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.

    R&D CAP

    SME Repayment Cap April 2021
    Following the Budget Update on the 3rd of March, it is confirmed that a cap on the amount of cash payable to loss-making companies under the SME scheme is being introduced to prevent potentially fraudulent claims and abuse of the scheme by rogue companies. HMRC has identified entities specifically set up to access the scheme despite having no clear R&D and no prior legitimate activity in the UK. As such action is being taken to ensure that only genuine companies remain able to claim and benefit.

    R&D cash credit Cap R&D Tax Claims
    In a change from previous guidance, the cap will now apply to accounting periods starting on or after 1 April 2021, giving companies time to prepare for the changes.
    The cash credit is limited to £20,000 + 3x total PAYE & NIC liability of the company for the year. (Related party PAYE & NIC liabilities attributed to the R&D can be included within the cap.)
    From the definition of the cap above, it follows that if the repayment is below £20,000, then the claim is unaffected. In addition, there are further conditions that influence the applicability of the cap, as noted below:

    Cap exemption
    The claim can remain uncapped if both of the following two tests are met:
    • The company’s employees are creating, preparing to create or actively managing intellectual property arising from the R&D project.
    • The Company’s R&D related expenditure on work subcontracted to, or externally provided workers provided by, a related party is less than 15% of its overall R&D expenditure.
    Although this will allow greater flexibility and ensure that many claimants are still able to claim in full, there will remain a substantial proportion of companies limited by the cap, particularly larger companies that utilise smaller entities conducting R&D activities within the group. The new rules will particularly affect start-ups with little or no PAYE + NIC contributions, and who place significant reliance on subcontractors to carry out their R&D activities. Such entities often have limited budgets for IP investment and involve large R&D claims to enhance already substantial losses, in the hopes of surrendering these for a large cash credit. This form of the R&D incentive forms a lifeline for businesses that seek to shore up cash flow through this mechanism.
    HMRC has issued further guidance in respect of point a) clarifying that know-how and trade secrets are included in their definition of Intellectual Property, meaning the time consuming and expensive process of obtaining formal IP need not be undertaken. This will cover cases where companies are not able or do not wish, to protect the results of their R&D. How this will be monitored remains to be seen so it is recommended that companies maintain good records of their work and any relevant contracts.

    Conclusion
    Although many claimants aware of this incoming cap will not be constrained by the new rules or can begin to decide to accommodate it, there remains a large proportion who may not be aware of the nuances involved. It is important to ensure that anyone who may be affected is notified about the possibility of a restriction in the potential relief available.

    Why has the SME R&D tax credit cap been reintroduced?
    To understand the proposed cap, we need to look back to the start of the millennium, when the first R&D incentive was introduced. That initial scheme, while still highly beneficial, came with a restriction – any payable tax credit was capped at the total of a company’s joint PAYE and NIC liability for the period. This mainly affected loss-making and low-profit companies seeking to make use of the new scheme.
    It wasn’t until over a decade later in 2012 that this cap was removed. At the same time, the minimum spend threshold of £10,000 was also abolished, meaning a huge boost in the number of innovative companies that could begin to claim under the scheme.
    HMRC saw a boom in the number of SMEs claiming and the number of payable R&D credits increased by 22% between 2016 and 2018 to reach £2.2 billion. R&D tax reliefs were proving to be effective, and the government remained committed to its target of R&D investment reaching 2.4% of GDP by 2027.
    Notwithstanding the evident effectiveness of the scheme, HMRC began to identify, and tackle, a growing number of fraudulent claims for payable tax credits on R&D work carried out overseas. This fraud totalled more than £300 million and, as a result, a reintroduction of the cap was proposed in the 2018 budget.

    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

    Enterprise Investment Scheme (EIS)

    Enterprise Investment Scheme (EIS)

    What is EIS?

    EIS uses tax reliefs to incentivise private investors who recognise that significant returns are achievable if they are willing to risk their funds by investing in early-stage businesses. Early-stage businesses often struggle to raise equity finance, so EIS has established itself as a trusted and crucial source of equity funding. The schemes, therefore, play an important role in facilitating the smooth flow of risk equity capital from private individuals to early-stage businesses.

    The Enterprise Investment Scheme (“EIS”) is a Government scheme that provides a range of tax reliefs for investors who subscribe to qualifying shares in qualifying companies.

    How the scheme works

    EIS is designed so that your company can raise money to help grow your business. It does this by offering tax reliefs to individual investors who buy new shares in your company.

    Under EIS, you can raise up to £5 million each year, and a maximum of £12 million in your company’s lifetime. This also includes amounts received from other venture capital schemes. Your company must receive investment under a venture capital scheme within 7 years of its first commercial sale.

    You must follow the scheme rules so that your investors can claim and keep EIS tax reliefs relating to their shares. Tax reliefs will be withheld or withdrawn from your investors if you do not follow the rules at least 3 years after the investment is made.

    Are you eligible for EIS?

    both the company and investor must fulfil certain additional conditions to benefit from any of the tax reliefs under EIS. EIS is one of the more complex tax benefit options available. Before you think about applying, check that you meet the requirements, either as a company looking to attract an investor under the EIS scheme or as an investor hoping to profit from tax benefits.

    Investor

    If you are an investor, you must satisfy the following requirements to qualify for EIS:

    • Your interest in the company must be no more than 30%
    • You must not be an employee, partner or ‘paid director’ of the company
    • No partner or associate of yours may have interests in the company (including your spouse, relatives, or previous business contacts)
    • You must not have any form of preferential shares
    • You must not have any form of controlling interest in the company
    • You must not be using the scheme as a form of tax avoidance.

    There is one exemption to the rule disqualifying connected persons employed in the company. This exemption aims to encourage investment from business angels in the scheme, despite their roles as directors of the company. Business angels may still qualify for tax relief despite being paid for their services, provided that the angel director was not connected to the company at the time of issue of the shares. The rules for business angels are strict, however, so its advisable to seek advice from HMRC.

    Company

    For an investor to be able to claim EIS, the company they are investing in must meet the EIS eligibility requirements and maintain their EIS eligible status for the duration of the shareholding. To be considered an EIS eligible company, the following conditions must be met:

    • the company must have a permanent establishment in the UK
    • the company must not be listed on a recognised stock exchange, or plan to be listed, at the time of issuing shares
    • the company must not have control over another company, except any qualifying subsidiaries
    • no other company may have control of the qualifying company or have 50% or more of its shares
    • the company does not expect to close
    • the qualifying company and any of its subsidiaries must not have gross assets which exceed more than £15 million in value before any shares are issued, and not more than £16 million immediately after
    • the company must have less than 250 full-time employees at the date of issue of the shares.

    In addition to these conditions, the investment must be used for a qualifying trade. Most business activities are acceptable, but some of the excluded trades are listed below. Should these excluded trades represent over 20% of the business’ daily activities, this would render the company ineligible for the scheme. Examples of excluded activities are:

    • Coal or steel production
    • Farming or market gardening
    • Forestry
    • Legal or financial services, including banking and insurance
    • Property development or leasing
    • Production of fuel
    • Energy generation
    • Exporting electricity
    • Operating hotels or care homes
    • Providing services to a non-qualifying business
    • Dealing in futures or securities.

    HMRC will evaluate your daily business activities to determine whether your company fulfils the qualifying trade requirement. If your company deals in any of the excluded trades above, you should consider seeking advice from HMRC on your eligibility for the scheme. You can do this by seeking ‘advance assurance’.

    Enterprise Investment Scheme

    • In 2020 to 2021, 3,755 companies raised a total of £1,658 million of funds under the EIS scheme. Funding has decreased by 12% from 2019 to 2020 when 4,165 companies raised £1,890 million.
    • As the Covid-19 pandemic impacted the UK economy, EIS investment across the first 3 quarters of 2020 to 2021 remained below the level seen across the same quarters of 2019 to 2020. However, in the last quarter of 2020 to 2021 EIS investment rebounded above the last quarter of 2019 to 2020.
    • Around £358 million of investment was raised by 1,370 new EIS companies in 2020 to 2021.
    • In 2020 to 2021, companies from the Information and Communication sector accounted for £571 million of investment (34% of all EIS investments).
    • Companies registered in London and the Southeast accounted for the largest proportion of investment, raising £1,078 million (65% of all EIS investment) in 2020 to 2021.

    If you need assistance in applying EIS, please contact us at 02082271700 or info@wimaccountants.com.

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

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