Everything You Need To Know About Business Tax Scilly Business Week - - PowerPoint PPT Presentation

Everything You Need To Know About Business Tax

Scilly Business Week – 6th March 2017

Income Tax Rates – 2017/18 v 2016/17

2016/17 (Current year) Income Tax 2017/18 Income Tax Personal Allowance - £11,000 Higher-rate threshold - £43,000 Additional-rate threshold - £150,000 Personal Allowance - £11,500 Higher-rate thresholds - £45,000 Additional-rate threshold - £150,000 Highest-rate band - £100,000 to £122,000 Highest-rate band - £100,000 to £123,000 Dividend allowance - £5,000 Personal Savings allowance - £1,000/£500 Dividend allowance - £5,000 Personal Savings allowance - £1,000/£500

• Honouring Osborne commitment to increase personal allowance to £12,500

and higher-rate threshold to £50,000 by the end of this Parliament.

• Biggest increase in the higher-rate threshold since 1989.

2017/18 Tax Rates

Income Tax

• Personal allowance - £11,500
• Basic rate band - £11,501 to £45,000 (non-dividend

income taxed @ 20% - dividend income in excess of £5k taxed @ 7.5%)

• Higher rate band - £45,000 to £100,000 and £123,001 to

£150,000 (non-dividend income taxed @ 40% - dividend income taxed at 32.5%)

• 60% band - £100,001 - £123,000 (non-dividend income

taxed @ 60% - dividend income taxed at 40%)

• Additional rate band - £150,001 + (non-dividend income

taxed @ 45% - dividend income taxed @ 38.1%)

Current Tax Rates (cont)

National Insurance Contributions (NIC)

0% - £0 to £8,164 12%/13.8% - £8,164 to £45,000 2% - £45,001 +

Class 1 NIC

£2.85 per week

Class 2 NIC

0% - £0 to £8,164 9% - £8,164 to £45,000 2% - £45,001 +

Class 4 NIC

Current Tax Rates (cont)

Corporation Tax

• Currently 20%
• Under current proposals set to decrease to 19% with

effect from 1 April 2017 and 17% from 1 April 2020

• Should we expect further reductions?

Ltd Co v Sole Trader/Partnership– Overview of Tax Position

Sole Trader/Partnership Limited Company Subject to income tax and class 2 and 4 NIC on profits/share of profits (if a partner). Company pays corporation tax (currently 20%) on profits. Can withdraw cash with no associated tax liability. Income tax on withdrawal of net profits – referred to as ‘double layer of tax’. Can borrow from the business with no associated tax liability. Dividends subject to income tax if in excess of £5k pa – not recent changes. Tax charges arise on borrowing from the company.

Tax - Which structure?

Limited Company

• Higher-rate and Additional-rate shareholders
• Entirety of profits net of corporation tax do not need to be

extracted

• Facilitates sharing of income around different members of a

family

• Enable pension saving through a company
• Outside investment is required
• Open to staff equity incentivisation
• Access tax reliefs only available to companies
• Easier for succession
• Non-tax considerations – limited liability (can be achieved

through an LLP), perceived kudos, facilitates protection of capital assets from commercial risk of the trade

Tax - Which structure?

Sole trader/Partnership

• Basic-rate taxpayers
• Outside investment is not required
• Non-tax considerations

⁻ Require reduced administration ⁻ Don’t wish information to be public

Changing structures

• Structures can be changed relatively easily
• Specific tax reliefs exists to aid both incorporation and

disincorporation

• Important to regularly review structures – especially re

incorporation given announced focus.

• Corporate groups (moving from one company to a

group)

– Risk management – separating valuable assets from the inherent liabilities of a trade – Inheritance tax and capital gains tax – separating investment from trade

Corporate restructuring

HoldCo TradeCo PropCo/InvestCo

Company – Tax efficient extraction

Small salary (to ensure qualification for state benefits) and dividends still the efficient

• Reduced efficiency due to dividend tax changes effective from 6 April

2016

• Make use of £5k pa dividend allowances
• Remember employment allowance

Pension contributions

• Deductible for corporation tax purposes and not taxable on

individual

• Even more desirable given changes to IHT treatment and pension

freedoms

Loans from company

• Corporation tax charge (32.5%) that is repayable when loan is repaid
• Taxed on any interest benefit – low tax charge given low interest

rates (3%)

Beware changes re liquidations

Corporation tax reliefs

• Research & Development (R&D) tax relief
• Patent box
• Creative industry tax reliefs
• Land Remediation Relief

Raising Funds

• HMRC approved schemes to facilitate third party investment

– Enterprise Investment Scheme

• Investors receive 30% income tax relief on qualifying

investment

• Capital gains exemption on any gains realised on the shares

after a 3 year holding period

• Capital gains deferral relief

– Seed Enterprise Investment Scheme

• Investors receive 50% income tax relief on qualifying

investment

• Capital gains exemption on any gains realised on the shares

after a 3 year holding period

• Capital gains reinvestment relief – gains up to 50% of

investment are exempt (effective tax saving on investment of 64%)

Raising Funds (cont)

• Employee share ownership

– Beware! Onerous employment tax rules – Approved HMRC schemes

• Enterprise Management Incentive (EMI) scheme – option based

incentivisation

• Company Share Option Plan (CSOP) for larger entities
• Grant funding

Always reassess!

• Regularly review the business structure

– Objectives – Legislation change – Business performance

• Seek experienced advice

– RRL pride ourselves on adding value through experienced advice

Property/Real Estate

Income tax – Overview

• Net rental profits subject to income tax
• Calculation = rental income less tax allowable expenditure
• Accruals basis – income is recorded when it is earned (not

received) and expenses recorded when they are incurred (not when they are paid)

Income tax – Allowable expenditure

• ‘Wholly and exclusively’
• Examples – letting agent fees, accountancy fees,

insurance costs, repairs and maintenance costs, ground rent, service charges, utility costs, advertising costs, loan interest etc.

• Specific tax deductions – 10% wear and tear allowance

for ‘furnished lets’ (abolished from 6 April 2016 i.e. 2016/17 onwards), peculiar rules for ‘furnished holiday lets’.

• Non-deductible – private use elements, capital

expenditure (improvements, costs associated with buying and selling the property), loan repayments etc.

Capital gains tax – Overview

• Tax on value uplift realised on disposals (sales and

gifts).

• Capital gain/loss calculated

– Sale proceeds; less – Acquisition cost; – Associated costs of disposal (legal fees, estate agents fees etc); – Associated costs of acquisition (legal fees, stamp duty etc); and – Capital improvement expenditure.

• Gains above annual exemption taxable in year of

disposal (exchange), losses realised against gains realised in the year or carried forward to gains realised in future tax years.

Capital gains tax – Tax rates

• Tax free – capital gains annual exemption - £11,300 in

2017/18

• 18% on gains within basic rate band
• 28% on gains within other tax bands
• Entrepreneurs’ Relief (10% on lifetime gains up to

£10m)

– Unlikely to be available unless a Furnished Holiday Let (FHL).

• Principal Private Residence (PPR) Relief

– Potentially available if you have used the property as a residence during the period of ownership.

Inheritance tax – Overview

• Properties held at death valued at subject to 40%

inheritance tax where value of estate exceeds available nil-rate band (currently £325,000).

• Spousal exemption and transferrable nil-rate band.
• No beneficial reliefs available (unlike for property

development businesses).

• Lifetime gifts – but capital gains tax problem.

– Ways of gifting rental properties during lifetime and avoiding a capital gains tax charge – involves using trusts.

• New ‘Residence’ Nil-Rate Band.

Inheritance tax

• Residence Nil-Rate Band

– Gradually introduced from 6 April 2017

• £100,000 – 2017/18
• £125,000 – 2018/19
• £150,000 – 2019/20
• £175,000 – 2020/21

– Residential property (used as a residence) needs to pass to direct descendants

• Beware passing to discretionary trusts

– Generally not advisable to use on 1st spouse’s death – Restricted if estate value exceeds £2m

• Planning opportunity

Structuring – Overview

• Company v personal
• Rental income realised in a company subject to corporation

tax

– 20% small companies rate (reducing to 19% on 1 April 2017 and to 18% on 1 April 2020).

• Double tax charge on extracting net profits

– Options – salary, dividend income (subject to income tax) – note dividend tax changes.

• Unlikely to be beneficial for basic-rate tax payers
• Beneficial to higher-rate tax payers who don’t need to

extract all of net profits i.e. can roll-up income in the company.

• Likely Capital Gains Tax and Stamp Duty Land Tax

implications on transferring let properties into a company.

Property dealing & development

• Gains realised on property acquired with the intention
• f making a profit are subject to income tax.
• Gains realised on property developed with the

intention of making a profit are subject to income tax.

• If deemed to be trading, the deemed income could

also be subject to Class 4 National Insurance Contributions (and weekly Class 2 National Insurance Contributions payable).

• Common misconception that such gains are subject to

capital gains tax.

• Use of company may be way of mitigating such

exposure.

What’s new?

• Stamp Duty Land Tax – 3% surcharge for ‘additional

properties’ from 1 April 2016

• Restriction on income tax relief for finance costs for

higher-rate income tax payers

– Phased implementation over 4 years commencing on 6 April 2017 – 25% in 2017/18, 50% in 2018/19, 75% in 2019/20 and 100% in 2020/21 onwards

• Abolishment of ‘wear and tear allowance’ from 6 April

2016

• Increase in ‘rent-a-room’ exemption from £4,250 to

£7,500 on 6 April 2016.

Finance Costs Restriction

Restriction on higher-rate tax relief for finance costs

• Commences 6 April 2017

– 25% reduction in each tax year until 6 April 2020

• Beware change of calculation method

Example:

2016/17 2020/2021 Rental income £10,000 £10,000 Less: Finance costs (£5,000) Net rental profit £5,000 £10,000 Higher-rate tax £2,000 £4,000 Less: Tax relief on finance costs (£1,000) Associated tax liability £2,000 £3,000

Other Important Points

Capital allowances

• Be sure to make all available claims
• Usually not adequate advice on transactions involving

commercial property – Beware!

Business Property Renovation Allowance (BPRA)

• some urgency required – 1/6 April 2017 deadline for claims

ATED

• Applies to companies owning residential property with a

market value at 1 April 2012 or date of acquisition

• Exemptions
• Returns due by 30 April 2017 for 2017/18 tax year

Transactions in Land

• “main purpose, or one of the main purposes”

Employers

• National Minimum Wage increases
• Apprenticeship Levy

– Employer’s with an annual pay bill of over £3m – 0.5% of pay bill

Age group Current rates From 1 April 2017 25 and over £7.20 £7.50 21 - 24 £6.95 £7.05 18 -20 £5.55 £5.60 Under 18 £4.00 £4.05 Apprentice £3.40 £3.50

Employers

• Salary sacrifice income tax and NIC advantages

removed

– Exceptions for child care, pension contributions, pensions advice, Cycle to Work, and ultra-low emission cars – All arrangements in place before 6 April 2017 protected for 1 year – Arrangements in place before 6 April 2017 relating to cars, accommodation and school fees protected for up to 4 years

Corporation Tax

• Use of losses made more flexible from 1 April 2017

– New rules will apply to all losses carried forward – Change 1: Restriction on use of cfwd losses

• Use of cfwd losses restricted to 50% of profits where

company’s/group’s profits exceed £5m – Change 2: Increased flexibility of use of cfwd losses

• Rules around use of cfwd losses is onerous and illogical
• Post 31 March 2017, any losses can be used against any

profit in the company or in the group

• Pre – 1 April 2017 losses are relieved under the current

rules

Making Tax Digital

• 6 (!) consultations closed for responses on 7 November

– Responses published on 31 January 2017

• Is it really Making Tax Digital?

– Much more a management accounting/book keeping/recording issue

• Driven by misconception that tax take is significantly

reduced by careless tax payer errors

– Only focuses on one half of the story

• MTD imposes new quarterly filing and potentially payment
• bligations for businesses and landlords.

– 1st phase affects small unincorporated businesses and landlords – 6 April 2018. – 2nd phase is for VAT – 3rd phase will affect companies, although not until 2020

Making Tax Digital (cont)

• End of the tax return?

– Requirement to prepare year end accounts in order to reconcile quarterly payments and claim various reliefs and make accounting adjustments. – Requirement to file a year end declaration, instead of a Self Assessment (SA) return/ Corporation Tax (CT) return. – HMRC will populate some figures

• Taxpayers will need to check that pre-populated data is correct.
• Digital record keeping

– HMRC to provide free software – Reality is that MTD will be expensive for the vast majority of businesses

• Limited exemptions

– £10k turnover

Wills & Powers of Attorney

• Important for business owners to have a Will in place

– Ensures assets are distributed as per wishes – Enables inheritance tax planning – Sole-traders/one director companies - enables executors to continue trading

• Lasting Power of Attorney

– Important to manage the event of incapacity – Health & Welfare, Property and Financial Affairs – Particularly for sole-traders and one director companies

Contact details

Steve Maggs LLB CTA

Tax Partner Robinson Reed Layton Truro and Penzance T: 01872 276116 (Truro) T: 01736 339322 (Penzance) steve.maggs@rrlcornwall.co.uk