Lee Sharpe looks at some tax planning strategies for owner-managed corporates.
In this article, I will be looking at some of the more common tax planning techniques and how they have been affected by the 2018 Budget announcements.
Please note that, at the time of writing, we await legislation to flesh out the mechanics of some of the new Budget 2018 measures. Direct consultation with a suitably-qualified professional is, therefore, strongly recommended, to adapt the business’ particular circumstances to any developments that may have arisen in the interim.
Capital allowances
Capital allowances are flexible; generally, a full year’s worth of relief can be claimed even if the asset is bought at the very end of the accounting period, so they can be useful in reducing tax exposure reasonably ‘late in the day’.
Budget 2018 announced a much higher cap on expenditure that may qualify for the 100% annual investment allowance (AIA) from £250,000 pa to £1 million per annum, for the two years ending 31 December 2020. But while this may be welcome for larger businesses, it will not benefit smaller businesses – and may even cause them serious problems.
Businesses whose chargeable corporation tax (CT) periods straddle 1 January 2019 should be particularly careful that they do not incur significant capital costs in the transitional period. Where the chargeable CT period straddles the change on 1 January 2019, there is both an annual limit for AIA purposes and a limit for each sub-period before the change, and afterwards. The part-period before moving to the higher rate can be very restrictive in terms of availability of AIA. The restriction can be so severe that it takes the limit below the original £250,000 annual threshold – in other words, it could seriously affect the spending plans of even ‘small’ businesses.
In some such cases, it would be appropriate to consider extending or shortening the chargeable period to align with the calendar year.
Employer pension contributions
Although specific financial advice is essential, a company can make an employer contribution to an employee’s pension scheme as a lump sum. It will generally qualify for tax relief for the company unless the employee in question has only a minor role and gets a very generous contribution (typically, a spouse or other relative of a director). The contribution ‘counts’ towards the relevant individual’s pension annual allowance, and there are complex rules that may apply to further limit the employee’s annual allowance, broadly where earnings exceed £100,000 a year.
One of the key points to consider in relation to employer contributions is that one cannot simply accrue at the year end for future expenditure; the contribution must have been physically paid by the end of the CT period to be deductible. Very large contributions may also need to be spread over more than one tax year, but these are rare in any but the largest companies.
Bonuses/additional salary
It would, of course, be quite straightforward to accrue for a large bonus to be paid to the directors. However, while the payment is deductible against the company’s profits, it usually attracts a charge to PAYE and National Insurance contributions (NICs). This generally makes a bonus less attractive than, say, a dividend. But dividends are normally paid out in proportion to respective shareholdings, while bonuses suffer no such constraints; there may be other non-tax reasons why bonuses might be preferable. Three points, in particular, to bear in mind as regards bonuses, salary, etc.:
• They must be paid within nine months of the end of the chargeable period, in order to be deductible.
• Particularly with directors, it is easy for the company to trigger an obligation to pay PAYE/NICs – even if the money has not yet been physically paid to the director. If one hopes to provide for a bonus and get CT relief but not actually pay a bonus until later there is potentially a tension, basically between wanting to identify a specific amount so that it may be accrued in the company’s accounts, but not wanting to trigger PAYE/NICs on an ‘identifiable’ amount.
• Evaluate paying a salary to any family members who are working for the company but have spare tax-free personal allowance (and/or unused basic rate band) – so long as the work done justifies the reward, there should be no problem with CT relief.
Maximising claims – don’t forget the previous year!
The company usually gets up to one year to submit its tax return following the end of its chargeable period and then one further year to amend that return.
There are many claims that a company might potentially make, such as:
- losses against current or the previous year’s profits;
- capital gains reliefs such as on the replacement of business assets out of the proceeds of the disposal of a previously-qualifying asset (‘rollover relief’);
- research and development – expenditure on qualifying activities (basically to resolve technological uncertainty relevant to one’s business) results in a ‘super-deduction’ for qualifying expenses, which can sometimes be converted into a payable credit for the company (although Budget 2018 changes will require that the payable credit cannot exceed more than three times the company’s PAYE bill for the year);
- there are also ‘creative industry reliefs’ such as in relation to certain films, high-end television productions, animations, video games, and opera;
- because of the timing of amendments, etc., an impending year end is an opportunity to check that there are no more potential claims to be made for the preceding year (before the permissible period for making amendments expires); and
- note that, if the company has acquired commercial property with fixtures potentially eligible for capital allowances, the company gets two years from the date of purchase to make an election jointly with the vendor, to agree how much of the purchase price is eligible for capital allowances and potentially AIA. If the company as buyer does not manage to secure that the election is made in time, it cannot claim any capital allowances on any affected fixtures that came across with the acquisition of the building – and nor can any subsequent buyer.
Loan accounts
The year-end is a particularly good time to gauge the position for loans to directors and other participators (shareholders, etc.) in the business.
Loans to employees that exceed £10,000 at any point in the tax year can trigger a benefit in kind taxable on the employee as it is a ‘perk’ of an interest-free loan (although the notional interest is quite affordable). But the company also has to pay a kind of deposit – referred to as ‘section 455 tax’ – at 32.5% of any loans to shareholders or other participators which are owing at the end of the year and are still not repaid within nine months of the year end. Although the section 455 tax is repayable, it normally takes at least 12 months for the company to get it back. The solution is typically to vote a dividend (or sometimes a bonus) to clear the balance before the year end or soon afterwards, which should both avoid the section 455 charge and reduce any loan benefit.
But consider also writing off the loan in the alternative; it is generally taxed as a dividend and can, therefore, be tax-efficient. Note, however, that HMRC may check whether this was authorised by the shareholders or by the board of directors; if the latter, HMRC may try to argue it is remuneration, not a dividend.
Although it is not often taken up, there may be scope for directors’ loans that are in credit to charge a reasonable rate of interest to the company, where the company is using the funds for working capital or some other allowable purpose and the charge is reasonable; it may fall within the lender’s ‘savings allowance’ and, therefore, afford a modest tax-free extraction opportunity.
Capital losses
The 2018 Budget also announced that capital losses would start to be restricted from April 2020, much in the same way as trading losses have been from 1 April 2017 (i.e. while losses brought forwards of £5 million or less may be fully relieved, any excess will be relieved at only 50%).
Most businesses will be unaffected, but any company with large capital losses may prefer to have a capital gain before the restriction is imposed from April 2020. There are anti-forestalling measures in place but, according to the consultation, ‘… the government does not intend that capital gains arising under normal commercial practice during [the period leading up to 1 April 2020] will be subject to an anti-avoidance rule.’
Conclusion
There is plenty to consider, and Budget 2018, in particular, has introduced a raft of new measures; it may be a particularly good time to speak to the company’s tax adviser!
