Did you enjoy the summer? That was those two days over the Bank Holiday weekend at the beginning of May. Now back to spring and, of course, that means the spring issue of the Square Circular.
This time we’re telling you an interesting mixture of the new and the old. Yes, there are some old chestnuts but with one or two new developments.
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.
BORROWING FROM YOUR COMPANY
The 2013 Budget announcements had something to say about loans from
owner-managed companies. It is one of the most constantly recurring problems that crops up. So much so, even the layman is sufficiently familiar with it to call it by its section number, Section 455 (in earlier legislation it was section 419). We thought maybe it was worthwhile putting a little focus on this perennial old chestnut.
Sometimes a participator (shareholder) may draw money from their company in the form of a salary or dividend. Sometimes they may just want to borrow from the company which happens to have full coffers. There’s the first problem. Borrow? Who says it’s borrowing? If there’s no documentation it could be anything. It could be salary and, indeed, HMRC may want to treat it as such in these days of Real Time Information. At the very least there should be a minute of a meeting identifying that the loan is, in fact, a loan.
Once you borrow from your company it can be the start of a slippery slope. What starts off as a small loan for a brief period might be increased and for a longer period. Like Topsy, “I s’pect I growed”. It’s not too bad if you pay it all back before the end of the accounting period. No tax consequences. It’s not even too bad if you pay it back within nine months of the year end. It means filling in an extra bit on the Corporation Tax Return but that’s all.
How’s this for a clever little wheeze? You owe your company £50,000? So arrange to pay it back and then draw it out again the next day. Problem sort’d for another year. Actually, not so clever. This year’s Finance Act will introduce a new “30 day rule” which says that if your loan is more than £5,000 and you try this kind of trick so that the new borrowing is within 30 days of the so-called repayment of the old borrowing it will be treated as if you’ve never paid off the old borrowing. So why not make all the necessary arrangements, only wait for 30 days? If your loan is over £15,000 it still won’t help; the new loan will just be regarded as a continuation of the old loan.
All in all, an overdrawn loan account is a tricky area. Here are two good pieces of advice. The first is to document what is a loan and if there is more than one loan, which one is being repaid. And the second is to not be shy in asking for our advice.
We told you before that documentation for a loan is important. It dispels any doubts as to the reason why a payment is being made.
The same is true for any payment made to you by your company. If you pay yourself a dividend who’s to say that’s actually what it is? The appropriate minutes of the meeting approving the dividend payment and the appropriate dividend voucher will help prove what it is. If it can be interpreted as being for something different there can be unintended tax consequences.
The same is true for a whole host of other things. Is a transfer of money from one person to another a gift or a loan or payment for some kind of service? Record it and we’ll know. And if for some reason you absolutely can’t, at least tell us so we can make an appropriate note on our files.
P A HOLDINGS DROPS APPEAL
P A Holdings which lost a case against HMRC in the Court of Appeal has apparently withdrawn its appeal to the Supreme Court so the decision of the Court of Appeal stands.
So what? Who cares? The case was a tax avoidance case. P A set up complex arrangements which enabled them to pay bonuses to employees in the form of dividends on different classes of shares held by employees. The company wanted a Corporation Tax deduction but also wanted the payments to employees to be treated as dividends with the income tax and National Insurance advantages that brings. The Court said that the intention was to motivate and encourage employees and was therefore remuneration. The arrangements which created the form of dividends did not deprive the payments of their character of employee emoluments. None of this affects us does it?
Well, what about cases of employees owning alphabet shares where employees own A shares, B shares etc. and receive dividends rather than bonuses with different dividends being paid on different shares. Or what about a case of the owner managed company where the director/shareholders take a dividend once a month which perhaps, in truth, is designed to reward them for their services managing the company but is “dressed up” as a dividend on the shares they own. Even if you have all the formalities right, minutes of meetings, dividend vouchers, the sort of thing we talked about earlier, will HMRC be able now to ignore the documentation and insist that your dividend is really remuneration?
HMRC have suggested in the past that “genuine” dividend payments made to owner managers will not be taxed as remuneration and it is arguable that just because a dividend may be paid with the same frequency as salary would be paid (monthly) it doesn’t change the nature of a genuine dividend with proper documentation. All the same, it is possible that HMRC may want to have a re-think at least about alphabet shares.
PARTNERSHIPS AND LLPS
We talked earlier about borrowing money from your company. New rules clarify that if a company lends money to a partnership in which a shareholder is a partner or lends money to an LLP in which a shareholder is a member you will get the kind of problems we mentioned above.
There is also going to be a consultation exercise (the consultation paper has only just been published) to deal with what HMRC sees as abuse of the structure of LLPs with corporate members. Action almost certainly will be required before 5 April 2014.
If you’re affected, don’t worry. We’ll be in touch well before then.
R & D AND LRTR AND ECA
What does this dazzling array of capital letters have in common?
Well, first let’s sort out what it all stands for:
LRTR is Land Remediation Tax Relief
ECA is Enhanced Capital Allowances
What they have in common is that not only do you get a particularly generous tax relief if you incur R & D or LRTR or ECA expenditure but if you can’t utilise that tax relief straight away because your business has losses, you can trade in the enhanced loss for a tax credit. The payment you get is a % of the loss and works out at slightly less than the Corporation Tax value of the loss.
You have to decide whether you prefer the immediate cash flow advantage of the tax credit or whether you’d be better carrying the loss forward because you’re likely to be in a tax paying position in the near future.
One problem for us is identifying that you’ve incurred such expenditure. For example, suppose you’ve incurred expenditure on asbestos removal as part of your land remediation expenditure. Or suppose you’ve bought an asset which would qualify for ECA. When we’re doing your company’s accounts or audit we may very well happen to pick up the invoice which tells us that the ”repair” or the new piece of equipment has something special about it. But it’s easy to miss, so please do tell us.
JOINTLY OWNED PROPERTY
You probably know that if property is jointly held between spouses the income from that property must be divided either 50/50 or in the proportion in which they actually own the property. Not so for non-spouse joint ownership. The proportion of sharing income depends on what the owners decide, not necessarily the proportion of ownership. It is preferable to have that decision in writing.
If this opens opportunities for you please feel free to contact our tax partner, Simon Topperman, or your usual contact partner.
Our “and finally” quotations tend to be a little “jokey”. This one isn’t. It’s so beautiful that we couldn’t resist it.
In the report of the Office of Tax Simplification in January 2013 on the subject of Unapproved Share Schemes, the foreword said:
“….this area of tax legislation has been like a poorly tended bramble patch. In trying to get at the delicious blackberries, the unwary have found themselves snagged on the thorns of complexity…”
How true about tax in general.