Forget the first cuckoo. Forget the vernal equinox. Forget official British Summer Time. Spring hasn’t really sprung until the Chancellor of the Exchequer has delivered his Budget which was actually rather late this year.
Unsurprisingly, Square Circular has one or two comments to make although we do like to be a bit more than just a News Sheet and talk about other things as well.
If you want more details about any of the matters we’ve mentioned in this Issue, or indeed, about any of the matters we haven’t mentioned please do contact us on 0161 832 4841.
• Adrian Berg and Stephen Jolley were involved in the management buy out of
H L Interactive from Halliwells LLP on 30 April.
• Linda Wilson took some time off from running audits to run in the BUPA Great Manchester Run on 17 May. She raised over £550 for charity. Needless to say, we’re all very proud of Linda’s admirable feat (or should that be, feet?).
SALARY OR DIVIDEND?
Where the directors and shareholders of a company are the selfsame individuals, one of the questions most frequently asked of us is whether income should be drawn from the company in the form of remuneration for the directors or a return on shares for the shareholders in the form of dividends. Which is the more tax efficient?
There are commercial and “political” considerations before you even think about tax. By “political”, we mean balancing the different contributions individual directors make in an executive capacity with the different shareholdings they own. The tax issue is also a bit of a balancing act. Since the directors remuneration is an allowable expense against the company’s profits and the dividends aren’t, but the dividends are taxed at a lower rate than directors’ remuneration in the hands of the recipient, you have to balance the respective rates of corporation tax (lower, marginal or higher) against the rates of personal tax. And then, there are National Insurance contributions to consider!
Thanks to the Budget, the tax goalposts move slightly each year. Traditionally, in a small company you’d go for a dividend, in a marginal rate company you’d go for a remuneration bonus and in a large company it wouldn’t make that much difference. For 2009/10 at first sight the dividend route would win all three contests; the small company contest quite clearly, the big company contest slightly and the marginal rate company by ever so slightly. But the really, really correct answer is that there’s no substitute for actually doing the sums so please feel free to get in touch when you need to solve the bonus versus dividend conundrum.
Next year the screws will tighten on taxpayers with income in excess of £150,000 as their tax rate increases and pension contribution relief is restricted. In addition, sleight of hand tax avoidance tricks are being attacked. The rate increase applies to higher rate tax and the dividend rate. The rate applicable to trusts and the dividend trust rate will also increase. In the case of a successful family company what better ploy than to direct dividends towards those members of the family who have less income? And what easier way to do it than for the better off family members who perhaps have larger shareholdings to waive their dividends so all the dividends go to the less well-heeled members of the family.
Although HMRC seem to have temporarily delayed their plans to attack arrangements which are effectively devices to transfer income from one taxpayer to another (usually husband and wife) it doesn’t mean it’s open season for all kind of abnormal dividend arrangements including dividend waivers. If you are contemplating a dividend waiver we strongly suggest you review the recent tax case of Buck v HMRC before going ahead.
Actually…..a better idea…..give us a call. We’ve reviewed that case and can tell you in simple terms how it might affect proposed dividend waivers by the shareholders in your company.
LETTINGS SURPRISE – THE GOOD NEWS AND THE BAD NEWS
You’ve read us talking before about UK furnished holiday lettings. The “goodies” offered by the Taxman in the way of income tax and CGT reliefs were just too generous to not mention even though renting out the cottage in sunny Somerset or the flat in breezy Blackpool on a commercial basis may not have been everyone’s cup of tea.
Well now for some good news. UK furnished holiday lettings, as you may have guessed, have to be in the UK. Now, don’t you think that’s discriminatory; aren’t we all meant to be Europeans? So, in order to comply with European law, commercially rented holiday properties now qualify for tax reliefs in exactly the same way as UK holiday properties do.
And, the bad news? It’s been announced that from 6 April 2010 the letting of furnished holiday accommodation whether in the UK or the EU will no longer enjoy favourable trading status. Ah, the irony of tax!
In practical terms, landlords with furnished holiday accommodation in the EU will be able to make appropriate claims this year and last year and may be able to make retrospective claims if beneficial. Landlords will also need to decide what action they should take before the rules change in April 2010.
NO GAIN BUT STILL PAIN
Talking about properties abroad, here’s a little story. A bloke bought a property in Spain a few years ago for €500,000 when the exchange rate was at €1.50 : £1. He got an interest only 100% mortgage of €500,000. Lucky man!
He reads in the newspapers about the effects of global warming and reckons it won’t be long until Spain is an arid desert. Manchester will have that comfortable Mediterranean climate; deck chairs in St Ann’s Square! So he sells up in Spain for the same as it cost, only now the Euro stands at €1.14 : £1.
You wouldn’t think he’s got any gain, would you? Well, in sterling equivalent he bought for £333,333 and he sells for £438,596. Poor chap’s got a UK capital gain of £105,263 and has to find tax (@ 18%) of £18,947 from money that he hasn’t got. And before you ask, yes in sterling terms he has made a loss of £105,263 on his mortgage but that is not an allowable loss for CGT purposes.
Can’t life be cruel, sometimes? Just take care when dealing with overseas assets and getting involved with foreign currency gains.
CAPITAL GAINS CAUTION
We make no apologies for referring you back to our article in Summer 2008 Issue 22 called Capital Gains Caution. If you’ve not got a copy you can find it on our website.
The question was whether the owner of a property used by his family company or partnership should charge a rent for the use of those premises given the change in the CGT rules when Taper Relief gave way to Entrepreneurs’ Relief. It’s a very common situation which is why we mention it again.
The answer wasn’t “yes”. The answer wasn’t “no”. The answer was to talk it over with us because “it depends”. That’s still the right answer.
IT’S GOOD TO TALK ….. BUT NOT TOO MUCH
Just a reminder that a mobile phone provided by an employer to an employee is tax free even though the phone can be used by the employee to make private calls.
A second phone is fully taxable but if you must talk on two phones at least you can pick which one is the tax free phone and which is the benefit phone.
Incidentally, a tax free phone is one that is in the name of the employer. If the contract is in the employee’s name and the employer pays the bills, the employer is satisfying a debt which the employee should be paying and the payments should be put through the payroll and taxed. Suppose that’s what’s meant by a “Pay As You Go” phone?
“The hardest thing in the world to understand is the income tax.”