“Now is the spring of our discontent”.
Yes, we know Shakespeare wrote winter not spring. But given recent climatic conditions in April and the first half of May, and the rather frosty reception given to the spring Budget it looks like winter and spring are interchangeable.
As the headlines about granny tax, pasty tax and charity tax start to recede this Square Circular looks at one or two implications of the Budget amongst other things.
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.
More personal than commercial this time; weddings for two members of staff. Trevor, one of our audit seniors, to Lauren on the 2 June and Natalie, our tax department secretary, to Jonny on 5 June. We wish both couples every future happiness.
Obviously, they’ve been giving serious thought to the tax benefits of marital bliss.
EXTRACTION OF PROFIT 2012/13
It’s become an annual ritual hasn’t it? Every Budget sees a tinkering with personal and corporate tax rates. For a company director/shareholder is it more efficient in 2012/13 to extract profit by paying extra remuneration or is it better to do so by dividend?
There’s no hard and fast rule in all cases but in most cases the rule is pretty hard and pretty fast. As in previous years dividend wins in all cases. A higher or additional rate taxpayer will, as a general rule, save a few % by taking a dividend as a shareholder rather than extra remuneration as a director whether the company’s profits be small, large or marginal. Give us a call if you want specific figures for your company.
And, as we warn you each time this is discussed, don’t automatically assume that the general rule will fit your situation. In real life companies often have different shareholders and different directors, some old and some young, quite often with different agendas and a certain amount of politics may be involved. Quite often the plan has to be tailor-made to suit the circumstances. One size doesn’t fit all and specific numbers may need to be crunched.
That’s all the more reason to get in touch.
GAAR stands for General Anti Abuse Rule. Substitute Avoidance for Abuse and you can see what the Government are really talking about and the picture they are trying to paint. Why does the mention of GAAR follow on naturally from profit extraction? Probably because so many tax mitigation solutions are designed for profit extractions although, of course, there are also perfectly legal and perfectly valid solutions for mitigating Capital Gains Tax and Inheritance Tax as well. The talk is of introducing a GAAR to come into effect next year. Why it is necessary and what will be its effect?
Perhaps the need for a GAAR is an indication that HMRC feels it is struggling in the battle against well thought out and properly documented planning. If you can’t find a nut-cracker use a sledgehammer. Sure, HMRC do win as many cases as they lose but remember they’re in a position to pick and choose which cases to fight. They’ll obviously pick the weakest. When they try to stop legal and legitimate attempts to reduce tax by calling it “evasion” or “illegal avoidance” or “abusive” it muddies the waters.
As far as we are concerned, like most firms of accountants we don’t “do” avoidance strategies but where we know of sound commercial and legitimate solutions to problems we’d be failing if we didn’t refer you to the best of those solutions leaving the issue of “risk” up to you. However, what does concern us is that the GAAR may be so widely drawn that it could affect simple planning that you wouldn’t think of as tax avoidance and certainly not as aggressive or abusive planning. We await developments. In the meantime it occurs to us that there has never been a better time to contact us and arrange an A to Z review of your tax affairs, whether personal or corporate. You may find various options open to you are closed by next year.
EMI and ER
Yes, more acronyms. EMI stands for Enterprise Management Incentives. We’ve spoken about it before. It enables employees to exercise options in their employer’s company at a fixed agreed price and possibly “make a killing” if the share value is enhanced at a later date upon sale or flotation. The maximum value of options which an employee could hold was £120,000. That’s going up to £250,000.
Now here’s more good news. Everybody’s heard of ER – Entrepreneurs’ Relief. A higher rate taxpayer pays Capital Gains Tax (sorry, CGT, let’s stick to acronyms) at a rate of 28%. Not if you get ER. Then, it’s 10%. To qualify for ER on the sale of a trading company’s shares, in the year leading up to sale you need to have owned 5% of the ordinary voting shares and to have been an employee or officer of the company. Now, quite often, an EMI shareholder might not have as much as 5% especially if there are a few such EMI employees. The good news is that gains made on shares acquired through exercising EMI options on or after 6 April 2012 will be eligible for ER. Together with the increased limit of £250,000 it will certainly make EMI’s more appealing.
There is one small drawback. Employees aren’t necessarily flush with funds. Typically an EMI person would wait until the happy day of sale or flotation, exercise his EMI option at the fixed price and immediately sell at the enhanced value. That doesn’t work if you still have to hold your shares (5% or not) and be an employee for 12 months leading to disposal.
We fear this particular bit of generosity may be of limited value.
PAYE RTI – COMING SOON TO A PAYROLL NEAR YOU!
The RTI bit stands for Real Time Information. It’s another HMRC big project. The aim is to have employers updating their PAYE records as and when changes occur rather than just at the end of the tax year.
Don’t think it’s one of those projects which will be shelved at some stage and will never reach you. In April ten volunteer employers went into the launch of the RTI pilot and this month and next another 310 employers are joining them. If the pilot is successful another thousand or so volunteer employers will join in and by October 2013 we’re all meant to be doing it.
Sounds like fun.
When is a phone not a phone? When it’s a blackberry has been the traditional answer. But that changed a few months ago when HMRC started to call a blackberry a phone.
For years, it’s been established that an employer can provide an employee with a mobile phone (only one) for private use without creating a taxable benefit. And for years HMRC called iPhones and Blackberrys computers, not phones. So it never came within the special concession for a mobile phone. They changed their minds at the end of February.
Now is around the time that employers should be getting to grips with 2011/12 Forms P11D. So if that’s where you’re up to and you’ve given an employee a personal use blackberry please make sure you don’t include it as a benefit.
What’s more you can go back to 2007/08 and claim back wrongly paid Class 1A NICs for that year and subsequent years. In addition, employees may be due repayments of income tax.
If we can be of help with any of this please let us know.
IR35 is HMRC’s way of dealing with personal services companies when they think that a taxpayer (sorry, customer) is getting too good a tax deal by operating through a limited company and paying himself too much by way of dividend and too little by way of salary. Specialist units are to be set up in Salford, Edinburgh and Croydon to concentrate efforts on these wicked taxpayers (sorry, customers).
On 9 May HMRC published business entity tests to risk score companies so as to decide where to concentrate efforts. There are 12 tests mentioned, the business premises test, the previous PAYE test, the right of substitution and actual substitution tests to mention just a few.
Space doesn’t allow full details of them all but if IR35 is a concern to you and you want some ideas as to how likely it is that they’ll pick on you, give our tax partner, Simon Topperman, a call.
HERE’S A REMINDER
If you’re newly self-employed don’t forget that you have to tell HMRC about it within 3 months. For more information see ‘News’ on our website www.alexander.co.uk or give us a call.
“I believe we should all pay our tax bill with a smile. I tried but they wanted cash”