Tax Tips For Businesses And Their Owners For 2014

This article discusses a mixed selection of imminent and proposed tax changes, which may be relevant to tax planning and employee reward strategies in 2014. There is no particular theme, but all of the topics are important in their own way. 

The Finance Act 2012 introduced new rules for claiming capital allowances (CAs) on the purchase of a building where the purchase price includes ‘fixtures’ such as central heating, air conditioning, etc, which have become, in law, part of the building. The rules are intended to prevent allowances being given to both vendor and purchaser for the same expenditure. It has been the case since April 2012 that the proportion of the purchase price allocated to fixtures needs to be fixed by a joint election (under CA 2001, s 198) between vendor and purchaser, or failing such agreement by the tax tribunal, within 2 years of purchase. Otherwise the purchaser’s expenditure is treated as nil. 

However, a ‘section 198 election’ only applies to items for which CAs have been claimed by the vendor. The Finance Act 2012 also introduced a rule that no claim for CAs could be made by the purchaser unless the vendor had included the item in their CAs ‘pool’, but as a transitional measure the pooling rule is not effective until April 2014. At present, it is still open to the purchaser to claim CAs on items for which no claim had been made by the vendor, but this will cease to apply for expenditure incurred on or after 1 April 2014 for corporation tax ,or 6 April 2014 for income tax. Thus, where a property purchase is imminent, there may still be tax savings to be made if fixtures for which the vendor has not claimed CAs can be identified (usually by a specialist valuer). 

AIA was fixed at £250,000 per annum by the Finance Act 2013 for a two year period from 1 January 2013 to 31 December 2014. Thereafter it is expected to revert to £25,000 per annum. AIA is particularly useful for small to medium sized businesses as it may be claimed in respect of virtually any plant or machinery except cars, including fixtures treated as ‘integral features’ such as central heating, electrical systems, etc, where expenditure enters a ‘special rate pool’ qualifying for writing down allowance (WDA) at only 8%. Clearly, it is preferable to allocate AIA against expenditure on integral features in preference to expenditure on other plant and machinery qualifying for WDA at 18%.

Where the accounting period overlaps 31 December 2014, AIA will be apportioned between the periods up to and after that date.  So if the year end is 30 June the maximum AIA for the year to 30 June 2015 will be £250,000 x 6/12 = £125,000 for the period to 31 December 2014, and, £25,000 x 6/12 = £12,500 for the period to 30 June 2015, i.e. £137,500 overall. However, if £100,000 of expenditure is incurred by 31 December 2014 and £37,500 between 1 January 2015 and 30 June 2015, the total allowance would be £100,000 + £12,500 = £112,500, whereas if the whole expenditure is incurred by 31 December 2014 it would only be restricted to the maximum overall limit of £137,500. It is not possible to examine these rules in detail, but the timing of expenditure is critical.

Businesses will obviously wish to take advantage of AIA at the current rate as far as possible, especially in relation to expenditure on integral features qualifying for WDA at only 8%.  In general terms it will usually be beneficial to accelerate expenditure to fall before 1 January 2015.

From 1 April 2014, the small profits rate of corporation tax (CT) is set to reduce to 21% and from 1 April 2015 there will be one unified rate of CT at 20%. This will simplify matters for small and medium-sized companies/groups. The rule whereby the marginal relief upper and lower limits for small profits rate of £300,000 and £1,500,000 are divided by the number of ‘associated’ companies will cease to have effect; though the associated companies rules (CTA 2010, Pt 10) will continue to apply for determining whether a company is ‘large’ for the purposes of the CT quarterly payments regime.

There are very few ‘free lunches’ for CT these days in terms of absolute savings of CT, other than by making pension payments. Otherwise, while relief for expenditure, CAs, etc, may be advanced to worthwhile effect, these are ultimately timing differences. However, with a CT rate of 21%, and soon 20%, the limited company represents an efficient tax shelter from income tax at up to 45% currently. 

The Office of Tax Simplification’s (OTS) further proposals in relation to employee share schemes include the introduction of a simple vehicle to enable companies (mostly, but not exclusively unquoted) to manage their employee share arrangements and create a market for employees’ shares. This could be a statutory ‘safe harbour’ employee benefit trust. One of the problems of awarding shares in private companies to employees is that such shares are by definition unmarketable and therefore for such awards to act as a real incentive, an ‘exit route’ is needed to enable ‘good leavers’ to realise the value of the shares in due course. The OTS also propose that for unapproved share option schemes, whereas now the employee is taxable on the market value of the shares when an option is exercised, but is not in receipt of any cash with which to pay the tax, in future the employee should be able to choose whether to pay tax up front or defer liability until the shares can be sold for cash.  

It is likely therefore that in 2014 these themes will be developed and so companies contemplating the introduction of employee share schemes will find greater encouragement to do so. Certainly the relaxations to ER for enterprise management incentives (EMI) shares will directly benefit employees disposing of such shares in 2014.

The Finance Act 2013 introduced some relaxations to the rules (in ITEPA 2003, Pt 7) dealing with HMRC-approved share option schemes, but perhaps more importantly the rules allowing CGT entrepreneurs’ relief (ER) have been relaxed in relation to shares acquired on or after 6 April 2013 on the exercise of qualifying EMI share options. The changes remove the requirement that the employee must hold at least 5% of the company’s equity/voting rights in relation to such shares. The requirement that the shares must be held for at least 12 months before disposal in order to qualify for ER is also modified, in that the 12 month period runs from the date the option was granted. This is important as EMI options are typically exercised shortly before the sale/flotation of the company and therefore prior to FA 2013 changes the 12 month test could not be met in those circumstances.

From an employee’s point of view, the ER changes may mean that the employee will hold shares which qualify for ER and others (probably acquired before 6 April 2013) which do not. The FA 2013 changes modify the identification rules for disposals from such share ‘pools’ the effect of which is that part of the gain will qualify for ER and part will not, on a pro-rata basis. Employees who are free to dispose of their shares (e.g. where the company is listed on the alternative investment market) may benefit from professional advice in order for the shares to be realised in the most tax-efficient way, including, perhaps, inter-spouse transfers.