • Cap on unlimited tax reliefs
  • Non-active traders
  • Tax-generated losses
  • Farming or gardening businesses

 

How can I plan for the relief?

When planning for loss relief it is important to consider the following factors:

  • Personal Allowances and Annual Exempt Amount: Aim to maintain these allowances
  • Marginal tax rates: Prioritise offsetting losses against income taxed at higher rates for maximum savings
  • Cash flow: Consider if it is worthwhile to claim relief for earlier tax years for cash repayment, or to claim relief at the highest marginal rate
  • Income tax relief caps: Consider if reliefs will be lost if not claimed in the following year which they may arise

 

Class 4 NICs

HMRC consider losses as ‘negative earnings’ for Class 4 NIC purposes, so trading losses can only be set against trading profits. If otherwise (ie. set against non-trading income common in early trade loss relief), in the interests of Class 4 NIC this section of the loss is carried forward and will be set against future profits.

 

Overlapping losses

In the event the trader chooses to not end the year on the regular Financial or Tax year (31 March and 5 April respectively), trading profits could be taxed twice according to basis period rules. This amount is known as the ‘overlap profit’ and is only relieved if the accounting date changes or trade terminates. However, a loss is only identified on the earliest period so a double relief cannot be claimed.

 

For more information or if you’d like to discuss our Sole Trader services, feel free to contact us.

Car Benefits: Your 2021/22 Tax Guide

Car Benefits: Your 2021/22 Tax Guide

 

Car benefits are a topic which is often brought up in enquiries with our clients, so this article will go over some concepts in the interest of tax planning for the acquiring cars through businesses.

 

Generally, when a business owner uses their own car in the interests of their business, they can be reimbursed by their own company and will not incur tax liability – as long as they are classed as a qualifying expense by HMRC.

If they were to use a company car instead, they would have to pay income tax on the benefit received. This varies on the CO2 emissions and listing price of the car. The company would also then be liable to Class 1A NIC on the benefit.

The company will, in most scenarios, pay for the ownership (or lease) of the car and its concurrent costs provided it satisfies HMRCs golden rule when it comes to expenses, that it must be done “wholly and exclusively” for the purpose of paying the business owner. These costs will allow deductions for Corporation Tax purposes. Car depreciation also enables corporation tax relief in the form of capital allowances.

As a result, when deciding between the acquisition of a car via lease or buying it outright, one must consider the effect of the capital contributions, company contributions, business mileage, capital allowances and the factors listed beforehand amongst others.

 

What are the charges?

Car Benefit:

Car benefit charges are calculated from the product of the listing price of the car and the current percentage rate set by the Chancellor, which can be found on our tax rates page. The rates are determined by car CO2 emissions which are measured in grams per kilometre (g/km).

Fully electric cars are subject to this tax, currently at 1% and are set to rise to 2% for the successive tax years. This percentage varies with the range at which an electric car can cover. A pure electric range above 130 miles will also be subject to the benefit in kind rate.

2021/22 1%
2022/23 – 2024/25 2%

Fully electric cars have low benefits in kind, qualify for 100% capital allowances and the anti-avoidance rule for salary sacrifice is applicable. Therefore, businesses may want to consider exploring electric cars as a tax-efficient option for a company car in the future as corporation tax rates are set to increase to 25% by 2023.

Fuel Benefit:

Fuel benefits can be calculated by multiplying the same percentage rate used for the car benefit and the current set figure for the tax year:

Year Fuel Benefit
2019/20 £24,100
2020/21 £24,500
2021/22 £24,600

In an instance where an employee has to reimburse the entire expense incurred by their employer for the provision of private fuel, no fuel benefit will arise. If the employee makes a partial reimbursement, then the benefit will be calculated to the method described above.

 

Business Mileage

Employees can be reimbursed for business mileage carried out in their own cars (i.e., miles travelled wholly and exclusively for the business) at 45p per mile for the first 10,000 miles and 25p for every subsequent mile. If a fellow employee is also carried in the same car a further 5p per mile is added to the reimbursement if and only if the travel is a work journey.

This rate also applies to fully electric cars.

A director that does not receive fuel benefit but drives a company car can claim an allowance for the business mileage at a lower rate than if they were to use a car in their ownership.

 

Capital Allowances

Eco-friendly cars are encouraged by HMRC, indicated by the numerous associated incentives which have a considerable positive impact on the cash flow of a business.

  • Writing down allowances (WDAs). Cars emitting less than 50g/km of CO2 in the 2021/22 tax year are included in the Plant and Machinery pool at an 18% WDA. Cars emitting more than the aforementioned amount is in the Special pool with 6% WDA. Hence, there is no balancing allowance on the disposal of these vehicles.
  • 100% first-year allowances (FYA) on expenditure for new low emission electric cars. The car must be purchased between 16 April 2002 and 1 April 2025 and have zero CO2 emissions.
  • 100% FYAs on brand new equipment installed for the purpose of electrically charging vehicles.
  • 100% FYAs on new goods vehicles with no CO2 emissions.

Note that the FYAs are not available to businesses in “difficulty” or are deemed to be recovering.

15% of the leasing costs of a car are also available to claim as a reimbursement provided its emissions are less than 50g/km from 6 April 2021.

 

HMRC also has a company car and car fuel benefit calculator which is a useful tool to help with tax planning.

 

If you have any further queries or are interested in our services, feel free to contact us and have a quick chat.

Your Pension Obligations as an Employer

Your Pension Obligations as an Employer

 

Pensions are an essential resource for individuals as a reliable source of income to live on when they retire from working. A recent investigation found that the average pension pot savings across the UK are £61,897 which tends to also come with an extra £12,000 annually in retirement income. This is a significant amount to allow an individual to have a basic retirement lifestyle, but this money doesn’t appear out of thin air. As an employer, it is your duty to attend to an employee’s enrolment in a pension scheme to help facilitate this lifestyle post-retirement, which will be the focus of this piece.

What do I need to contribute?

Before we delve into what your obligations are, let’s run through the actual rates an employer and employee need to contribute to the pension pot.

The amount contributed to the pension depends on the type of workplace pension scheme the employee is enrolled in, or whether the employee has opted into a scheme or has been automatically enrolled. Make note of the auto-enrolment, as this is an important system every employer should be aware of and will be discussed in depth further on. Additionally, it is common for the government to apply a tax relief to a pension provided that the person pays income tax and pays into a personal or workplace pension.

If an employee is auto-enrolled, you as an employer must contribute at least 3% of an employee’s earnings towards the pension scheme. The employee then makes up the reminder to make the total minimum contribution of 8%. These rates only apply if the person earns between £6,240 and £50,270 a year pre-tax (also known as “qualifying earnings”) and may also be influenced by the type of private pension scheme they are enrolled in.

What is auto-enrolment?

Auto-enrolment moves away from the archaic method workplace pensions used to operate. In the old system, a burden was placed on the employee to enrol into a pension scheme but now the process is automatic provided the employee earns above £10,000 per year and is over the age of 22. This pension pot can only be accessed once the employee is 55 years old, otherwise, it is held by the company.

The reason for this change is to increase the number of people saving for retirement, which has produced positive results with 78% of UK employees enrolled in a workplace pension – up from less than 50% in 2012 when auto-enrolment came into effect.

You must also let them know when they’ve been auto-enrolled as well as:

  • The date they were added to the scheme
  • The type of pension scheme and who runs it
  • Employer and employee contributions
  • How to leave the scheme. Note that you must refund money if the employee opts out within a month
  • How tax reliefs apply

You must notify them in writing of their right to join the pension scheme and of its associated details. They also have a right to rejoin a scheme at least once a year and you must auto-enrol them every 3 years if they’re still eligible and have previously opted out. It is your duty to inform an employee of these details and you cannot refuse a request to join a pension scheme. An exemption lies if, and only if, your employee earns less than the following amounts:

  • £520/month
  • £120/week
  • £480 over 4 weeks

But you don’t always have to auto-enrol your staff if they don’t meet any of the above criteria or the following conditions:

  • They have already provided notice to leave, or you have provided notice
  • They have evidence of “lifetime allowance protection”
  • They are already on an arranged pension with you
  • They have taken a lump sum payment from a closed pension scheme, and have left and rejoined the same company within 12 months of payment received
  • They opted out of an arranged pension scheme more than 12 months before the auto-enrolment start
  • They are from an EU member state and in an EU cross-border pension scheme
  • They are in a Limited Liability Partnership (LLP)
  • They are a director without an employment contract and employ at least one person

Do I have to enrol immediately?

You are not actually required to auto-enrol your employee as soon as they are eligible. A 3-month delay period is allowed but you must inform your employee of the delay. 

You can also delay the first 3 months of pension contributions, and instead pay it as a lump sum on the 22nd of the fourth month from the start of enrolment.

There are also tax saving incentives via usage of the ‘salary sacrifice’. Also known as a ‘SMART Scheme’ the salary sacrifice works by paying a portion of the salary an employee gives up directly to the pension pot. This may be desirable as it means you and your employee pay less tax and NI.

What happens if I don’t auto-enrol?

To keep things simple, you will be penalised, and in some cases heavily. The typical process involves fines being noticed, which must be paid online. In the event you are late in payment, missed contributions are expected to be paid to staff and may include the need to backdate contributions. You may also be expected to pay your staffs own contributions on top of your own. Further action involves court proceedings to recover debts which could end with a maximum of 2 years imprisonment.

Fines tend to range between £400 for non-compliance with notices to as much as £10,000 daily depending on the size of your company and staff numbers. 

If you have further questions regarding your obligations as an employer towards pensions feel free to give us a call and have a chat. Find our contact details here.

 

Remittance Basis for Non-Domiciles in the UK

Remittance Basis for Non-Doms in the UK

 

What does the term ‘Remittance Basis’ mean to you? If you are a domiciled UK resident it probably won’t mean much, but if you are non-domiciled (or non-dom) this is a concept which you should familiarise yourself with as it could be a huge advantage in your favour. In short, if you are eligible for Remittance Basis you are only taxed on your non-UK income and Capital Gains if they were brought into the UK.

So if you do not have UK income and Capital Gains, as well as having no need to bring in non-UK income to sustain your living, you can be deemed as a UK tax resident and pay no tax. This is a huge prospect that many overseas individuals living in the UK are unaware of.

 

What is meant by tax residence?

Tax residence is defined by how many days an individual spends in the UK. For an individual to be considered a UK resident for tax purposes, the must have spent a minimum of 183 days in the UK during any tax year.

Certain factors can actually affect how many days spent in the UK qualify you as a tax resident, such as having family living in the UK. As the number of factors connecting you to UK stay increases, the fewer days you can spend in the UK without gaining tax residency status.

 

What is meant by domicile?

Domicile is a concept of common law, and an individual can only ever hold one domicile at any point in their life. In this regard it is very distinct from residency, as you cannot be domiciled in more than one country at a time, nor can you be domiciled nowhere. In most cases, you are domiciled in the country you have permanent residence in.

A non-dom has limited exposure to the UK tax rules due to the fact they have less of a connection to the UK than say someone who was born and domiciled in the UK. As a result, a non-dom has thrice the tax advantage of an average taxpayer:

  • Being able to benefit from the Remittance Basis of tax
  • Restricted Inheritance Tax to UK assets
  • The ability to create a non-resident trust where the individual can benefit. The individual is exempt from IHT, CGT, Income Tax and anti-avoidance rules being placed on the trust’s assets

 

 

What is ‘Remittance Basis’?

If you are a UK resident but non-domiciled (ie. you are living in the UK but plan to return to your homeland in the future) your foreign income is taxed on an arising basis. This means your worldwide income is taxed whether or not it is brought and spent in the UK, however you can apply for a claim under the Remittance Basis.

This claim is not automatic, as you must apply for the Remittance Basis via your UK tax return and it can only be claimed in some tax years.

The number of years you have resided in the UK also determine the Remittance Basis Charge (RBC) you pay when you bring foreign income to the UK:

  • In the first 7 tax years of residency in the UK, the Remittance Basis is free of charge, at the downside of losing some minor CGT and income tax allowances.
  • When at least 7 of the previous 9 tax years have been spent as a UK resident (ie. you are in your 8th year of continuous UK residency), the annual RBC payable is £30,000.
  • If you have been a UK resident for at least 12 of the previous 14 tax years, the RBC rises to £60,000 per annum.
  • From the 15th tax year onwards no RBC is imposed on you as you will be deemed domicile in the UK, and you will no longer be able to benefit from the Remittance Basis.

It is also worth noting that an individual considered a minor during the duration of a tax year is exempt from RBC.

 

Pre-Arrival advice

Funds that you bring into the UK before gaining tax residency is considered to be ‘clean capital’ – which is exempt from income tax and CGT. This also includes:

  • Income/gains which were taxable on an arising basis (income was from a UK source or gains were attributed to a UK asset)
  • Gifts or inheritances
  • Income/gains received during relief from a ‘split year’ treatment under the scope of the statutory residence test
  • Income/gains received from dual residency under a double taxation treaty

 

If you are planning on moving to the UK, you need the best advice and specialists. The UK tax system is strict, and it is important that you plan your lifestyle funding well in advance. WIM Accountants can help you make your claim and will endeavour to guide you every step of the way. This blog post aims to serve as a basic introduction to non-domicile status in the UK, but if you have more queries or would like to have a chat about our services feel free to contact us.

New Guidance for CGT on House Sales

New Guidance for CGT on House Sales

Selling property is not as simple as it used to be. With tighter rules being enforced by HMRC over the last few decades sellers need to be aware of these changes and how they are affected, particularly when concerning the disposal of UK residential property.

A UK residential property refers to land which included occupation or dwelling at any given time such as a freehold property. Most of the time residential property gains can be found in the disposal of an investment property, for example a house you rent out. To the relief of a number of homeowners, not all property disposals are chargeable for CGT. Typically this tends to be properties which have been the main residence of the owner during ownership or properties which were bought with the intention of development and resale. In the case of the latter, this transaction is seen as one which is trading in nature as profits are subject to Income Tax. Otherwise CGT rules apply. It should be noted that all your capital gains in a year are added together, however there exists an annual exemption of £12,300.00 of which capital gains below this amount are not taxed.

On 6 April 2020 the deadlines for filing and paying CGT off the disposal of a UK property changed. This affected both UK residents and non-UK residents who own residential property in the UK. Under new rules, residents must take no longer than 30 calendar days to inform and pay HMRC for the disposal of property. Disposals of other CGT chargeable assets are unchanged and must follow the standard Self-Assessment deadlines. Furthermore, disposals represented by charities, pension scheme investments and lease granted for commercial purposes.

For UK Residents, disposal of property making gain which is liable to CGT must be informed of to HMRC as well as the payment of owed CGT. This must be done within 30 days of property disposal using the new online service, which can be found here:
UK residents with property abroad do not need to worry about this notice period, as rules on this matter are unchanged.

Preventing abuse of R&D Tax Relief for SMEs

Preventing abuse of R&D Tax Relief for SMEs

What are the R&D Tax Credit measures due to come in for accounting periods starting from 1st April 2021?

The proposal in the Finance bill is:

A company claim for payable credit (R&D Tax Credits are only available under the SME scheme to claimants making a loss after the R&D deduction/relief is applied) below £20,000 will not be affected by the cap. The cap will be 300% of the company PAYE/NIC (excluding statutory deductions) and £20,000.

A company will include connected party R&D qualifying PAYE and NIC liabilities when calculating the cap, and the total will be increased by 300%. Connected parties are connected through shared control. These can be subcontractors or externally provided workers.

A company’s claim of any size will be uncapped if it meets two tests. These tests require that a company’s employees create or prepare to create or actively manage intellectual property (IP) and that its expenditure on work subcontracted to, or externally provided workers provided by, a connected party is less than 15% of its overall R&D expenditure.

My views on this change?

It is good that the cap has increased from the 2018 proposal. It is now £20,000 plus 3x NIC/PAYE. A company with no PAYE/NIC can still get a cash benefit for a claim up to £20,000. If the claim were more extensive than this, it would generate a £20,000 cash benefit and increase losses to carry forward. £20,000 is significant to a lot of small firms.

A company is exempt from the cap if:

it’s employees are creating, preparing to create or managing Intellectual Property (IP), and

it does not spend more than 15% of its qualifying R&D expenditure on subcontracting R&D, or the provision of externally provided workers (EPWs) by, connected persons

How would I solve this problem?

Remove the test on IP and on connected party expenditure.

In the case of preventing the abuse, the simple question arises “what would have stopped them faking the IP consideration or even applying for it outside the UK where the fake subcontract work was supposed to be done?” The IP test does not deal with the problem the legislation attempts to solve.

What did defeat an attempted abuse is security/money laundering checks by HMRC. It seems this would defeat fraud, not subjective judgments about applying for IP. HMRC have a lot of information to make those judgments on. Why not make that process better and focused on claims that are impacted by the cap?

No measure will be perfect, but it seems odd to bring back IP considerations into R&D claims which were removed from the SME scheme in 2012 because of the highly subjective nature of such judgments. IP is a relatively complicated legal area.

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

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