Tax Planning for your Business
It is always worthwhile considering some of the options available to help mitigate the business’s tax liability. In
addition, there are some changes to the tax legislation which have to be taken into consideration.
Please note that this is a general overview (some of the sections will not be relevant to your circumstances)
Changes in the main rate of Corporation Tax
The main rate of Corporation Tax will remain at 20% from 1 April 2016.
The main rate will be reduced to 19% from 1 April 2017.
The main rate will be reduced to 17% from 1 April 2020.
Corporation Tax: Due date of payment
Companies are required to pay their Corporation Tax liability within nine months and one day following the end
of the accounting period.
The government announced that it would bring forward corporation tax payment dates for those companies
that have taxable profits over £20 million. These companies will be required to pay the tax in instalments in the
third, sixth, ninth and twelfth month of the year.
This new payment schedule will apply to accounting periods starting on or after 1 April 2019.
To calculate the instalment payments, the company will have to estimate its Corporation Tax liability for the
accounting period, factor in any penalty tax payable on loans to participators (if it is a close company), and
deduct all reliefs and set-offs to arrive at the company’s liability. The accounts for the previous year will
probably have to be used as a reference.
The estimate of the Corporation Tax liability may undoubtedly change as the accounting period progresses
which will necessitate a recalculation of each instalment payment based on the revised figure. Top-up payments
may be required in order to cover the shortfall in previous instalments.
Close company loans to participators
The government will increase the penalty tax payable by close companies on loans to participators
(shareholders) and/or their associates from 25% to 32.5%. This rate of 32.5% applies to loans made on or after 6
April 2016.
The government is increasing the tax burden on companies which issue loans to their shareholders by keeping
the tax rate aligned with the higher rate of tax charged on dividend income.
The penalty tax is payable on the loan which is still outstanding 9 months and 1 day following the end of the
accounting period in which the liability arose. A repayment or waiver of the loan results in a rebate of the
penalty (however, there is a potential tax and NI charge on the participator).
A ‘close company’ is defined as a company controlled by (more than 50%):
1.
2.
Five or fewer shareholders (including the interest of their associates), or
Any number of shareholders who are also directors
Business Restructuring
Where you are currently operating as a sole trader and the overall tax bill is so significant that it impacts on the
cash flow of the trade it might be in your interest to consider restructuring the business:
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 Employ family in the business
 Introduce family into the business as partners – operate as a partnership/LLP
 Incorporate the business – operate as a limited company
Where you are running your business as a limited company you might want to consider issuing share capital
and/or gifting some of your existing shares to your family (spouse/civil partner, children and/or grandchildren)
as a tax saving measure for Income Tax and Inheritance Tax.
Alternatively, you may want to stop trading as a limited company and subsequently run the same business in
your own name as a sole trader.
Please note that the government is planning to introduce legislation, from April 2016, which will treat certain
distributions from a company to the shareholders, following a winding up of the company, as income payments
rather than capital distributions.
Distributions in a Winding up of a Company
The owners of a company, who have decided to cease trading activities, and have no viable option of either
transferring/selling the shares or the business, can arrange to wind up the company.
The distributions made, following the completion of the wind up, are treated as capital payments liable to
Capital Gains Tax (CGT). CGT is payable, after the Annual Exemption (AE) of £11,100 on any chargeable gains at
the standard rates of 10/20%.
CGT Entrepreneurs’ Relief (ER) is available at the rate of 10% on the chargeable gain where it is a trading
company or the holding company of a trading group.
However, in the Autumn Statement 2015 they announced the introduction of a new Targeted Anti-Avoidance Rule
(TAAR) that will apply to treat certain capital payments made to shareholders from 6 April 2016 following a
winding – up as if they were distributions liable to Income Tax as Dividends.
This treatment arises where all three conditions are met:

The company has to be a close company, or was a close company in the two years prior to the winding
up

The individual, within two years of receiving the distribution, continues to be involved in a trade or
activity which is similar to the trade or activity carried on by the wound up company. The individual may
carry out the trade directly, through a company he or she controls, or through a person with whom he
or she is connected

The main purpose or one of the main purposes, of winding-up the company is the obtaining of a tax
advantage. The main question which HMRC will address is whether the person continues in some way
the same or a similar trade or activity
Instead of being liable to CGT at the special rate of 10%, the shareholder will be liable to Income Tax at the
basic/higher/additional rates of 7.5/32.5/38.1% respectively.
Relevant Life Policy for Directors/Employees
A Relevant Life Policy (RLP) offers real tax advantages for your business and the individuals who are covered. A
RLP provides a lump sum death benefit on the death of an employee/director to their relevant dependents. The
tax benefits of the policy are:
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
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The premiums are allowable as business expenses
The premiums are not reportable as P11D benefits
No liability to employee and employer National Insurance Contributions arises
The premiums are not treated as pension contributions
The value of the policy does not form part of an estate for the purposes of Inheritance Tax
The pay-outs from the policy to dependants are exempt from tax
However, the policy has to be set up via a Discretionary Trust. The Trust may have to pay Inheritance Tax (IHT)
when pay-outs are made and/or every 10 years from the date the trust is set up.
In addition, the business has no financial entitlement to the pay-outs.
If you are interested in setting up a RLP we strongly suggest that you get in touch with a certified Independent
Financial Adviser (IFA) who can guide you through the process.
Employer Pension Contributions
Employer pension contributions for directors/employees in the business are an attractive way of reducing the
taxable profits. The employer payments help in maximising the Annual Allowance (AA) for pension payments.
They are a tax free benefit (for the director/employee) which the company can claim as tax deductions and no
liability to National Insurance Contributions arises.
It is worth emphasising that contributions must be physically paid before the end of an accounting year end to
obtain tax relief, therefore, you cannot “accrue” contributions.
The AA is a limit on the total amount of tax – free pension savings to all arrangements that can be made in each
tax year. The AA is currently £40,000 per annum and it applies to personal, employee and employer
contributions. Where the annual pension savings exceed the limit in the current tax year, it is possible to carry
forward any unused AA from up to three previous years. If this limit is also exceeded then a pension tax charge
will be applied which would effectively cancel out any tax relief originally claimed.
Workplace Pension Reforms – Auto Enrolment
Please note that the government is introducing regulations which necessitate that businesses must introduce a
workplace pension scheme which is available to their existing (and future) employees. It is a mandatory process
with the deadline for each business based on their PAYE reference number. You can find information on your
‘staging date’ by referring to the following link:
http://www.thepensionsregulator.gov.uk/automatic-enrolment.aspx
Businesses can either setup their own employer pension scheme or they can register with the government’s
scheme, NEST. If the business already has an existing pension scheme you need to ensure that it complies with
the new regulations.
We can help with Auto Enrolment as part of our payroll service – contact Lucy Danon for more info.
Employee Share Options
Share option schemes are an alternative form of remuneration for directors and employees in a company, in
addition to salaries, bonuses and benefits in kind. They grant the individual(s) concerned a stake in the future
success of the company.
Essentially, share option schemes can be either approved or unapproved. Unapproved schemes provide the
most flexibility in that the employee and company do not have to meet any specific conditions. Furthermore,
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there are no restrictions in place concerning the holding period and the size of the options granted. However,
there are no tax advantages for the employee.
By contrast, approved schemes [Company Share Option Plan (CSOP) and Enterprise Management Incentives
(EMI)] are more tax advantageous for an employee provided that the conditions for the employee and company
are complied with.
Tax Free Incentives for Employees
There are various payments or assets which an employer can provide to employees which are of some benefit
for the employees and are free of P11D reporting requirements.
The advantages of maximising tax free benefits are as follows:
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The employer can claim an allowable deduction for tax purposes
No reporting requirements
No Income Tax or Class 1 NIC liability (employee/employer)
No Class 1A liability on the employer
The options outlined are by no means exhaustive as there are other tax free benefits which employers can utilise:
Employer Provided Phones
The provision of one mobile phone to an employee is an exempt benefit for tax purposes regardless of the level
of private use on that phone.
This is on the basis that the contract is in the name of the company and only the company pays the costs arising
on the phone.
The exemption covers the cost of the phone itself, any rental/line charges, and the cost of calls made (business
and private)
Health Screening and Medical Check Ups
No tax liability arises if the employer provides a health – screening assessment or a medical check – up to
employees.
There should only be a maximum of one health – screening assessment and one medical check – up in any tax
year to qualify for the tax exemption.
Cheap Loans
Generally, if an employer lends to an employee money interest – free, or at a rate of interest below the
“official” rate, the employee is charged to tax on the ‘beneficial loan.’
However, there is no tax charge if the total of all interest – free loans to an employee does not exceed £10,000
at any time in the tax year.
As a loan is a form of capital, it cannot be claimed as a deduction for tax purposes by the employer. However, it
can serve its purposes as a form of ‘short term’ funding for employees.
Entertaining Employees
Annual parties at Christmas or other functions, such as an annual dinner dance, which are open to staff
generally and which cost no more than £150 per head to provide are exempt from tax.
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The key is that the party/function is something which occurs once every year and is not casually occurring at
frequent intervals.
The total cost of providing the party or function, and any transport or accommodation incidentally provided is
taken into account in calculating the “cost per head.”
Gifts to Employees
The provision of gifts to employees as part of an annual or seasonal event (example, Christmas holidays) or
personal event (example, birthday, engagement) is not liable to Income Tax and there are no Class 1 National
Insurance charges (employee or employer).
This is on the basis that the cost of each gift does not exceed £50 and it is not cash (or a cash voucher). Noncash vouchers are covered by this exemption.
From 6 April 2016, there will be an annual cap of £300.00 (a minimum cost threshold) where more than one
trivial benefit is provided to directors or office – holders of a close company (including a member of their family
or household).
Long Service Awards
As a general rule, a cash payment to an employee to mark their long service with a business is taxable with their
earnings.
However, non – cash awards are not reportable for tax purposes if both of the following conditions are in place:

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The award marks at least 20 years of service by the employee, and
The employer has not made another long – service award to the same employee within the previous ten
years
The award should not exceed £50 per year of service (therefore, £1,000 for 20 years of service).
Employer Provided Childcare
Under the existing legislation tax – free childcare is available for members of staff where their employer
provides them with ‘qualifying childcare.’ This can consist of childcare vouchers and/or directly contracted
childcare.
Where an employee joins an employer – supported scheme after 6 April 2011, the provision of ‘qualifying
childcare’ is exempt from Income Tax and National Insurance contingent on their earnings from the employer:
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£55 per week for basic rate taxpayers
£28 per week for higher rate taxpayers
£25 per week for additional rate taxpayers
However, from early 2017 a new tax – free childcare scheme will be introduced by the Government which will
replace the existing employer provided scheme. Under the new scheme parents will have to open a special
online account with National Savings & Investments to fund their childcare expenses.
As part of the transition to tax-free childcare, employer – provided childcare will remain open to new entrants
until April 2018. After April 2018, employer – provided childcare will not be available for new entrants, but
existing members may continue for as long as they remain with the employer and their employer continues to
offer the scheme.
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Alternatively, existing members can opt out of the employer – provided scheme, setup a childcare account, and
contract directly with the childcare provider.
Employers can contribute to the employee’s childcare account; however, any payments made by an employer into
the account will be classed as earnings and liable to Income Tax and Class 1 National Insurance Contributions.
If you have members of staff who might benefit from tax – free employer provided childcare you should put
measures in place before the start of 2017.
Taxation of Termination Payments to Employees
From April 2018, employers will be liable to pay employer Class 1 NICs on termination payments which exceed
the threshold of £30,000.00, however, termination payments will remain exempt from employee Class 1 NICs.
Employees are liable to Income Tax on the payments which exceed £30,000.00.
It must be emphasised that the exemption of £30,000.00 will only be available on termination payments to
employees i.e. compensation for the loss of employment. Contractual payments or payments to a departing
employee which relate to past service (golden handshakes) are treated as earnings liable to Income Tax and
Class 1 NICs (employee and employer).
Vehicles for Directors/Employees – Double Cab Pick-Ups
A remuneration package for an employee or director can often include the unrestricted private usage of a
company car. Where company cars are being issued to members of staff you might want to consider, purely
from a tax saving perspective for the business and the individual(s) concerned, double cab pick-ups as an
alternative.
Under the legislation for P11Ds, VAT and Capital Allowances (CAs), HM Revenue & Customs define double cab
pick-ups as commercial vehicles for tax purposes.
Therefore, the business can recover the VAT incurred on the purchase of a double cab pick-up. Double cab pickups are entitled to the 100% Annual Investment Allowance (AIA) when claiming CAs on the VAT exclusive cost of
the vehicle.
In addition, the P11D benefits for a double cab pick-up are the flat rate charges for a company van. The flat rate
charges are less onerous than the car and fuel benefits for a company car which are based on the vehicle’s CO 2
emission, list price, and fuel type. If a company van is made available to an employee for unrestricted private
use, the P11D scale benefits (for 2016/17) are:
Van Benefit
Fuel Benefit
Per Annum
3,170.00
598.00
Pool Cars/Vans
P11D benefits will not arise where employees/directors are using vehicles which qualify as ‘pool cars/vans.’ This is
where the vehicle is only available for business purposes and is not allocated to any one employee or director.
When the vehicle is not being used, it should be kept at the business premises with the keys in the custody of a
designated person. In addition, the business will have to keep mileage logs which have to be updated for every
journey undertaken, with the logs reviewed by another individual on a regular basis.
All of the following conditions have to be satisfied in order for no P11D benefit to arise:
1.
Made available to, and actually used by, more than one of those employees
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2.
3.
4.
5.
Made available, in the case of each employee, by reason of their employment
Not ordinarily used by one of those employee to the exclusion of others
Any private usage by an employee was merely incidental to the remainder of their usage
Not normally kept overnight on or in the vicinity of any residential premises of the employee
Where a car is concerned, private usage extends to ordinary commuting
Employing family members
As a sole trader, partner in a partnership, or director of a company, you may employ your family (for example,
spouse and/or children) in the business. For example, you can employ your children just to give them work
experience which they can put on their CV or to give them some cash in their pocket.
In order to obtain tax relief for the salary paid (and any employer NIC paid) the focus should be on what your
business gets out of the arrangement. It does not have to be a senior position or high tech role. The salary paid
should be at an appropriate level for the type of work done, i.e. what you would pay someone who was not a
family member or relative.
In addition to the commercial aspect, you should also consider the reporting through payroll for PAYE. Any
salary paid to an employee is now reportable to HM Revenue & Customs electronically using online payroll
software.
From the point of view of the family member, for 6 April 2016 onwards, a UK resident (regardless of age) is
entitled to a Personal Allowance of £11,000. No Income Tax is payable where the gross salary is covered by the
Personal Allowance (subject to any other income for the tax year).
Overall, you have to be able to demonstrate that the employment is genuine, has proper commercial substance
and a salary is actually paid to the family member(s).
Capital Allowances: Annual Investment Allowance
The Annual Investment Allowance (AIA) gives 100% tax relief for capital expenditure on qualifying plant and
machinery which is purchased and used wholly and exclusively for business purposes. The AIA is currently
£200,000 per annum from 1 January 2016.
Capital Expenditure
You can claim Capital Allowances on the incurring of capital expenditure where it is, for example:
a) Vans, lorries, trucks, crane and diggers
b) All kinds of business machinery, tools and equipment
c) Double cab pick – ups with a payload of one tonne or more
d) Integral Features and qualifying fixtures & fittings
Fixtures & fittings are also eligible provided that they are performing a function in the trade and not merely part
of the setting (i.e. do not retain a separate identity).
Please note, however, that not all assets qualify for 100% tax relief under the Annual Investment Allowance
(AIA). For example, motor cars are only eligible for a much lower “written down allowance” of 8% or 18%
depending on the CO2 emission rating of the vehicle.
Method of Acquisition
If you are going to acquire an asset how is the business planning to finance the purchase? Is it an outright
purchase or via a loan? Here is a brief overview of the various methods of acquisition and the tax relief
attributed to each:
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Outright purchase – no tax deduction for depreciation, however, Capital Allowances (CAs) can be
claimed as a tax deduction
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Loan – no tax deduction for depreciation, however, the interest payments and CAs can be claimed as
tax deductions
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Operating Lease [hiring of an asset] – rental payments can be claimed as a deduction, however, no tax
relief can be claimed on the capital element of the asset
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Finance Lease – depreciation and interest payments can be claimed as tax deductions, however, no
CAs can be claimed
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Hire Purchase – no tax deduction for depreciation, however, the interest payments and CAs can be
claimed as tax deductions
Where a car is acquired by way of a Finance Lease or Operating Lease, the tax deduction in the Profit & Loss
account is restricted by 15% where the CO2 emission of the vehicle exceeds 130 g/km. Where a car is acquired
any other way the rate of CAs is contingent on the CO2 emission of the vehicle.
If an asset is acquired under a Hire Purchase contract if will only qualify for CAs when it is brought into use in the
business and not when the contract is signed.
Broadly, where the Annual Investment Allowance or First Year Allowance can be claimed on the asset you
should look towards acquiring the asset via a loan or Hire Purchase contract. You can claim tax relief upfront
and the capital cost of the asset can be spread.
Otherwise, the Operating Lease or Finance Lease gives the ‘biggest’ tax deductions, subject to any restrictions if
it is a car which is acquired.
Repairs to Premises
There may be a requirement to undertake repairs and maintenance work on your business premises. Provided
that it qualifies as revenue expenditure, and not capital, you can claim it as a tax deduction in the Profit & Loss
Account.
However, if the expenditure is treated as capital for tax purposes, relief in the form of Capital Allowances is
available where the capital expenditure is either performing a function (as opposed to being merely part of the
structure) or qualifies as an Integral Feature.
You should record all expenses incurred on property repairs with details and evidence to support any claim for a
tax deduction.
VAT Registration and De-registration thresholds
From 1 April 2016 the VAT registration threshold increased from £82,000.00 to £83,000.00 and the
deregistration threshold from £80,000.00 to £81,000.00.
These thresholds are only relevant where a business is making taxable supplies. Businesses should monitor their
turnover on a rolling twelve month basis if there is a possibility that it might exceed the registration threshold.
They should check their turnover for the previous 12 months at the end of each month.
Businesses can choose to register voluntarily if they are trading below the registration limit. It is potentially
advantageous where the taxable supplies would be either zero and/or reduced (5%) rated, and the VAT on
business purchases is at the standard rate of 20%. The business might be able to claim VAT refunds.
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Stamp Duty Land Tax: New Rates for Commercial Properties
Stamp Duty Land Tax (SDLT) was payable, on the acquisition of non – residential properties, at a single
percentage of the price paid for the property, depending on the rate band within which the purchase price falls.
However, from 17 March 2016, SDLT on the purchase of non – residential properties has changed from the flat
rate to a slab rate, with the rate applying to the value of the property over each tax band:
Up to 150,000.00
150,001 – 250,000.00
250,001 – 500,000.00
500,001 or more
Pre 17.03.2016*
Nil
1%
3%
4%
From 17.03.2016**
Nil
2%
5%
5%
*On total consideration
** On band of consideration
All non-residential freehold and lease premium transactions worth less than £1,055,000.00 will pay the same
SDLT or less compared to the rates and system pre 17 March 2016.
Inheritance Tax Implications – Surplus cash in the company
Where a trading company has a cash reserve which is surplus to the business’s immediate spending
requirements, this can have a potential impact on a shareholder’s claim for Inheritance Tax (IHT) Business
Property Relief (BPR) on shares held in a trading company.
IHT BPR is available at the rate of 100% on the value of shares held for at least two years in an unquoted trading
company or AIM company. However, BPR is restricted if the company’s balance sheet includes ‘excluded assets’ –
assets not used for trading purposes.
Under the existing rules, surplus cash that is not required for an identifiable purpose may be treated as an
excluded asset and not covered by BPR. IHT is payable on the value of the shares which is attributed to the surplus
cash.
Inheritance Tax Implications – Investments in a Trading Business
Inheritance Tax (IHT) Business Property Relief (BPR) at the rate of 100% is available on the following interests in
a trading business, provided the interest is held for at least two years:
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A person’s sole trade
A person’s interest in a partnership
A holding in an unquoted or AIM company
However, BPR does not covered any ‘excluded assets’ held within the business. These are assets not used for
trading purposes and this also includes large cash balances which are not actually used for trading purposes or
there is no intention of the balance sheet being used for trading purposes.
Non – trading assets includes:
1.
2.
3.
4.
Land and/or buildings which are let out
Investing in stocks, shares, or securities
Investing cash
Making or holding investments*
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*This does not include the interest(s) of a holding company in trading subsidiaries
Please do not hesitate to contact us if you have any queries or you would like to discuss tax planning options.
Author:
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Bilal Mahmood ATT CTA
Tax Manager
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