Newsletter. Business Bulletin August Tax tips for small business owners. Corporation tax payable by ABC Ltd 0

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1 August 2014 Tax tips for small business owners Limited company - tax efficient profit extraction Newsletter One of the benefits of operating as a limited company is the ability to structure how the owners extract profits from the company. One tax planning strategy is to pay a low salary equivalent to the personal annual income tax free allowance and then pay dividends on a quarterly basis. Care is required to ensure that the appropriate documentation is prepared to declare the dividends correctly to satisfy both company law and HM Revenue and Customs. For ownermanaged businesses, where monthly dividends are paid, HMRC may challenge that the dividends are actually salary payments and look to apply PAYE and NIC to them. Example Assume a company, ABC Ltd, with one shareholder, Mr A, makes profit before tax of 100,000. If he took all the profit out as salary, then his net of tax income would be as follows: ABC Ltd profit before salaries and tax 100,000 Corporation tax payable by ABC Ltd 0 Income tax payable by Mr A (25,162) Employee/Employer National insurance (16,170) Mr A s net of tax income 58,668 If Mr A paid himself a low salary and took the rest of his profits out in quarterly dividends, then his net of net income would be as follows: ABC Ltd profit before salaries and tax 100,000 Corporation tax payable by ABC Ltd (17,944) Income tax payable by Mr A (10,773) Employee/Employer national insurance (527) Mr A s net of tax income 70,756 The total tax and national insurance saved and therefore the increase in Mr A s net of tax income by taking dividends is 12,088.

2 -2- Spouse/other family member as a shareholder? Mr A could look to reduce his overall tax liability and therefore the amount he can take out of the company by making his spouse or other adult family member a shareholder in the business. Assuming Mr A makes his spouse a director and 50% shareholder in the company, then he could utilise her lower rate tax allowances to reduce the higher rate tax liability on dividends received and Mr & Mrs A s combined net of tax income would be as follows: ABC Ltd profit before salaries and tax 100,000 Corporation tax payable by ABC Ltd (15,887) Income tax payable by Mr & Mrs A (1,548) Employee/employer national insurance (1,054) Mr & Mrs A s net of tax income 81,511 It would be possible for Mr & Mrs A to eliminate any higher rate tax liability by restricting their dividends received to their lower rate income tax thresholds and retaining the tax saved as funds within the company. Once the company s life comes to an end, these funds could be distributed tax efficiently in a number of ways. Please note that, whilst not uncommon, these tax planning strategies require tax advice to implement. Pension scheme payments via salary sacrifice There are significant savings to be made, both for the employer and employee, by setting up a pension scheme on a salary sacrifice basis (or converting existing pension schemes to salary sacrifice pension schemes, providing the employees currently make a contribution). By agreeing to have their pension contribution taken from their gross pay (which results in a reduction in gross pay as opposed to net pay), savings are made by the employee on income tax and national insurance contributions on the value of the deduction. In addition to the employee s savings, the employer saves the employer s national insurance that would be payable on the salary sacrifice amount. Most pension schemes make deductions from employee s net pay which does not take advantage of the savings available.

3 -3- For those earning over 100,000 the personal annual income tax free allowance reduces by 1 for 2 of income over 100,000. You could therefore also maintain some or all of your personal annual income tax free allowance by sacrificing some salary for an employer pension contribution to take you below the 100,000 threshold. Other salary exchange opportunities In addition to pension scheme payments, there are other opportunities for salary exchange available, for example: childcare vouchers cycle to work scheme green car scheme health screening car parking scheme Ways to retain child benefit If you or your partner s taxable income exceeds 50,000, child benefit is clawed back at 1% of the benefit for every 100 of income over 50,000. Therefore, when taxable income reaches 60,000, the entire child benefit is lost. If both you and your partner can reduce your annual taxable income below 50,000, the full child benefit will be retained. This may be achieved by allocating profits in a tax efficient way or salary exchange as discussed above. Travel, subsistence and personal incidental expenses (PIEs) If you make a business related journey, the costs incurred are tax deductible. This might typically be travel to a client meeting, training event or a trip to purchase some equipment for the business. All of the following costs can be reimbursed by the company and deducted against your business profits: flights, train, bus, and taxi fares parking etc. subsistence expenses e.g. lunch while on a business trip hotel and meals; if you need to stay away from home the business can pay 5 per night for personal incidental expenses (PIEs) for overnight stays in the UK and 10 for overseas stays. PIEs do not require receipts and can be claimed in addition to hotels and meals. All that is required is to keep track of the number of nights away and the purpose of the visit to be able to make the claim. mileage using your own vehicle

4 -4- Business mileage In most cases, it is best to run your own vehicle personally and claim mileage using HMRC authorised mileage rates. If you trade via a limited company, this will avoid large benefit in kind taxation charges on the use of company cars. If you do use your own vehicle for business travel, you can claim a certain amount per mile as a tax deductible expense. This is 45p per mile for cars and vans, 24p per mile for motorbikes and 20p for push bikes. Only the rate for cars and vans drops to 25p for each mile over 10,000 miles. Telephone expenses Home Telephone: You can claim the cost of the business calls only. It is not recommended to claim the cost of rental as this will be treated as a benefit in kind on which you will pay tax. Mobile Telephone: Provided the account is in the company name and company pays the bill then there is no taxable benefit for a mobile phone. Internet: If the account is in the company name and any private use is not significant then there is no taxable benefit for internet usage. Use of home as an office If you have an office area in your home you can claim a modest amount that can be justified to HMRC as a tax deductible expense. For minor use of your home as an office, the HMRC guideline figure is 4 per week. This amount can be reimbursed by the company and will reduce the company tax bill. If you wish to claim more than the HMRC guideline amount, you must actually work from home on income generating activities. The office you use must be a business office and must be available to be inspected by HMRC. The cost should represent the cost of you providing an office at home i.e. a proportion of heating, lighting etc. plus a proportion of council tax and other direct property costs. For example: In a 5 room house you could charge 1/5 th of your costs. However, one thing to watch out for is that you could find that your office is excluded from your principal private residence exemption from capital gains tax. This would mean when you come to sell your house, that a proportion, in this case 1/5 th of the property will be subject to capital gains tax. This can be avoided provided the office is not exclusively used for business purposes. Evidence of this should be kept in case of a further challenge from HM Revenue and Customs.

5 -5- Professional subscriptions, training, reference books and journals These costs are often neither reclaimed from the company by the business owner nor included in the accounts. All are genuine business costs which will help reduce your corporation tax bill. Staff entertaining You can deduct 150 per annum per head for staff entertaining. Anything over and above 150 may still be deducted but will be treated as a benefit in kind on which the employee will pay tax. You can choose to pay the tax on behalf of the employee through a PAYE settlement agreement; the company will obtain tax relief on the income tax paid on behalf of the employee. Specialist clothing If you have to buy specialist clothing for employees to perform their work e.g. uniforms or protective clothing, you may be able to get tax relief for the cost of them. Accelerating tax reliefs 1. Timing of staff bonuses One way of reducing your profits for corporation tax purposes is to declare staff bonuses. Provided minutes are prepared, on or before the financial year end date, stating that bonuses are being declared based on the results of that financial year and the bonuses are actually paid within 9 months of the year end date, then the company s profits will be reduced for that financial year. However, if no minutes are prepared, on or before the financial year end date, HMRC may challenge that the tax relief only be given for the financial year in which the bonuses are actually paid. If the bonuses are not paid within 9 months of the year end date, tax relief will only be given in the year in which the payment is made. Example 1 minutes prepared and bonuses paid within 9 months of year end A board meeting is held on 31 March 2014 and minutes prepared stating that staff bonuses are being declared based on the profits made in the year to 31 March The bonuses and related taxes are paid by 31 December In this case, the company obtains tax relief for the year ended 31 March 2014.

6 -6- Example 2 no minutes prepared but bonuses paid within 9 months of year end Staff bonuses and the related taxes are paid by 31 December 2014, based on the profits made in the year to 31 March However, no board meeting is held on or before 31 March 2014 to declare the bonuses. In this case, the company does not obtain tax relief for the year ended 31 March 2014 but for the year ended 31 March 2015 instead as there is no written evidence that the decision to declare bonuses was made on or before 31 March Example 3 minutes prepared but bonuses not paid within 9 months of year end A meeting is held on 31 March 2014 and minutes prepared stating that bonuses are being declared on the profits made in the year to 31 March However the bonuses are not paid until 1 January In this case again, the company does not obtain tax relief for the year ended 31 March 2014 but for the year ended 31 March 2015 instead as the bonuses are not paid within 9 months of 31 March Timing of pension contributions In order to obtain corporation tax relief for a company pension contribution, the contribution payment must have cleared the bank account on or before the end of the accounting period. So if a company makes a pension contribution for the year ended 31 March 2014 but the payment does not clear the bank account until 1 April 2014, the company will obtain tax relief for the year ended 31 March 2015 rather than 31 March Timing of equipment purchases If your financial year ends shortly, you may wish to consider bringing forward any fixed asset purchases you are considering before the year end, subject to cash flow constraints. Capital allowances are available to reduce your current financial year s taxable profit provided the asset has been invoiced before the year end. If you would like any assistance in this area, please contact your Accounting Services Manager or call us on