Sorry, the summer 2016 Issue of the Square Circular is a little late. How did you enjoy the summer? It was on the 18, 19 and 20 July.
If you’ve missed the summer at least you’re not missing summer’s Square Circular. There isn’t any one single theme to it and it may be a bit “technical” in places. But then the evenings are still quite long there’s not a great deal to do in the rain.
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.
A warm welcome to Abi Ward who has joined our accounts and audit department. Abi is a law graduate and ACCA trainee. An equally warm welcome to Louis Moore who has joined our tax department as an AAT trainee.
We wish them both every success and hope they have a long and bright future at Alexander & Co.
We suppose Brexit is no longer news but if we didn’t mention it you’d think we were living in the past. We have been asked how Brexit will affect UK accounting and tax law. But most people asking that question have had the good sense to add “I don’t suppose you know yet?”.
There’s a whole load of EU accounting and company law legislation affecting how we accountants work. Whilst many EU directives are likely to be reviewed it doesn’t mean they’ll be scrapped. It may be more likely for tax rules rather than accounting rules to be changed if the UK seeks competitive advantages over its former partners. The most likely area for potential change is VAT which is thought of as a “European Tax”.
Never mind, at least we’ll have a couple of years to prepare for it.
REAL NEWS – MAKING TAX DIGITAL
You may remember that we touched on Making Tax Digital in the Square Circular Issue last winter when we mentioned the possibility of quarterly reporting.
Don’t think that the topic has gone away. There will be further consultations now and in the autumn about progressing the Government’s digital strategy. Over the next few years it will gradually spread its net over more and more taxpayers and promises to be the biggest shake up in the tax world since self-assessment and online filing. When the Chancellor, sorry, previous Chancellor, announced the end of the tax return in his budget speech last March we weren’t sure whether it was a blessing or a curse. Time will tell.
So what’s going to happen? As you probably know, Big Brother taxman gets information about you from loads of different sources; employers, banks, building societies, other government departments etc. He has the details long before you send in your tax return on 30 January following the tax year (you don’t want to leave it until the 31st). So what’s the point in waiting? And why should he let you pay your tax in instalments so that the second instalment is paid nearly four months after the end of the tax year and a balancing payment made nearly ten months after the tax year? True, he doesn’t know what the profits from your business are or what dividends you’re taking from your company but if you were to update him quarterly it would be a good step to advancing payment of tax to, say, once a month. And wouldn’t that fit in with future plans to make payment of Capital Gains Tax due within 30 days of the gain.
Over the next few years the plan will extend so that by 2020 most businesses, to include individual taxpayers who are self-employed and those letting out property, partnerships and companies will have to keep track of their tax affairs digitally and update HMRC at least quarterly. We’ll keep you up to date as and when we know more. There is one thing we can tell you for sure. Come 2020, the days when our office junior used to run down to Albert Bridge House on 31 January with a bag full of last minute tax returns (hope yours wasn’t in that bag) will seem more like 200 years ago than 20 years ago.
KIDS CAN SAVE TAX
Well, not under 18 years old, they can’t. You probably know that. If you made a cash gift of £1 million to your 2 year old child, the interest, which wouldn’t amount to much more than a personal allowance at today’s interest rates, would rebound on you and you’d be taxed on it. But over 18, the settlements legislation wouldn’t apply.
Let’s for example, imagine that mum and dad are the shareholders and directors of a trading company. Their twin daughters are just around 18 years of age. Let’s say mum and/or dad gift some shares to the girls, not a huge number, say 5% each. And let’s say that once the girls are 18 the company pays dividends. Not huge amounts; just enough to provide a little pocket money while they’re away at university. Remember that the first £5,000 of dividends are taxed at 0%. That wouldn’t interfere with their personal tax allowances if they wanted to get a job in the long summer vacation. And if you wanted to give them a car, you know, just to encourage the occasional trip home you could think about your company providing you (them) with a clean green low CO² emissions vehicle.
But, here’s a warning. It’s not always as easy as we make out. What kind of shares would the kids have and how would you legitimately organise dividend policy to best effect? Would the shares be ordinary shares and carry votes and is it possible that the kids might, one day, work for the family company? And, what’s your tax position when you give them shares? Will there be CGT on the gift and how is that legitimately avoided?
Just have a few words with us before you do it. There’s a lot to think about.
OVERDRAWN PARTICIPATORS’ LOAN ACCOUNTS
Do you fancy borrowing money from your company? After all, it is your company. We can see the temptation for a higher rate taxpayer. Cheaper than taking a salary or a dividend.
If you know you can pay back a loan before the company’s year end, OK that’s fine. If you know you can pay back within nine months of the year end without borrowing more, that’s also OK. If you don’t know or if you know you can’t pay it back or have no intention of paying it back our advice is not to borrow in the first place. It can lead to a messy situation and a messy situation can lead to time consuming efforts on our part to sort it out and time consuming efforts on our part can lead to ………………….you can guess what’s coming next.
And if you must borrow from your company, here are a few things you can usefully do in the light of “tightening up” of the rules in recent years and notably April 2016 changes:
- keep any post-April 2016 advances in a separate account from pre-April 2016 ones
- meticulously document the fact that any particular withdrawal is a loan rather than a salary or benefit in kind. If the company pays a bill on your behalf who’s to say whether it’s a loan which will be repaid or a permanent benefit, if there’s no minute to say what it is
- if you decide to make repayment of loans, document which loan is being repaid, a pre-April 2016 one or a post-April 2016 one.
This just scratches the surface because we’re giving you guidelines without detailed explanation. If you want to know more call one of our tax partners, John or Simon, for more detail.
MORE ABOUT PROPERTY COMPANIES
Do you remember the Spring 2016 issue of the Square Circular. That’s the 53rd one you’ve got framed on the wall of your dining room. Or perhaps you don’t hang them in your dining room; perhaps in your lounge, instead. Whatever, we threatened to tell you more about the problems of converting a sole or partnership property rental business into a company. No idle threat……………..
There are two main tax problems. One is Stamp Duty Land Tax (SDLT) and the other is Capital Gains Tax (CGT). We’ll tell you about SDLT some other time. Let’s just concentrate on the CGT.
Let’s say Wayne and Jose share the rental income from a few residential properties. And let’s say that they wanted to transfer these properties to a limited company, Trafford Ltd. And let’s say the properties cost £100,000. And let’s say that they’re now worth £1 million. Not a bad investment. On a transfer to Trafford Ltd, Wayne and Jose would have a gain of £900,000 because the transfer must be at market value. CGT at 28% on £900,000 is a bit of a disincentive.
But there’s a section of the tax legislation (s.162 TCGA 1992, if you must know) which says that if you transfer the whole of the assets of a business to a company in exchange for shares you can hold over the gain into the shares. It’s as if your gain is £nil and as if the shares only cost you £100,000. It also gives Trafford an advantage if it sells the properties. It also means that the company can re-invest the rental profits after paying Corporation Tax of say 20% rather than Wayne and Jose only being able to re-invest after paying tax of 45% (we think they may be into additional rate tax!). The chickens don’t come home to roost until Wayne and Jose sell their shares in Trafford Ltd.
So why doesn’t everyone do it? It’s a no-brainer. The catch is that you have to transfer a “business” and there isn’t an easy definition of that. There are cases but these depend on their facts. Wayne and Jose would have to transfer all the properties as a going concern. They would have to demonstrate that they are involved in running the business to some extent. It they were to leave all the management to a property agent while they while away their time in some hobby, like playing football, they are collecting investment returns, not running a business.
You can see it’s not straightforward. In some circumstances the figures may suggest the properties should be transferred piecemeal. It all depends on the figures. Our tax team is used to dealing with such situations. If you’re in this “limited or not” dilemma, get in touch.
Another memorable church notice……….
“This evening at 7pm there will be a hymn sing in the park across from the Church. Bring a blanket and come prepared to sin.”