Tax Tips and More Spring 2018
Spring Statement 2018
Let Property Campaign
Patent Box Relief
Here we outline some of the key announcements from the Spring Statement, and provide a reminder of what has changed in the new tax year.
HMRC has details of all property transactions dating back many years. Therefore, if you have been receiving rental income and have not declared it, consider using the Let Property Campaign.
The Patent Box is a Corporation Tax relief, which gives a reduced rate of tax (10%) on income from patents and similar intellectual property, as opposed to the normal 20% tax rate.
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Contents
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Welcome and Partners
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Special Feature Spring Statement 2018
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There are two Certainties in Life - Death and Taxes
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Let Property Campaign
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Is Business Splitting a Viable Option?
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Xero Add-On Innovative Payment Solutions
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HMRC Want a ‘Bit’ of Your Bitcoin
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Employee Spotlight
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Patent Box Relief
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Upcoming Events
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Extracting Profits Tax Efficiently From Your Company
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“R&D? It’s what we do”
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www.raffingers.co.uk
Welcome to our SPRING Newsletter As announced last year, the Chancellor’s Budget will in future take place in the Autumn of each year, as opposed to the Spring. There was however, a Statement by the Chancellor on 13 March, but he made little mention of tax changes, instead choosing to focus on the state of the economy and stating that there is “light at the end of the tunnel”. What little changes were announced, we discuss on page 4. In this edition we also bring yet more information for landlords and property owners. Lately, we have received many calls from people who have, for one reason or another, let their tax affairs drift. Often, people feel they aren’t making any profit from their rental property or properties because everything they receive goes into paying the mortgage and the managing agent fees. Our advice to anyone who thinks they may have under-declared or not declared their rental income is to consider using the Let Property Campaign - discussed on page 6. Finally, in this edition we look at Bitcoin and cryptocurrency investments and what tax your profits are subject to, as well as advice on Business Splitting and Extracting Profits Tax Efficiently From Your Company.
For help or advice on any of the articles discussed please do not hesitate to contact one of us. To contribute to our next newsletter, contact: lauren.aston@raffingers.co.uk. The Partners at Raffingers
Raffingers Partners
Gary Inglis Managing Partner gary.inglis@raffingers.co.uk
Andrew Coney Partner andrew.coney@raffingers.co.uk
Lee Manning Partner lee.manning@raffingers.co.uk
Adam Moody Partner adam.moody@raffingers.co.uk
Suda Ratnam Partner suda.ratnam@raffingers.co.uk
Barry Soraff Partner barry.soraff@raffingers.co.uk
Paul Dell Partner paul.dell@raffingers.co.uk
Roy Butcher Partner roy.butcher@raffingers.co.uk
Neill Staff Partner neill.staff@raffingers.co.uk
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SPECIAL FEATURE
Spring Statement 2018
Here, we outline some of the key Spring Statement announcements and provide a reminder of what has changed in the new tax year.
Personal Taxation and Wages • The National Living Wage has risen to £7.83 per hour • Tax-free personal allowance on Income Tax has risen to £11,850 • Income between £11,501 and £45,000 is subject to 20% Income Tax • Income between £45,001 and £150,000 is subject to 40% Income Tax • Income above £150,001 is subject to 45% Income Tax Income Tax bands increased on 6 April 2018, along with the National Living Wage, which will give full-time workers a £600 pay rise.
Business Tax • The VAT threshold for small businesses will remain at £85,000 • Calls for business rate revaluations to be every three years As the Chancellor announced in the Budget 2017, the VAT threshold will remain at the current level of £85,000. The next business rates revaluations that were due to take place in 2022, will now be brought forward to 2021. The Chancellor states this is to make bills more accurately reflect the current rental value of properties. • The government aim to reduce single-use plastic waste through the tax system Disposable plastic items, such as coffee cups, plastic cutlery and foam trays have a long-term damaging effect on the environment. The government wish to act by exploring the supply chain (production, retail,
consumption and disposal) to see where waste can be eliminated. Changes to the tax system or charges may be used to reduce plastic waste. An additional £20million will be given to universities and businesses for research into how to reduce waste. • Businesses within the digital economy to pay a fair share of tax Digital businesses bring value to the UK economy; however, it is not always reflected due to the way in which multinationals pay less tax on their profits. The government is seeking ways in which to make the tax system fairer. • Tax relief for the self-employed and employees when self-funding training To encourage a skilled UK workforce and make the UK a competitive place for talent, the Chancellor announced that he is seeking views on extending the current tax relief to support self-employed people and employees when they fund their own training.
Stamp Duty and Housing • Stamp duty abolished for first-time buyers purchasing properties worth up to £300,000 • Plans for new housing builds have started Stamp duty has been abolished for first-time buyers. This makes the first £300,000 of the cost of any purchase exempt from stamp duty. An estimated 60,000 first-time buyers have benefitted so far. The Spring Statement confirms that the government is working with 44 areas on their bids for the £4.1billion Housing Infrastructure Fund to build new homes. The Housing Growth Partnership, which provides support for small housebuilders, will be doubled to more than £220million. In London, £1.67billion will be invested in building affordable homes by the end of 2021/22.
Gary Inglis, Managing Partner 020 8551 7200 | gary.inglis@raffingers.co.uk
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There are two Certainties in Life – Death and Taxes Year-on-year fewer and fewer people are putting wills in place. Putting a will in place deals with how assets are to be divided on death. However, increasingly, due to a lack of planning, there is a major beneficiary taking 40% out of estates – HM Revenue & Customs (HMRC). HMRC took more than £5.3billion from people’s estates in 2017 and projections from the Office of Budget Responsibility suggest that a further £1.2billion will have been collected by the end of the last tax year. What can be done to minimise what is taken out of your estate by HMRC? Inheritance is always an uncomfortable subject as it involves people acknowledging their own mortality or for the children, the realisation that their parents will not be around forever. There is normally no Inheritance Tax to pay if either: • The value of your estate is below the £325,000 threshold, the Nil Rate Band. • You leave everything to your spouse or civil partner, a charity or a community amateur sports club • There is also no Inheritance Tax to pay on gifts between spouses or civil partners. You can give them as much as you like during your lifetime, as long as they live in the UK permanently. • All gifts made out of normal income are exempt from IHT. However, you must be able to maintain your standard of living after making the gift. Additionally, if property is being passed onto children (including adopted, foster or stepchildren) or grandchildren, your threshold will increase. This measure introduces an additional nil-rate band when a residence is passed on death to a direct descendant. Including the property threshold, this means that the allowance in 2017/8 is £425,000 and this will rise to £500,000 each by 2021. This means that a couple will have a combined Nil Rate Band of £1million.
Inheritance Tax Calculation
If you are married, or in a civil partnership, and your estate is worth less than your threshold, any unused threshold can be added to your partner’s threshold when you die. Unfortunately, many people are not in a position to give away their assets, particularly if most of their wealth is tied up in their property. However, for those able to consider giving away their assets, the secret of good IHT planning is to start early. Any gifts made can reduce the estate. After 7 years, any gift can be considered to be out of the estate. In the meantime, they are classified as Potentially Exempt Transfers. Over the 7-year period, the amount considered to be in the estate reduces. Gifts use up the IHT nil rate band first and are only relevant if the whole of the estate exceeds the nil rate band. Example: John died in 2000 leaving all his money and assets to his wife, Susan. Susan died in 2017 and the estate was able to use John’s allowance, as he had not used his, and Jane’s allowance to make a Nil Rate Band of £650,000 (2 x £325,000). Jane’s estate was calculated at £1million. Therefore, the IHT payable would be £140,000 (40% x (£1,000,000 - £650,000)). If Susan leaves her house to her son, Michael, there would be an extra allowance of £200,000 (£100,000 each for John and Jane). The tax would then reduce to £60,000 (40% x (£1,000,000 - £850,000)). If Susan put some money into a trust for Michael, and at the time of death it was worth £100,000, over 7 years have passed and the estate would now be £900,000. If this had happened, the tax would have reduced by £40,000 to £20,000 (40% x £900,000 - £850,000)). From the table below, you can see that the use of a gift and the property allowance reduced the IHT bill from £140,000 to £20,000. There are many ways that you can reduce the amount of your estate that could be subject to IHT. To discuss further contact Paul Dell at paul.dell@ raffingers.co.uk.
Leaving Property to Children
Making Gift of £100,000
Estate Value
£1,000,000
Estate Value
£1,000,000
Estate Value
£900,000
Nil Rate Band
£650,000
Nil Rate Band
£850,000
Nil Rate Band
£850,000
Taxable Estate
£350,000
Taxable Estate
£150,000
Taxable Estate
£50,000
Tax @ 40%
£140,000
Tax @ 40%
£60,000
Tax @ 40%
£20,000
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Let Property Campaign
Raffingers’ tax team, which includes ex-HM Revenue & Customs (HMRC) staff, is extremely experienced in dealing with tax issues involving making disclosures to HMRC using The Let Property Campaign, as our Tax Partner, Neill Staff explains. There isn’t a week goes by without me getting a call from someone about the Let Property Campaign. I think that by now, everyone knows that HMRC has details of all property transactions dating back many years, and if you’ve been receiving rental income and haven’t declared it, then it is simply a matter of time before you receive a letter from HMRC. Of course, there are many reasons why rental income doesn’t get reported, and one of the more common reasons I hear is that people don’t think they are making a profit. A typical example is that the mortgage payments and expenses are higher than the rent received, so people assume there is no profit. Unfortunately, tax doesn’t work that way and you only get tax relief for the mortgage interest, not the capital repayment. I have also found that people are sometimes not aware that, regardless of whether they make a profit or not, rental income needs to be declared to HMRC and the person should have registered for self-assessment and declared the profit (or loss) on their tax return. My advice to anyone who thinks they may have underdeclared or not declared their rental income is to consider using the Let Property Campaign. It gives people an opportunity to bring their tax affairs up to date if they are an individual landlord letting out residential property in the UK or abroad, and to get the best possible terms to pay the tax they owe. The procedure is very simple in that you register for the scheme, and you then have
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Regardless of whether you make a profit, rental income needs to be declared to HMRC. 90 days to calculate and pay what you owe. In certain circumstances I have seen HMRC give time to pay. Who can do this? You can report previously undisclosed taxes on rental income to HMRC under the Let Property Campaign if you’re an individual landlord renting out residential property. This includes you if you’re:
• renting out a single property • renting out multiple properties • a specialist landlord, e.g. student or workforce rentals • renting out a room in your main home for more than the Rent a Room Scheme threshold • living abroad and renting out a property in the UK • living in the UK and renting a property abroad • renting out a holiday home even if you use it yourself
If you’ve been receiving rental income and haven’t declared it, then it is simply a matter of time before you receive a letter from HMRC. You can’t use this scheme to declare undisclosed income if you’re a company or a trust renting out residential property or if you’re renting out commercial property. Unlike many historic HMRC campaigns, the Let Property Campaign has not got a date by which HMRC will close it, so it is available for the foreseeable future. It is also worth noting that the campaign is not just about putting an individual’s tax affairs right relating to the rental income. There does have to be rental income to take part in the Let Property Campaign, but the campaign should also declare any other undisclosed income. So, if someone who is self-employed has also not declared all of their income from self-employment, they should use the Let Property Campaign to disclose and correct all of their tax affairs. The Let Property Campaign really is something that people should be considering. HMRC also obtain information regarding housing benefit, or from letting agents and local authorities (HMRC have the legal power to force local authorities or letting agents to provide this information) and HMRC will write to the individual to whom the rent is paid and invite them to take part in the campaign. If you have not declared or under declared rental income, contact Neill Staff who will be able to help.
Neill Staff 020 8418 2671 neill.staff@raffingers.co.uk
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Is Business Splitting a Viable Option? We know that the VAT registration threshold will remain at £85,000 until at least 2020 and there are hints that it may do so for many years to come. Therefore, it is likely that the age-old question about splitting a business into two parts, under different legal entities will be raised – the plan being that each entity will trade below the VAT threshold and neither will have to register. Let us consider a small guest house, which has bed and breakfast income and a small bar on the lower ground floor with an alcohol licence. It is run by Mr and Mrs Smith as a partnership and trades just below the VAT threshold. They would like to increase their prices, but it is likely that will involve them exceeding the threshold. Business splitting options The Smiths have asked about dividing the business into its constituent parts, for example: • The bar activity to be organised by their daughter Miss Smith as a sole trader? • Guests to pay a ‘room only’ fee to the partnership and then a separate payment if they wanted breakfast? The breakfast service would be run by Mrs Smith as a sole trader. • Use a self-employed cleaner to service the rooms. The cleaner could invoice each guest £5 a day for cleaning services. The partnership can then reduce its charges to the guests by £5 each day. HM Revenue & Customs (HMRC) has powers to treat separated businesses as one legal entity. The key challenge is for HMRC to be able to prove that the two businesses have “financial, economic and organisational links.” The main outcome of a direction from HMRC on disaggregation (business splitting) is that the combined businesses will need to register for VAT as a single entity moving forward - it does NOT have a retrospective effect. It is tempting therefore to assume that you may as well give it a go? Even if you fall foul of HMRC’s view that you have artificially split a single business, you will have benefited. Of course, it is not that simple. If HMRC decides there never were two separate businesses, this will become a late registration rather than a dis-aggregation issue. And, whereas there is no retrospective effect of a disaggregation direction, HMRC has the power to go back up to 20 years to correct a late registration.
What are the links? Financial links • One part would not be financially viable without support from another part • Common financial interest in the proceeds of the business Economic links • Seeking to realise the same economic objective • The activities of one part benefit the other part • Supplying the same circle of customers Organisational links • • • •
Common management Common employees Common premises Common equipment
Tips on business splitting To create a successful business split it’s important to consider the following issues: • Separate bank accounts and business records; • Any charges of goods or services between the separated entities must be made on an armslength basis; • Customers must be clear that they are dealing with two separate businesses; • The two entities must have separate suppliers; • Separate tax returns should be submitted for each part of the business. Conclusion Going back to the Smiths, which of their suggestions are possible solutions? There are potential risks with all of them, although the separate invoicing by the cleaner is really a non-starter because the cleaner is clearly providing services to the business and not the guests. A successful business split is often very hard to achieve when family members are involved. This is because there is less incentive to do things on an arms-length basis as the money all belongs to the same family pot. Also, customers perceive just ‘one business’ to be in place. It might be worth finding a third party who is completely independent from the family tree. That person may even pay something for the business goodwill to take over a part of the business, such as the bar at the guest house.
Barry Soraff 020 8418 2663 | barry.soraff@raffingers.co.uk
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+ XERO ADD-ON
Innovative Payment Solutions
Fidelity Payment are the card payment experts. Fidelity can reduce rates on your credit card processing and improve payment solutions for your business with 24/7 technical support. Fidelity syncs with Xero, the cloud-based accounting software company, to speed up payments for anyone using the FideliPAY payment gateway. You can now invoice customers online and get paid faster, anytime, anywhere. Fidelity will save you time and makes payments hassle-free, whether you’re using your mobile, tablet or PC. You also won’t need to spend time chasing customers for payments, the money automatically comes into your bank account and you’ll see that your invoices have been marked as paid in Xero. It’s so easy! This simple, smart solution means you can log in online at any time and see up-to-date financials. You can also use the mobile app to run your business on the go, allowing you to reconcile, send invoices and create expense claims. You can also schedule payments and batch pay suppliers.
FideliPAY will save you time and make payments hasslefree. Fidelity Payment is one of the world’s leading electronic payment providers, processing £1billion of credit and debit card transactions in the UK and £25billion globally. Fidelity Payment is licensed by MasterCard and Visa as an Independent Sales Organisation of AIB Merchant Services. Fidelity will perform all necessary fraud and security checks with direct integration or hosted form options to provide a seamless experience for you. To find out more, contact Sholly Inglis on 07773 514525 or at s.inglis@fidelitypayment.co.uk.
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HMRC Want a ‘Bit’ of Your Bitcoin The “profits” you make on cryptocurrency investments are likely to be subject to capital gains tax.
It could be that you’ve been tempted to “invest” in Bitcoin or one of the other cryptocurrencies. Equally, it could be that, like me, you’ve steered clear of it as you’re old enough to remember the Tulip mania bubble. (OK, I admit that’s probably a slight exaggeration as that was in around 1637!) Either way I suspect that thinking about how the gains you hope to make would be taxed might not be at the top of your agenda. Fortunately, our friends at HM Revenue & Customs (HMRC) have been way ahead of us all and issued guidance on this in 2014, in the form Revenue & Customs Brief 9/2014. HMRC’s guidance says that there are three possible treatments for gains/profits which are made on Bitcoin or other cryptocurrencies – they could be: • trading profits which will be subject to income tax, or; • highly speculative transactions which are treated as gambling and therefore not subject to income tax; or • capital gains which will be subject to capital gains tax. Trading UK Case law has long established a number of key indicators, which are looked at in order to decide if an activity constitutes a trade for tax purposes. These include whether there is a profit seeking motive, the frequency and number of similar transactions, connection with an existing trade, financing arrangements and the length of ownership and reason for the transactions. Many cryptocurrency transactions, where positions are taken for a brief or short time only, may reflect some of these indicators. In which case, it would look like this sort of activity would be classified as trading and subject to Income Tax. There is however case law, which has long established
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that profits arising from share dealing are not trading profits, even if the above indicators are present. Dealing in cryptocurrency is pretty similar to share dealing and it is therefore unlikely that profits would be treated as trading profits. Gambling Betting and gambling are not considered a trade for tax purposes, even if the key indicators mentioned above are present, and are not subject to income tax. There are now established markets for cryptocurrency dealing and it is generally considered that, even though highly speculative, these transactions are not treated as gambling and therefore profits or gains are likely to be taxable. Capital Gains HMRC’s view seems to be that cryptocurrencies can be chargeable assets for capital gains tax purposes. As a result, the “profits” you make on cryptocurrency investments are likely to be subject to capital gains tax. VAT Most of us are interested in the trading gains to be achieved from Bitcoin and similar cryptocurrencies. If you are one of those people trying to mine Bitcoins, then the good news is that any income received from Bitcoin mining activities will generally be outside the scope of VAT. This is on the basis that the activity does not constitute an economic activity for VAT purposes as there is an insufficient link between any services provided and any consideration received. If you are in receipt of Bitcoin and want to discuss the likely tax implication on your gains, contact.
Gary Inglis 020 8418 2770 gary.inglis@raffingers.co.uk
Employee Spotlight In this slot we introduce you to a valued member of our team, allowing you to put a face to a name. This quarter we speak to our Tax Senior, Michelle Calder. Name: Michelle Calder Email: michelle.calder@raffingers.co.uk Career: After completing a company secretarial course at Chelmsford Poly, I left to find a proper job (rather than working on the tills at Sainsbury’s). But, the market was against me. I ended up working for the Government in the local Social Security Office. Alter 7 years of being shouted at, sworn at and threatened by clients I decided my career path needed a much-needed change. So, via my Dad, I asked Mr Soraff Snr if he had any opportunities available. With Self-Assessment about to begin, it was the ideal time to start working at Raffingers and I joined the team here on 2 January 1998. Twenty years later, I am still here in the tax department and enjoying every day. I am pleased to say I still have the pleasure of completing returns for some of the same clients as I did when I first started. Interests: As someone who dislikes taking part in any form of physical activity, I spend many evenings and weekends watching some kind of sport. Whether it is West Ham on the TV, badminton in the winter or cricket in the summer - my son and husband keep me very busy. I am currently the secretary of the Essex Badminton Association and, with what little time I have left, I enjoy spending time with friends and family, shopping, eating and holidays, whether it be lying on a beach or city tours. My favourite place to visit was Kenya, watching the wildlife up-close was an absolute pleasure and honour. It makes you think twice when you visit a UK safari park or zoo. With New York and Vegas coming a close second, I have loads more places to visit on my bucket list. Partners Report: Michelle is an integral and highly valuable member of the tax team. Her background knowledge of clients is invaluable, as is her knowledge of personal tax and dealing with HMRC. More recently Michelle has been supervising the firm’s disclosures under the HMRC Let Property Campaign. It is always a pleasure to work with Michelle, although it’s generally best to speak to her after she’s had her morning porridge.
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Patent Box Relief CLIENT NEWS
What is the Patent Box relief? The Patent Box is a Corporation Tax relief which gives a reduced rate of tax (10%) on income from patents and similar intellectual property, as opposed to the normal 20% tax rate. It was implemented by the government in 2013 in a bid to encourage high-value growth in the UK through a tax system that supports Research and Development (R&D).
Who qualifies? HM Revenue & Customs (HMRC) states on their website that your company is only eligible for the Patent Box relief if: • Your company is liable to Corporation Tax and makes a profit from exploiting patented inventions • Your company must also own or exclusively license-in the patents and must have undertaken qualifying development on them • If your company is a member of a group, it may qualify if another company in the group has undertaken the qualifying development
What income qualifies? • Income from the sale of a patented product (including sales of products which contain patented components, regardless of how minor this part of the product is) • License fees and royalties received for granting the use of a patented item to individuals • Income from the infringement of patents • Notional royalties deemed to have been received where patented processes or items are used in the company’s own production
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To further illustrate how the Patent Box relief works, we’ll take the example of company, Tech Corp Ltd. This is an artificial intelligence company with taxable profits of £500,000. Tech Corp Ltd has several patented products which account for 25% of its income. Its routine costs amount to £1,000,000. The company would normally pay a corporation tax of 20%.
What else is there to consider? Within your organisation, look at whether you have any patents or exclusive licenses over patents. You should also consider whether patented inventions are used in the business (regardless of how minor this invention is). It is also advisable to identify the revenue streams within your business that are derived from patents. In addition, you may have patentable intellectual property (IP) that you are unaware of. Are you using certain technology that your competition does not have access to? If so, explore whether it would be beneficial to patent this technology. If you are using patented technology from another company, you should also investigate acquiring an exclusive license to use this technology to benefit from the Patent Box Relief.
How can Raffingers help? The Patent Box relief may appear to be complex and your company may have difficulty in calculating qualifying profits. We’ll be able to help you understand whether your company is eligible, qualifying IP rights and qualifying development rights. We have a highly-qualified team of experts who understand various tax regimes and who have helped previous companies save hundreds of thousands on R&D. Call us today on 020 8551 7200 or email info@ raffingers.co.uk for further information.
Upcoming Events May 2018 GDPR Seminar: Practical Guidance 09:30am-12:30pm | 9 May 2018 | The Clubhouse London, London, EC2R 7HJ The General Data Protection Regulation (GDPR) is coming into effect on 25 May. Since being announced, many organisations have tried to come to terms with what the GDPR means and how it will affect their organisation. Last year we hosted a series of successful GDPR webinars to educate businesses and not-for-profits. We were also able to host a workshop in March to help dispel further myths and offer advice. We want to continue to extend our efforts by hosting a seminar to give you more practical guidance before the deadline in May. Join us and you’ll find out about: • • • • •
Data subject rights Privacy impact assessments and practical application How to train your workforce on GDPR GDPR in practice; real-life case studies Roadmap/agreed next steps for attendees
July 2018 Annual Charity Golf Day 10am-8pm | 3 July 2018 | Toothill Golf Club, School Road, Ongar CM5 9PU Join us for our Golf Day. The day will include breakfast sandwiches, coffee and tea, a challenging 18hole golf course, competitions and a raffle, followed by a wonderful three course dinner. Our charity golf day raises funds for Raffingers Foundation, which supports pancreatic and ovarian cancer causes. You will be helping to fund research carried out by Pancreatic Cancer Research Fund and Ovarian Cancer Action, as well as supporting those directly affected through the Raffingers Foundation Fund.
September 2018 Raffingers Foundation Charity Ball 6:30pm-12am | 15 September 2018 | Prince Regent Chigwell, Manor Road, London, IG8 8AE Join us for our roaring 1920s Charity Ball. As well as a three-course dinner we have live music from Frog on a Rocket and will be entertained by a cabaret musician (as seen on TV!). Last year we raised over £12,0000 for Raffingers Foundation and hope with your help we can achieve this again.
To attend or find out more about any of our events contact lauren.aston@raffingers.co.uk.
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BLOG
Extracting Profits Tax Efficiently From Your Company By Paul Dell, Partner
With the introduction of the dividend tax regime from 6 April 2016 and the reduction of the dividend nil rate band from £5,000 to £2,000 from 6 April 2018, we need to look at additional ways of extracting profits tax efficiently from your company. It has always been the case that combining a low salary with dividends is the most efficient way of extracting cash from your company to avoid the national insurance costs, which apply if all cash is taken by way of salary. But are there any other methods we could employ to improve the position? Interest on Director’s Loan Account Where a director takes a low salary – say £10,000 and
• Assuming a salary is taken at the Personal Allowance level of £11,850 • Interest of £5,000 is paid on a £50,000 directors loan account (10%)
Profit Salary (PA Level) Interest Taxable Profit Corporation Tax Profit After Tax Dividends Total Income Tax on Dividends Total Tax on Profits Tax Saving
No Interest 40,000
Interest 40,000
(11,850) 0 28,150 5,348 22,802 22,802 34,652 1,560 6,908
(11,850) (5,000) 23,150 4,398 18,752 18,752 35,602 1,256 5,654 1,254
If you have lent money to your company talk to us about the possibility of improving your post tax position by having the company pay interest on the loan.
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the remainder of his profits by way of dividend, the starting rate for savings income is available - the starting rate band is now £5,000 with a tax rate of 0%. It is worth considering paying interest on loans made by directors to their companies. The interest paid by the company will need to have basic rate tax deducted from it and the tax paid over to HM Revenue & Customs (HMRC) under the interest payments scheme (form CT61). The interest paid should be deductible by the company for corporation tax purposes. Interest rates of circa 10% could be paid as this would be comparable with unsecured lending by an unconnected third party (a bank for example) to the company.
• At the £60,000 profit level, the numbers would be:-
No Interest 60,000
Interest 60,000
Salary (PA Level) Interest Taxable Profit Corporation Tax Profit After Tax Dividends Total Income
(11,850) 0 48,150 9,148 39,002 39,002 50,852
(11,850) (5,000) 43,150 8,198 34,952 34,952 51,802
Tax on Dividends Total Tax on Profits
3,901 13,049
3,834 12,032
Profit
Tax Saving
1,017
Paul Dell 020 8418 2688 paul.dell@raffingers.co.uk
Tax From the Trenches | Neill Staff
“R&D? It’s what we do” Last week I found myself on the M11 travelling out to the wilds of Hertfordshire to meet a new client. He had recently become a client at Raffingers and had mentioned that he’d been approached by a specialist R&D firm to see if his business might be carrying out qualifying R&D activities. I’d spoken to him on the phone and he was pretty sure there was nothing that would qualify although he freely admitted he didn’t know much about the R&D rules or incentives. It is a conversation I have had many times with company directors, who are very good at running their business and look to innovate and improve, but don’t necessarily see that what they are doing might have an element of R&D to it. From our short conversation on the phone I felt pretty sure that there were some qualifying activities and projects, and was certainly more than happy to invest half a day to go and speak with the director about it. It was one of those wonderful meetings where you find that the client is a genuinely nice person and you can warm to them immediately. He was very proud of everything he had achieved in the business over many years and took great pleasure showing me around the offices and the factory. He had a word, or a joke, for everyone that we passed, and I could sense just what a popular boss he was. During our walk around, he explained to me that the only reason he had looked for a new accountant was that his existing accountant had been with him for 40 years and was getting on a bit. I laughed as the director was well into his 70’s, but was fit as a proverbial fiddle. “This is where we build the units” he said introducing me to another area of the factory, “And this little team here do all the testing and making things fit”. I looked at him inquisitively and he explained to me what I already knew, that the company’s trade is pretty much a rarity in the UK, to the extent that I cannot really comment on what the company does without it giving away the name of the client, and the fact that the business is extremely lucrative. But as a field leader, the company has no knowledge base on which to track through any changes to their processes and procedures. Everything must be thought about, and then tried, tested, prototyped and eventually built. “But wouldn’t you consider what you’re doing to be R&D” I said, knowing perfectly well that it was. “But it’s what we do” the director replied.
This leads nicely on to the point of this blog, in that there are so many directors that I have spoken to over the years who look at their day to day innovation work as being nothing more than making things better or improving existing products and processes. Admittedly not everything done by every company qualifies as a R&D activity, and it does take a specialist to speak candidly to the director to establish what exactly takes place. After that it is a case of identifying the qualifying expenditure and starting the process of making a claim. After the guided tour we eventually ended up back in the board room with several of the senior team members and a plentiful supply of coffee and biscuits. I broke the news that the company were clearly carrying out qualifying R&D activities and that a claim should be possible for the accounting year just gone and the year before that. We ran through the nature of the costs that can be claimed and I provided an overview to the claims process and how, in this case, the claim should result in a substantial saving to the company’s corporation tax bill due later in the year. The director’s face was a picture. Happy as Larry and smiling from ear to ear, slightly bemused that he hadn’t realised that a claim could be made and ruing the earlier years that were beyond the claim time limits, but thoroughly appreciative of the visit and putting things right for the future. As we speak I have just scheduled in the first of several visits back to the company to start work on what will be quite a large claim. My advice to anyone in a similar position who thinks there may be R&D in their business but just isn’t sure, is to get a professional to come and see you to check. Any decent R&D firm or specialist accountants won’t charge you for this, and it really is in your best interest as thousands of pounds of tax savings could be at stake. If your firm is in the London or Home Counties then feel free to ring or email me. I’d be delighted to come out and see you, although some coffee and a few decent biscuits would be appreciated.
By, Neill Staff 0208 418 2671 neill.staff@raffingers.co.uk
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