Hope you missed us in the short break we’ve given you. The last Square Circular came out early so as to give you plenty of time for year end tax planning and you can have too much of a good thing!
Apart from anything else we’ve been waiting until after Gordon Brown’s Budget. This isn’t “day after stuff” – all facts and headlines before the implications are fully considered. And it isn’t “months after stuff” when the final intricate details of the Finance Act have become law.
Rather than our usual style of focusing on just one or two topics, this Square Circular highlights a few points you may want to consider with a view to minimising future tax liabilities. We are aware brevity hasn’t allowed us to do full justice to some of the topics mentioned so if you want further information on any of the points raised or on other tax, accounting or financial matters, please contact us.
DIVIDEND OR BONUS?
A perennial issue for the family company is the extent to which the directors/shareholders should be rewarded by salaries (including bonuses) or dividends. Alternatively, if the shareholders do not need to draw out all the company’s profits for living expenses is it a better strategy to leave the profits in the company with eventual Capital Gains Tax implications?
It’s one thing to know that Gordon Brown has changed Corporation Tax rates this year, has changed Capital Gains Tax business taper relief and is going to collect lots more National Insurance Contributions from employers and employees next year. It is another thing entirely to know the impact this will have upon how the owners of a company should draw out their profits. And then there’s also pension contributions to consider.
It’s easy enough for us to produce “models” to show in general terms which is the best way to extract rewards from a company using a “model” size of a company and “model” shareholders. In real life, companies, shareholders and directors never seem to be models. What’s more, cash flow and timing considerations come into it and the best alternative is proper number-crunching in each individual situation.
If your company is making good profits (we hope it is!) the best time to ask us to review the dividend/remuneration/pension/capital retention policy is a couple of months before the company’s year end. Even afterwards, it’s never too late although room for manoeuvre is much more limited. We suggest that you contact us in good time.
A COMPANY – TO BE OR NOT TO BE?
That is the question which has become frequently asked in the last few weeks. First, let’s be clear that taxation is only one of a number of matters to consider when deciding whether one should operate a business through an incorporated entity. Until quite recently a sole trader business had to be earning healthy profits for tax to even be a consideration. The introduction of the limited liability partnership concept could also have militated against the limited company as a trading vehicle. Now, it seems everyone wants to be a company. Corporation tax changes (this year) and NIC changes (next year) have sent accountants dashing to their calculators to see how much tax can be saved by “going corporate”.
If you’re a sole trader or partnership attracted by the thought of having abbreviations such as “co. ltd” after your name we suggest you think carefully. Yes, we think you could very well save tax. Yes, we can calculate the likely tax savings for you. Yes, there are one or two other measures in last month’s Budget which can assist in the process of incorporation.
But yes, there is a cost involved in setting up the company in the first place and a cost involved in its added paperwork. And what happens in a year or two’s time if the pendulum were to swing the other way and you find out how much harder it is to disincorporate than it is to incorporate. The slings and arrows of outrageous fortune (to continue the Shakespearian metaphor).
There are circumstances where we think it would be an advantage to incorporate or to maintain an existing company which isn’t doing very much rather than dissolve it. Each case depends upon its own facts. If the issue is one which affects you call either Simon Topperman or your usual contact partner on 0161 832 4841 to discuss matters further.
COMPANY CARS – NOT AGAIN!
Afraid so. Can’t afford to ignore such an essential tool of modern day life.
We’ve told you already (ad nauseam, some might say) about the company car benefit scales based on CO2 emissions announced last year and effective from 6 April 2002.
Some of you have had the foresight to ask us to do calculations to determine whether your car should be owned privately or by an employing company.
New features include:-
a) A 16% increase in the fuel benefit scale charge where the employer provides fuel for private motoring.
b) Fuel benefit in 2003/04 to be calculated using the same percentages as car benefit and applied to a fixed figure (£14,400 proposed).
c) 100% enhanced capital allowances on investment in new cars emitting up to 120g/km of carbon dioxide.
So if you are apt to wonder why the company managing director’s Jaguar in which he travels 20,000 miles per year on company business is privately owned whilst his 18 year old daughter’s Smart car used to travel from home to college every day is a company car, it’s a safe bet that it’s something to do with tax.
It’s also a safe bet that we’ll be re-visiting the issue of company cars and free fuel later this year. In the meantime if you want to know whether or not you should have a company car and, if not, how you buy it out of the company and you can’t wait till later, call Simon Topperman or you usual contact partner at our office on 0161 832 4841.
VAT’S NOT NECESSARILY A GOOD IDEA!
A small business (up to £100,000 taxable turnover excluding VAT) may well be tempted to participate in Gordon Brown’s “let’s make it easy” VAT flat rate scheme. Instead of contending with input tax and output tax each quarter you just apply a flat rate percentage to the VAT inclusive value of sales in a tax period. Saves time! Saves worry about making mistakes! Dead simple!
Hang on. Not so fast. The flat rates proposed by Customs & Excise for differing businesses seem to be set in their favour and whilst it may save you time and effort it may cost you money. We’re not saying that you shouldn’t join the scheme if your business is small enough. Just that you should talk to us before taking the plunge.
Bowing to considerable media pressure, Gordon Brown announced that there will be a review of the complex rules on residence and domicile. It has always been on the cards that the Revenue might change the rules relating to non-domiciled but UK resident individuals (broadly those of non-British descent who live in the UK). The press has sometimes described these rules as “loopholes”.
At present a non-domiciled but resident individual is liable to UK tax on his or her UK source income/gains and is only liable to UK tax on non UK source income/gains if these income/gains are “remitted” to the UK. As regards the future, it’s a matter of “watch this space”.
If you think you may be non-UK domiciled and want to clarify your status with the Revenue, please let us know. We can take steps to do this for you. Time will tell whether it proves to be a rewarding exercise.
LAST BUT NOT LEAST
We told you a long time ago (August 2000) that the Government was intending to give Corporation tax relief on the disposal of substantial shareholdings but the Budget proposals are somewhat different from those first mooted. If your company holds a stake of at least 10% in another trading company the new rules could affect you.
Put this together with new rules for expenditure on intangible assets and new rules on CGT business taper relief for individuals and we are facing the need for a complete review of corporate tax planning strategies.
To focus on these important changes needs more space than this Square Circular will allow. Perhaps next time. There now! That’s something to look forward to!