Employee Ownership Trusts

Employee Ownership Trusts (EOTs)

 

EOT were promoted by the government to promote employee ownership by giving business owners the opportunity to avoid capital gains tax from selling their shares to an employee-owned trust. EOTs do not involve direct share ownership by employees, rather a controlling interest in company is transferred to an all-employee trust which is then held for the benefit of employees

It enables a company to become owned by its employees, set up for the benefit of all employees by owners; the trust becomes a majority owner of the business as part of succession planning strategy. Because an EOT is a trust for the benefit of all employees, the employees will not directly own the shares in their company; they are beneficiaries of the trust which owns a controlling share. An Employee Ownership Trust is a type of indirect employee ownership.

Benefits in the short term allows owners an exit where there are no obvious third-party purchasers, and this can provide a quick and streamlined exit route for shareholders that allows tax free disposal by UK shareholders. The owners are permitted to retain up to 49% involvement with the remaining capital still available to incentivise management and key employees.

Benefits in the long-term help aligning goals of stakeholders and employees with improved employee retention and morale. Helping encouraging innovation at all levels, it Improves business performance by driving growth of stakeholder values. Employee ownership encourages employee engagement.

John Lewis was a pioneer in this sphere and the UK government introduced Employee Ownership Trusts in 2014 as their long-term goal was to encourage more businesses to move to an employee ownership model.

In simple terms, the John Lewis model gives every employee a stake in the company – this means each employee is part-owner of the business. John Lewis employees get a share of the group’s annual profits, as well as a say in how the company is run. Profit share is a major factor in improving productivity, as employees are given a tangible incentive to excel and help the company thrive.

According to the UK Government, research has suggested that employee-owned companies are run appropriately, benefit their employees, the business, and the economy itself. Employee-ownership encourages greater commitment and engagement in the company while reducing absenteeism, staff turnover, and even the number of accidents in the workplace. It stimulates productivity and profitability compared to similar non-employee-owned businesses. It helps businesses become more resilient through times of economic hardship due to less variability over economic cycles. It encourages faster growth in sales and employment.

The Government greatly supports employee-ownership, which is why they offer very generous tax incentives for business owners who sell their controlling stake to an Employee Ownership Trust. Some specific tax benefits are:

  • Owner: Disposals into the trust can be made free from capital gains tax and inheritance tax.
  • Employee: EOT can pay annual bonuses of up to £3,600 to employees free of income tax.
  • Company: Corporation tax deduction for the value of the bonus available to the company.

Employee-ownership suggests the most substantial benefits of moving to employee-ownership are enjoyed by the employees, not the existing owners. This is not the case – there are some major benefits for existing business owners who dispose of a controlling stake in the company to an Employee Ownership Trust, such as, being guaranteed the full market value of shares and the sale of shares is effectively exempt from capital gains tax. While no IHT liabilities arise on the transfer to the EOT, they can recognise the contributions employees have made and reward them appropriately.

Employee-owned companies are a rapidly growing sector of the economy, with the top 50 employee-owned companies in the UK generating more than £20bn in combined sales in 2020. This is a 4.3% increase from 2019. Other companies that are owned by their employees include Richer Sounds, Aardman Animations, Weir Group, Mott MacDonald and Arup.

To explore options on how EOT can help your company, get in touch today with WIM Accountants.

Changes in the UK Tax Regime 2022-2023

The only constant that remains in anyone’s life is change and the situation with the tax regime in the UK is similar. Every year the finance budget is introduced by the chancellor of the exchequer in March. The UK fiscal year begins on 6 April and ends on 5 April the following year while the financial year begins on 1 April and ends on 31 March each year. Therefore, the UK budget for a financial year would cover the period from 1 April to the following 31 March.
A common interchangeable jargon used to refer to the finance act in UK is ‘the budget’. For the year 2022 the budget runs through the financial year starting from 1st April 2022 till 31st March 2023 and applies to corporations, whereas the fiscal year runs from 6th April 2022 till 5th April 2023 and applies to sole traders and individuals.
In the budget 2022-23, key elements relating to certain changes have been highlighted here.

1. Corporation tax
This is a tax paid by a limited company, any foreign company with a UK branch or office, a club, co-operative or other unincorporated association, e.g. a community group or sports club.
For the 2022 financial year the main rate of corporation tax is 19% and for the 2023 financial year the main rate of corporation tax is 25%. For financial year 2023 onwards, there are two rates of corporation tax which may apply to UK companies, depending on the amount of their profits. The main rate of corporation tax is 25% and the standard small profits rate is 19%

2. P11D
The P11D form is a statutory form required to be filed with HMRC by businesses that detail benefits paid to their employees and the cash equivalents of those benefits. You will also need to file a P11D (b) alongside it.
From 6 April 2022, the interactive PDF used to submit P11D and P11D(b), HMRC’s Online End of Year Expenses and Benefits service, will no longer be available. Instead, employers should use HMRC’s PAYE Online service. This allows:

• Submissions for up to 500 employees; and
• Online submissions of P46(car) – without the need to download the latest Adobe

End-of-year expenses and benefits can also be reported using commercial payroll software. Employers may access HMRC’s PAYE Online Service using the government gateway details used for the previous service. In the event of any issues, support can be found through the help function on the PAYE Online Service or by contacting the online services helpdesk.

3. Section 455 Tax
It is usual for family and personal company directors to lend and borrow to/from the company. Under such circumstances, a record of the amount borrowed is kept in the DCA (director’s loan account). The loan can be cleared by paying dividends or salary, settling expense claims by the directors or by a repayment. If the director’s loan account is not cleared at the end of the accounting period and the loan has not been repaid within nine months of the year end, the company must pay an amount of corporation tax equal to 33.75% of the loan balance outstanding at this point over to HMRC. This is known as section 455 tax. If the loan is repaid, this tax can be reclaimed.
Reclaiming section 455 tax is possible once the loan has been repaid however the repayment cannot be claimed until nine months and one day after the end of the accounting period in which the loan was repaid. This is the normal corporation tax payment date for the accounting period in which the loan was repaid. The loan needs to be repaid before the company’s corporation tax is due, 9 months and 1 day after the end of the accounting period. If the loan remains unpaid at that date, the company will be liable to an additional tax charge. In specific circumstances, the director may also be required to pay additional tax and national insurance under the PAYE ‘benefit in kind’ (BIK) rules.

4. Capital Gains tax
CGT is a tax on the proceeds from the sale of anything that an individual owns. For an asset owned for more than a year, it is calculated on the gain generated calculated by finding the difference between the sales price and the purchase cost. Typically, CGT is applicable to:
• Shares
• Investment funds
• Second properties
• The sale of a business
• Art and antiques
• Valuables like jewellery
• Assets transferred below fair market value
• Inherited properties

According to the UK Government, disposing of an asset includes:

• Selling or swapping it for something else
• Giving it away as a gift or transferring it to someone else
• Getting compensation for it – like insurance pay out in case it has been lost or destroyed

Also, if capital gains tax is due when an asset is sold for a profit, there are four possible rates based on income levels.
• 10% tax rate – applies to lower rate taxpayers selling non-property assets
• 18% tax rate – applies to lower rate taxpayers selling residential property
• 20% tax rate – applies to higher and extra rate taxpayers who sell non-real estate assets
• 28% tax rate – applies to higher and extra rate taxpayers selling residential property

5. Income tax
This is a tax individuals must pay on their total earnings during a fiscal year arising from various sources that fall under self-assessment filing requirements, such as:
• are a sole trader earning more than £1,000
• are a partner in a business partnership
• have a total income over £100,000 or have complicated tax affairs
• have an income over £50,000 and either you or your partner receive child benefit
• get income from savings and investments or dividends over £10,000
• have property income over £10,000, or profits over £2,500
• need to pay capital gains tax on assets you have sold
• are a religious minister, Lloyd’s underwriter, examiner or share fisherman
Marriage Allowance lets you transfer £1,260 of your Personal Allowance to your husband, wife or civil partner. This reduces their tax by up to £252 in the tax year (6 April to 5 April the next year).
To benefit as a couple, you (as the lower earner) must normally have an income below your Personal Allowance – this is usually £12,570.
You can calculate how much tax you could save as a couple. You should call the Income Tax helpline instead if you receive other income such as dividends, savings or benefits from your job.

6. National Insurance Contributions (NIC)
Between 6th April to 5th July 2022, employees were able to earn £190 a week without paying Class 1 NICs. From 6th July 2022 to 5th April 2023, this weekly threshold will increase to £242 per week. The move is designed to lessen the impact of the 1.25 percentage point rise in employee NICs from 12% to 13.25% on earnings up to £50,270 per annum. Earnings above this figure now incur NICs of 3.25% instead of 2%. In fact, the revised NIC threshold in July will remove NICs altogether for some 2.2 million workers nationwide.

Class 1 (primary) NI. Paid by employees on the wages they earn working for someone else.
Class 1 (secondary) NI. Paid by employers, who make NI contributions towards their employees’ NI.
Class 1A or 1B NI. Some employers might also need to make NI contributions on the equivalent financial value if they provide any work benefits (sometimes known as Benefits in Kind) to employees.
Class 2 NI. Self-employed people pay Class 2 NI on what they earn through their business activities.
Class 3 NI. These are voluntary contributions that you can make if you need to top up the amount you have paid in a tax year.
Class 4 NI. Depending on how much they earn, self-employed people might also pay Class 4 NI on their business activities.
From April 2022 there has been a temporary increase to the rate of Class 1 and Class 4 NI because of the new Health and Social Care Levy. These rates will return to normal the following year.

Employee income was subject to employee nil NICs if they earn under £9,880 per annum and this threshold has increased to £12,570, in line with the personal allowance, as of 6th July 2022.
An employee’s NI contribution actually has two parts; their own contribution (which comes out of their pay), and their employer’s contribution (which the employer pays). If you’re an employer you’ll deduct your worker’s contribution from their wages each time you pay them.
When an employer pay this on to HMRC using PAYE, you’ll add on your NI contribution as their employer. The information that you send to HMRC will show how much you’re paying as the employer, and the amount which you’ve taken from the employee on their behalf.

7. Dividends tax
Individuals who own shares in a company earn money: from selling the shares if they grow in value or from dividends paid by the company if it chooses to distribute profits to shareholders. Sale of shares comes under the CGT explained earlier. However, tax on dividends is lower than the rate you’ll pay on money from other sources of income. Furthermore, from 6 April 2022 dividend tax rates have gone by 1.25 %.
You can use your tax-free dividend allowances, meaning you can earn more income from your investments before you’ll start paying tax. Dividends can be a great way to generate a regular income from your investments. But, as with any income you earn, you may have to pay tax.

8. Inheritance tax
This is a tax that is colloquially called the ‘death tax’ because it is levied upon the estate of a person upon their demise. An estate is defined as the belongings that a person owned, including property, savings and other assets and IHT only applies to the value of their estate after death. This means that beneficiaries named in the will may not receive everything they expect as the Executors must pay up to 40% of the value of the deceased’s estate above the tax-free allowance, currently £325,000.
The requirement to report all IHT transactions has been scrapped from January 2022 onwards, for estates that falls below the IHT threshold. This means if the estate is less than £325,00 the executors will no longer have to file IHT paperwork. In addition, there will no longer be a need for physical signatures on an IHT return for any issues relating to either the estate or a trust. This change was introduced as a temporary measure due to the global pandemic but from January 2022, it will be made permanent. There are exemptions in IHT for transfers between spouses, enabling bypass taxation. HMRC has confirmed the following are considered as spouses under IHT law for tax purposes:

• People legally married to each other, including same sex couples
• People who are legally registered as civil partners
• People who are legally married but separated at death
• People within a valid polygamous marriage

The nil rate band of £325,000 has not been changed since 2009 and it was widely expected to be increased in the spring budget of 2021, however, the chancellor recently announced it would remain frozen at the same rates until 2026.

Capital Tax Gains on Properties

CGT is a tax on the proceeds of the sale of anything you own. For an asset owned for more than a year, it is calculated from the profit generated, which is the rise in value of the sale price compared to the purchase cost.

Typically it’s applicable to:
• Shares
• Investment funds
• Second properties
• Inherited properties
• The sale of a business
• Valuables including art, jewellery, and antiques
• Assets transferred at below their market value

According to the UK Government, disposing of an asset includes:
• Selling it
• Giving it away as a gift or transferring it to someone else
• Swapping it for something else
• Getting compensation for it – like insurance payout if it’s been lost or destroyed

Capital gains on certain assets are currently taxed at rates distinct from income tax. This is because acquiring such goods is viewed as a risk, whether entrepreneurial or investment-related, and the higher burden of risk brings a bigger potential gain.

Provided a taxpayer sells their principal private residence (PPR)and makes a profit, there is no capital gains tax to pay if they resided in it throughout the ownership period. In this instance, any amount of gain can be earned without incurring CGT.

If you leave your PPR to move into a new PPR but continue to own your old PPR, the final nine months of ownership of that previous PPR are exempt from CGT under current rules.

Also, if capital gains tax is due when an asset is sold for a profit, there are four possible rates based on income levels.
• 10% tax rate – applies to lower rate taxpayers selling non-property assets;
• 18% tax rate – applies to lower rate taxpayers selling residential property;
• 20% tax rate – applies to higher and extra rate taxpayers who sell non-real estate assets.
• 28% tax rate – applies to higher and extra rate taxpayers selling residential property.

As a result, if you are a higher rate taxpayer and sell property that triggers a CGT duty, you must pay 28% tax on the gain within 60 days of disposal and file a property disposal return to HMRC. If in the next 60 days you need to file the self-assessment and pay your taxes, then you don’t need to file the property disposal return serprately.
Even if you are a non-resident for tax purposes, you must pay tax on profits made on property and land in the UK. Other UK assets, such as shares in UK firms, are exempt from Capital Gains Tax if you return to the UK within 5 years after leaving.

In a given tax year, you may make a profit on one asset while losing money on another. The good news is that your CGT bill can account for both profit and loss, which means that in some cases, you can remove the loss from the profit to compute your overall CGT liability.

You can also carry forward any losses that you have not utilised to offset your profits. This implies that you must report particular losses on your tax return even if you haven’t generated any profits and no CGT is owed. This is because it will be easier to offset any prospective future benefits against the loss.

If you have made large gains in cryptocurrencies, you should be aware that the government does not regard cryptocurrency as money. If you live in the UK and own crypto assets, you will be taxed on the gains.

This means that earnings from crypto assets are taxed in the same manner as profits from selling shares are taxed. CGT does not apply to unrealised (paper) profits in cryptocurrency; rather, it applies when you swap it for another cryptocurrency or convert it to pounds sterling, at which point your gains are realised.

The yearly CGT allowance is applied, as with other assets, and your gains are determined based on the difference between how much your cryptocurrency cost you and how much you sold it for.
However, you may not be required pay CGT if:
• The total gains are below your annual tax-free allowance, which is £12,300.
• You do not usually pay tax on gifts to your husband, wife, civil partner or a charity.
• If any gains are from – ISAs or PEPs, UK government gilts and Premium Bonds, and betting, lottery or pools winnings

You can also transfer assets between partners in a marriage or civil partnership to decrease your CGT liability. If you transfer an item to a partner and then sell it for a profit, the amount of CGT owed will be calculated based on the entire period you possessed the asset as a pair, not the date it was transferred to your partner.

It is recommended that this should be noted that this should always be done after seeking particular guidance because different reliefs may be available. In WIM Accountants we have team of tax specialists who can assist you in CGT tax planning, calculations, and reporting to HMRC.

What is NMW and How It Impacts Employers

Workers must be paid at least the statutory minimum pay for their age under minimum wage legislation. The National Living Wage (NLW) and the National Minimum Wage (NMW) are the two forms of minimum wages. The age threshold for the National Living Wage is dropped beginning April 1, 2021, in addition to the typical annual increases.
National Living Wage
The NLW is a higher statutory minimum wage that is paid to workers who are over the NLW age criteria. Prior to April 1, 2021, it was only available to workers above the age of 25. The NLW age threshold is being decreased as of April 1, 2021, and it must now be paid to workers aged 23 and up.
National Minimum Wage
The NMW is paid to employees who are under the age of entitlement to the NLW. Prior to April 1, 2021, the NMW applied to employees over the obligatory school leaving age but under the age of 25; after April 1, 2021, the NMW must be paid to workers under the age of 23 but over the required school leaving age.
Apprentices
Apprentices also have their own NMW rate. It is applicable to apprentices under the age of 19 as well as those above the age of 19 who are in their first year of apprenticeship.
Accommodation offset
Employers who offer accommodation for their employees might pay a reduced minimum wage to cover the expense of the accommodation. For each full day of housing given, the daily accommodation offset rate can be subtracted. A day is defined as midnight to midnight. The weekly offset rate for accommodation is seven times the daily rate.
From April 2022, the minimum wage and living wage rates are:
Age 23 and over (NLW): £9.50
Age 21 to 22: £9.18
Age 18 to 20: £6.83
Age Under 18: £4.81
Apprentice: £4.81
Who is entitled to a minimum wage:
The GOV.uk states that workers entitled to the correct minimum wage if they’re:
• part-time
• casual labourers, for example someone hired for one day
• agency workers
• workers and homeworkers paid by the number of items they make
• apprentices
• trainees, workers on probation
• disabled workers
• agricultural workers
• foreign workers
• seafarers
• offshore workers
However,
• self-employed people running their own business
• company directors
• people who are volunteers or voluntary workers
• workers on a government employment programme, such as the Work Programme
• members of the armed forces
• family members of the employer living in the employer’s home
• non-family members living in the employer’s home who share in the work and leisure activities, are treated as one of the family and are not charged for meals or accommodation, for example au pairs
• workers younger than school leaving age (usually 16)
• higher and further education students on work experience or a work placement up to one year
are not entitled to the National Minimum Wage or National Living Wage.
Employer Responsibility
Employers who fail to pay the National Minimum Wage or falsify payment records commit a crime.
Employers that discover they have paid a worker less than the correct minimum wage must make up the difference right away. This is even if the employee or worker no longer works for them.
HMRC officers have the authority to conduct checks at any time and to request payment records. They can also conduct investigations into employers if a worker complains to them.
If HMRC discovers that an employer has not been paying the correct rates, any arrears must be repaid right away. There will also be actions taken, and the government may decide to name offenders. Some of these actions may include:
• issuing a notice to pay money owed, going back a maximum of 6 years
• issuing a fine of up to £20,000 and a minimum of £100 for each employee or worker affected, even if the underpayment is worth less
• legal action including criminal legal proceedings
• passing on the names of businesses and employers to the Department for Business, Energy and Industrial Strategy (BEIS) who may put them on a public list
Holidays and Holiday Pay
Workers are entitled to at least 5.6 weeks of paid annual leave, which includes public and bank holidays. For someone who works five days a week, this corresponds to 28 days of yearly leave. Employers are permitted to offer
more annual leave than the statutory minimum, but not less. Except when the employee is leaving work and has earned and unused yearly vacation, holiday entitlement cannot be substituted by cash in lieu of leave.

VAT Rates for Residential Property Renovations

Bringing vacant properties back into use may be expensive, especially if extensive renovations are necessary. Domestic building work, including repair, maintenance, and upgrades, is often taxed at the regular vat rate of 20%.

In some cases, VAT on construction works is taxed at a lower or even zero-rated rate. It is critical essential you understand them if you wish to repair an empty house.

Builders are typically unaware of the various VAT rates that may apply, which may result in you spending more than you need to. Overpayments could be difficult to recover.

VAT – residential properties empty for at least two years

Renovations and improvements to residential buildings that have been vacant for at least two years will be eligible for a reduced 5% VAT rate beginning January 1, 2008. This includes labour and materials used for repairs, alterations, garage constructions, and hard landscaping.

HMRC will demand evidence that the property has been unoccupied for more than two years. HMRC recommends that the builder get evidence from the Local Authority’s ’empty properties’ officer; however, many Local Authorities do not have an empty properties officer. Copies of council tax documents or the electoral roll demonstrating that the property has not been occupied for more than two years are also acceptable proof.

To reduce VAT paid, carefully analyse who supplies materials, and it will typically pay to work with a VAT-registered builder, since the savings of 15% material provided and fixed (Labour and materials) will usually outweigh the savings of 20% VAT on labour.

VAT – Conversion of non-residential properties empty for ten years or more

Once the property is sold, a developer or property owner can reclaim any VAT paid on the refurbishment of a structure that has been vacant for 10 years or longer. If the house owner keeps the property for private residential use, they can claim the VAT under the DIY Builders Refund Scheme available from Customs and Excise.

A ‘non-residential conversion’ occurs when one of the following occurs –

The building (or part) being converted has never been used as a dwelling or number of dwellings for a ‘relevant residential purpose,’ or the building (or part) has not been used as a dwelling or number of dwellings for a ‘relevant residential purpose’ in the 10 years prior to the sale or long lease.

Examples of a ‘non-residential conversion’ include the conversion of –

  • a commercial building,
  • an agricultural building,
  • a redundant school or church
  • Commercial into residential use

    A farmhouse conversion or an office converted into flats are simple examples of commercial buildings being converted into residential use. HMRC has agreed that a residential property that is converted to commercial use and then converted back to domestic use qualifies for the reduced rate of 5%.

    VAT and the installation of certain energy efficiency measures

    Additionally, reduced VAT rates apply to a variety of building activities, such as installing energy-saving measures, adapting a property for a disabled person, or converting a non-residential building into a residence.

    The installation of certain designated energy-saving materials in residential accommodation is subject to a reduced VAT rate.

    The reduced rate applies to installation of:

  • Central heating and hot water controls
  • Draught stripping
  • Insulation
  • Solar panels
  • Wind Turbines
  • Ground source heat pumps
  • Air source heat pumps
  • Micro combined heat and power units; and
  • Wood-fuelled boilers
  • Change in the number of dwelling units
    When renovation work on a residential property results in a change in the number of housing units-for example, splitting a home into flats or merging two small cottages or a number of flats into a single residence-the work is eligible for a 5% VAT reduction. Bringing vacant properties back into use may be expensive, especially if extensive renovations are necessary. Domestic building work, including repair, maintenance, and upgrades, is often taxed at the regular vat rate of 20%.

    In some cases, VAT on construction works is taxed at a lower or even zero-rated rate. It is critical essential you understand them if you wish to repair an empty house.

    Builders are typically unaware of the various VAT rates that may apply, which may result in you spending more than you need to. Overpayments could be difficult to recover.

    Tax Breaks for Business

    A tax break, or tax relief, is a way for you to reduce your tax liability by considering things you spend money on or invest in for your business. It’s the Government’s way of helping to stimulate the economy by ensuring you have more money to spend on your business. It’s also a way to encourage positive behaviours, such as donating to charity and investing in innovation. Read More

    UK Business Structures and Tax Implications

    When starting, a new business must select a business structure, which will have both legal and tax implications, and the choice of business structure is a monumental step for a new company. It can affect ongoing costs, liability and how your business team can be configured. This topic becomes particularly timely during tax season, as your business’ structure has direct tax implications.

    What Is a Business Structure?

    Business structure refers to the legal structure of an organisation that is recognised by HMRC. An organisation’s legal structure is a key determinant of the activities that it can undertake, such as raising capital, responsibility for obligations of the business, as well as the amount of taxes that the organisation owes to HMRC.
    At a basic level, business entities establish a business as legal entities that can have bank accounts, enter contracts, and conduct business without putting everything in their name. For some small businesses, working under your name may be okay, but if you plan to earn a full-time income from the business, sign contracts, or hire employees, it is likely in your best interest to choose a business structure and register with your state.

    Business Structures

    Sole Trader

    Being a sole trader is often referred to simply as being ‘self-employed’, though there are other forms of self-employment (such as being a contractor). A sole trader is the most popular structure for a start-up and the simplest. You pay income tax on your profits (rather than corporation tax), so any profits above £45,001 will be taxed at 40 %, and profits above £150,000 will be taxed at 45 %. Depending on your profits, you may also have to pay National Insurance (NI) contributions.

    Pros:
    • No cost to start — You are a sole proprietor by default.
    • Easy to maintain — There are no ongoing registration or legal requirements to start, maintain, or shut down a sole proprietorship.

    Cons:
    • Personal liability: You are personally liable for anything that goes wrong related to the business.
    • No tax benefits: You must pay self-employment tax on all earnings and include business earnings on your personal tax return.

    Partnership

    In a partnership, several individuals sign a partnership agreement to establish how the business’s ownership, profits and liabilities are shared between them, and how partners may leave the partnership. A partnership is similar to the sole trader structure, except that there are at least two of you. There is no legal upper limit to the number of partners, though very large partnerships can be riskier to manage (see Limited Liability Partnerships). Each partner registers as self-employed and submits a separate tax return. Your tax and NI obligations are like those of a sole trader.

    Pros:
    • Easy to create: Creating a partnership with your state is a relatively simple process.
    • May offer liability protections: Limited Partnerships and Limited Liability Partnerships may offer personal financial and legal liability protection.

    Cons:
    • May does not protect from all liabilities: Partnerships may not shield all personal liability depending on the specific business structure and operations.
    • More complex tax requirements: Partnerships must file their own tax returns and supply additional forms to partners for personal taxes.

    Limited Company

    A limited company is a form of business which is legally separate from its owners (typically shareholders) and managers (formally called directors). In the UK, it must be incorporated at Companies House. This confers the status of being a separate ‘legal person’ from the people who run it, with a unique company registration number.

    Pros
    The main advantage of setting up a limited company is that its finances are separate from yours. This reduces your personal exposure to financial risk, so if the business fails (or is sued) then you are liable only for the face value of your share in the business.
    Another big advantage is the tax regime: companies pay corporation tax at 19 per cent on their profits. This can be significantly more tax-efficient than paying income tax on income, especially for higher-rate taxpayers (though as a director you will still have to find a way to take income from the company, such as salary or dividends, which will be taxed accordingly).

    Cons
    One downside is that a limited company involves much more administration. You must submit an annual company tax return and full statutory accounts to HMRC and are responsible for paying employees’ income tax and NI contributions too. Also, Annual Accounts and financial reports must be placed in the public domain.

    Each company structure has a set of pros and cons that make it appealing to everyone’s needs. If you are thinking of starting a business and require assistance in choosing the most optimal business structure for yourself, contact us at Wim accountants. We will provide bespoke advice based on your business necessities and even assistance in setting up the structure and running of your company. To contact us please call us on 02082271700 or via email at info@wimaccountants.com.

    Investors Relief

    What is Investors Relief

    Investors relief is a government scheme implemented to reduce the capital gains tax on the disposal of shares in a private trading company that is not listed on the stock exchange. It applies to shares that are issued on or after 17 March 2016 that are disposed of on or after 6 April 2019, as long as the shares have been owned for at least 3 years up to the date of disposal. It is not usually available if you or someone connected with you is an employee of the company. Qualifying capital gains for each individual are subject to a lifetime limit of £10 million.

    Qualifying Conditions

    To qualify for Investors’ Relief, you have to have subscribed for shares that meet the relevant qualifying conditions throughout the period you have owned them and that you have owned for at least 3 years. The main conditions that must be met are:
    • Share owned are all ordinary shares in the company
    • They were fully purchased in cash and were fully paid up when issued
    • the company is a trading company or the holding company of a trading group
    • none of the company’s shares are listed on a stock exchange
    • neither you nor any person connected with you is an employee of the company or a company connected with it

    Why consider?

    Investors Relief is highly attractive to investors, especially those who used up their lifetime Business asset disposal relief allowance, as its another form of tax relief they can use. It also is used as an incentive to attract investment into unlisted companies, allowing their growth, and contributing to a wider market for investing in not exclusive to those listed on the stock market.

    Comparison to other Tax reliefs

    The commercial background of any potential investment will determine the availability of reliefs but, where flexibility exists, individuals are likely to want to consider the relative pros and cons of different reliefs.

    EIS BADR IR
    Maximum investment £1m a year1 None None
    Income tax relief 30% None None
    CGT 0% 10% 10%
    Cap on gains relieved None £1m £10m
    Income tax loss relief Yes No No
    Reinvestment/ rollover relief Yes No No
    Ownership Less than 30% More than 5% 2 None
    Employee/ director involvement ‘Business angels’ only 3 Required Not permitted 3
    Holding period 3 years 2 years 3 years
    Use of pre-existing shares 4 No Yes No

    • EIS – Enterprise Investment Scheme
    • BADR – Business Asset Disposal Relief
    • IR – Investors Relief

    Making a claim

    Investors’ Relief must be claimed, either by the individual or, in the case of trustees of settlements, jointly by the trustees and the eligible beneficiary. You must claim to HMRC in writing by the first anniversary of the 31 January following the end of the tax year in which the qualifying disposal takes place. For qualifying share disposal in the tax year 2019 to 2020 (ending on 5 April 2020) a claim for Investors’ Relief must therefore be made by 31 January 2022. A claim to Investors’ Relief may be amended or revoked within the time limit for making a claim.
    If you or your business requires assistance in claiming Investors’ relief, please contact Wim Accountants at 02082271700 or info@wimaccountants.com.

    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.

    Tax Evasion and Tax Savings

    Tax Evasion

    While the majority of people abide by the law and pay their taxes, there are those who deliberately and dishonestly set out to defraud HMRC by evading tax, stealing public funds or cheating the system in other ways. Tax fraud undermines our economy, creates unfair competition for legitimate businesses and robs our vital public services of much-needed funds. It also supports other crimes that harm our communities.

    2020 saw a record fall in the volume of recorded tax fraud, including tax refunds, evasion of duty, evasion and VAT fraud. It fell by 93% from 2019 to 2020, from £721 million to just £54 million. There was a 51% drop in the volume of cases in 2020 as opposed to 369 in 2019.
    • £4.6 billion of the UK “tax gap” is due to tax evasion
    • Around £70 billion of revenue has been lost to tax evasion overall in the UK
    • 73,000 people reported to the UK tax evasion hotline in 2019-2020
    • Income tax accounts for as much as 23% of the government’s total revenue

    Criminal activities people commit to evade tax include:
    Deliberately underreporting or omitting income – Concealing any income is fraudulent. Examples include a business owner’s failure to report a portion of the day’s receipts or a landlord failing to report tenant payments.
    Keeping two sets of books and making false entries in books and records – Engaging in accounting irregularities, such as a business’s failure to keep adequate records, or a discrepancy between amounts reported on a corporation’s return and amounts reported on its financial statements, generally demonstrates fraudulent intent as it usually occurs due a manipulation in the data.
    Claiming false or overstated deductions on a return – HMRC is always vigilant when it comes to inflated deductions. Common examples range from claiming unsubstantiated charitable deductions to overstating travel expenses.
    Claiming personal expenses as business expenses – Assets, such as cars and computers, will have both business and personal use. Concise record keeping is required to display the business usage. Business usage is often overstated, leading to fraud.
    Hiding or transferring assets or income – This type of fraud can take a variety of forms, from simple concealment of funds in a bank account to improper allocations between taxpayers. For example, improperly allocating income to a related taxpayer who is in a lower tax bracket, such as where a corporation makes distributions to the controlling shareholder’s children, is likely to be considered tax fraud.
    Engaging in sham transactions – You can’t reduce or avoid income tax liability simply by labelling a transaction as something it is not. For example, if payments by a corporation to its stockholders are in fact dividends, calling them “interest” or otherwise attempting to disguise the payments as interest will not entitle the corporation to an interest deduction. As discussed below, it is the substance, not the form, of the transaction that determines its taxability.

    To Prevent Tax Evasion, HMRC took numerous approaches to increase the difficulty of committing fraudulent activities such as building checks and legislation, implementing controls within the HMRC system, and even working with businesses, notifying them if they are at risk of tax Fraud. If there is any indication an individual or business is committing tax evasion, a specialised criminal and investigation team will be dispatched to investigate the issue and if fraudulent behaviour is found, harsh repercussions are given.

    Tax Saving

    Although tax evasion is not allowed, there are numerous methods for individuals and businesses to save money on their tax payments. Companies such as Wim Accountants, which specialise in Tax, can save money for businesses by ensuring they are dealing with their tax the right way. The Tax accountants will ensure all reliefs and tax-saving programs you are eligible for are claimed, being able to claim benefits you missed from up to four years prior, for example, if your balance sheet showed losses the past few years you can claim it against your profits for the year you made a profit. All of this is done whilst following all HMRC guidelines to guarantee legal compliance.

    If you need assistance with your tax affairs, then please contact us at 02082271700 or info@wimaccountants.com

    Pension Allowance and Tax Savings

    What is my annual pension allowance and how can I avoid paying tax?

    Pension allowance is the amount you can pay into all your pensions in a tax year. If you are a high-income earner, earning an excess of £200,000 a year, you will be exceeding your annual allowance causing yourself to be taxed on the excess.

    1. How much do you need to earn before incurring a pension tax charge

    The amount your pension is taxed depends on your threshold income, plus your adjusted income. Your threshold income is your total net income for the year. Adjusted income is your total income plus the value of all employer pension contributions.
    You will not be subject to the tapering of the pension allowance and get your standard allowance of £40,000 per annum if the following criteria are met:
    • Your threshold income is below £200,000 or
    • Your threshold income is above £200,000 and your adjusted income is less than £240,000.
    Alternatively, if your threshold income is above £200,000 and your adjusted income is above £240,000, then your annual pension allowance will be subject to tapering and a pension tax charge.

    2. How your earnings are calculated

    Threshold income is, in effect, your net total income for the year. Included in your threshold income calculation are:
    • Salary
    • Benefit in kind
    • Bonuses
    • Dividend income
    • Interest on savings
    • Rental income
    • State, occupational and personal pension income
    • Earnings from self-employment and partnerships
    • Income received by an individual by the trust.
    Deducted from this total is gross relief at source personal pension contributions.
    Adjusted income is your total income plus the value of all employer pension contributions.
    When calculating if you must pay the pension charge, you also need to calculate if you have any unused allowances from the previous three years. You only pay the tax charge if you have insufficient carry forward allowance to offset the excess over the limit. If you have exceeded the limit, then you are taxed on the excess at your marginal rate of taxation.

    3. How the tax charge is calculated

    If both your threshold and adjusted income exceed their limits and you still have an excess after using up any unused allowances from the previous three years, your annual pension allowance of £40,000 is reduced for each £2 adjusted income exceeding £240,000 by £1.
    If your adjusted income is £312,000 and above, the annual pension allowance will be reduced to £4,000 per annum and in any case the minimum allowance is £4000.
    For example, if your pension contributions for 2020-2021 were £75,000. If the threshold income is £210,000 and the adjusted income is £275,000 and there are no unused allowances from the previous three years your tax charge will be:
    £275,000-240,000= £35,000.
    £35,000/2 = £17,500.
    The annual pension allowance is reduced to £22,500 (£40,000-£17,500).
    The excess pension contributions are £75,000-£22,500 = £52,500.
    Taxed at marginal rate of 45% = £23,625 tax charge.

    4. If your pension scheme can pay any pension tax due

    If the tax charge is greater than £2,000 you can ask your pension scheme provider to pay this on your behalf. Your scheme will make the payment in return for the appropriate reduction to your fund:
    • Money purchase scheme – the pension fund is reduced by the tax charge and any early withdrawal charges which may apply.
    • Final Salary scheme – the scheme calculates the reduction in benefits, but this always has to be just and reasonable.
    ‘Scheme pays’ is a mechanism by which your annual allowance charge can be paid out of your pension scheme, rather than by you personally. This means that you don’t have to find additional funds to pay the charge.
    An election needs to be received by the scheme administrator by 31 July following January in which the annual charge is declared on your self-assessment return. For example, for the tax year 2020-2021, the deadline would be 31 July 2022.
    It is your responsibility to ensure your pension scheme makes the payment on your behalf and if not, you must make the payment personally.
    If your liability is less than £2,000 you can request your pension scheme to make the payment on your behalf, but they don’t have to.

    If you need assistance with your pension tax affairs, then please contact us at 02082271700 or info@wimaccountants.com

    Research and Development Expenditure Credit scheme explained

    RDEC (research and development expenditure credit) is a UK government tax incentive designed to reward innovative companies for investing in research and development (R&D). It is targeted at large companies, but it is also accessed by SMEs in some circumstances.

    What is RDEC?
    RDEC is one of two R&D tax credit incentives offered by the UK government to promote private sector investment in innovation. The tax relief is for large UK companies that are subject to UK Corporation Tax, carry out qualifying R&D and spend money on those activities. SMEs are usually eligible for the SME R&D tax credit, which differs from RDEC: it offers a more generous tax credit rate and a wider eligible cost base. However, in certain circumstances, SMEs are prevented from using the SME incentive, and therefore claim through RDEC instead.

    Overview
    • An RDEC tax credit is worth 13% (Previously 12%) of your qualifying R&D expenditure.
    • The credit is taxable at the normal Corporation Tax (19%) rate which effectively means the benefit is worth 11p for every £1 you spend on qualifying R&D.
    • The benefit can be shown ‘above the line’ (ATL) – this means it is visible as income in your accounts.
    • The credit is offset against your tax liability or, in some circumstances, is payable in cash.

    Benefits of RDEC
    RDEC can be accounted for above the line in your income statement (also known as your profit-and-loss account), providing a positive impact on visible profitability in your accounts. This visibility in turn has a positive impact on R&D investment decisions.
    Since RDEC is independent of your company’s tax position, the benefit you receive is easier to forecast. This provides far greater stability and makes it easier for large companies to factor the relief into their investment decisions.
    Unlike its predecessor, the large company scheme (defunct as of 1 April 2016), RDEC also offers a cash credit for loss-making companies.

    What is the RDEC rate?
    The RDEC rate is 13%. However, because the RDEC rate is paid net of Corporation Tax, the RDEC effective rate you receive is worth 11p for every £1 spent.
    The RDEC rate was increased in the Spring 2020 Budget from 12% to 13%. This was the third time the RDEC rate has increased since its introduction, which is great news for companies using the incentive.

    RDEC qualifying activity
    RDEC uses the guidelines produced by the Department for Business, Energy and Industrial Strategy to define the activities that constitute R&D. These are sometimes referred to as the ‘BIS’ or ‘BEIS guidelines’ and apply to both RDEC and SME R&D tax credits alike. The definition of R&D for tax purposes is purposefully broad and applies to all companies whatever their size or sector.
    If your company is taking a risk by attempting to ‘resolve scientific or technological uncertainties’ then you may be carrying out a qualifying activity. If your company is creating new products, processes, or services, or modifying existing ones, there’s a good chance you’re carrying out qualifying R&D.

    Qualifying expenditure for RDEC is:
    • Staff costs, including salaries, employer’s NIC and pension contributions, as well as some reimbursed business expenses.
    • Money spent on Externally Provided Workers (EPWs) and some (limited) subcontractor costs.
    • Expenditure on materials and consumables like light, power and heat that are used up or transformed in the R&D process.
    • Some types of software costs.
    • Money paid to clinical trial volunteers.
    • Contributions to independent research.

    Filing RDEC In 7 steps:

    Discharge any liability to Corporation Tax for the accounting period. The gross RDEC rate (13%) is offset against your Corporation Tax liability for the period to which your R&D tax credit claim relates.
    Adjustment to reduce the net of the tax amount. To ensure that only the net amount of the credit is payable in cash, if the amount remaining after step 1 exceeds the net value of the credit (gross credit less Corporation Tax), the balance is withheld and carried forward for you to use in future periods.
    Limit to PAYE/NIC of R&D staff. The payment of the cash credit is subject to a cap based on the PAYE and NIC paid to HMRC relating to the employees included in your RDEC claim. Amounts over the cap can be carried forward for use in future periods.
    Discharge Corporation Tax liability for any other accounting periods. Before the credit is paid in cash, HMRC may offset it against any outstanding Corporation Tax owed for any other accounting periods.
    Elect whether to surrender for group relief. You can surrender up to the credit amount available at this step (as well as any amount restricted at step 2) to a group company to offset their tax liability. But you don’t have to do this; you can still receive a cash payment even if other companies in your group have tax liabilities.
    Discharge any other liabilities of your company with HMRC. Any amounts remaining at this step will be offset by HMRC against other taxes if amounts are outstanding. For example, overdue PAYE or VAT liabilities.
    Cash credit payable to company.

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

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