Commercial property transaction? Think of the pool before you jump in.

The start of 2014-15 tax year heralded a significant change which is set to have an impact on commercial property transactions. It’s always been the case that buildings will contain items classed as ‘fixtures’, on which it’s possible to claim capital allowances. Historically, however, owners of properties may not always have identified everything that can potentially be claimed. All in all, it didn’t matter too much. If you were buying, you’d employ a valuer to estimate the current replacement value of the fixtures and make a claim based on their report.

HMRC thought the system was open to abuse and a potential source of tax leakage, as it was possible that claims might be made for fixtures on which the owner had never paid tax as a disposal value. Under new rules, a ‘pool’ has to be established which contains all the items that can potentially be claimed.

As a purchaser of a property, you can only claim capital allowances for expenditure the seller has already pooled. And if you acquire a property where no pooling has taken place, no one will be able to claim a capital allowance. It will then become an ongoing issue.

Commercial property contracts will now include a clause that requires the seller to pool all relevant assets prior to the completion of the sale as standard. A buyer will then employ a specialist valuer to look for anything that may have been missed. It’s worth remembering that more items qualify for the list than ever before. Back in 2008, it was decided that capital allowances could be claimed on ‘integral’ fixtures, such as electrical, power and heating systems. Essentially, anything that is fixed within the building, and which can’t easily be removed, counts for these purposes.

A couple of points to bear in mind. The rules about pooling don’t apply if the seller has a specific tax exempt status, such as a charity, pension fund or local authority. And the new interpretation of integral features doesn’t apply retrospectively to items bought pre-2008, which are dealt with under a different procedure.

Whether you’re a buyer or a seller, it pays to be aware of the new rules. It’s also well worth having a discussion with your professional accountancy adviser about the best approach to the issue of allowances.

If you would like to discuss anything related to this article please do not hesitate to call Barnett & Turner on 01623 659659 or email Jonathan at jwilson@barnettandturner.co.uk

The new tax climate that no one can avoid

Accountancy isn’t always a discipline that gets the general public talking excitedly. But there are few people who don’t have an opinion about taxation. In the Budget of 2014, the Chancellor raised a new spectre which was guaranteed to cause controversy – the proposal that HMRC would be allowed to dip into taxpayers’ bank accounts and take the monies it believes are rightfully owed to the government.

We could see this announcement as just one part of a wider picture of the Revenue cracking down on tax avoidance, of course.

There’s been plenty of high-profile debate about large businesses organising their affairs in such a way that they can seemingly duck out of paying corporation tax in the UK. Critics may see this as a cynical attempt to avoid corporate responsibility, while others point to the fact that these companies are employing large numbers of people and paying significant amounts of national insurance.

Whatever the rights and wrongs of the issue, the climate has noticeably shifted and many accountants find that clients are reluctant to take advantage of perfectly legitimate planning opportunities to reduce their tax liability.

One long-standing option for small business people, for instance, is to pay themselves a modest salary and remunerate themselves via company dividends. When used to its full advantage – perhaps in a company where a husband and wife each have a 50% stake – this strategy reduces national insurance contributions and can take individuals out of the higher-rate personal tax bracket.

Other arrangements are more elaborate and require what is called a Disclosure of Tax Avoidance Scheme (DOTAS) to the Revenue. There has never been a guarantee that such schemes, often promoted by specialist firms, will be accepted by HMRC. In fact, they are frequently challenged in court and the government will attempt to recover the sums of tax they claim are due. Promoters of the schemes may well arrange insurance to cover clients’ professional fees in these circumstances.

Under new regulations in the Finance Bill, however, HMRC will be able to take the tax at source before any proceedings begin. The burden of proof seems to be shifting towards the assumption that the scheme is irregular. It’s only if you manage to prove your case that you can recover the sums involved. And in the meantime, the government has being sitting on your cash.

No one likes uncertainty. So as high-net-worth individuals consider their options, it may be that more and more will choose to play safe. It’s also worth bearing in mind that the fees charged by specialists in these tax schemes can be quite off-putting. There’s always a danger that the lure of a tax saving is actually disguising arrangements which are not quite as financially beneficial as they first appear. So the message might be: don’t let the tax tail wag the commercial dog.

It’s difficult to be certain of how this area of regulation will develop in the coming years. Perhaps there’s a potential silver lining in what seems an increasingly cloudy world? If the overall tax take increases and avoidance is reduced, some might argue that tax rates are likely to fall. In the meantime, the important thing is that you consult with your accountancy firm carefully and go into any scheme with your eyes wide open. Be aware of the facts. And understand the risks.

If you would like to discuss anything related to this article please do not hesitate to call Barnett & Turner on 01623 659659 or email Jonathan at jwilson@barnettandturner.co.uk

Why EMI options could be exactly the right incentive for your key staff members

There are plenty of ways of measuring the success of a growing economy, but one very specific signal that things are on the up is the increased interest in Enterprise Management Incentive (EMI) options. Although they’ve been around for a few years now as a way of retaining and rewarding key staff, more and more businesses are starting to take notice. The bottom line is that EMI options are a tax-efficient way of granting shares to key employees. Critically, they qualify for Entrepreneur’s Relief under most circumstances, which means the capital value of any shares would only be taxed at 10% on the sale of a business.

Perhaps you’re an owner-manager of a business and thinking about the best way to incentivise a key member of staff? Although it’s always important to take professional advice from your accountant, here are some key facts that are worth bearing in mind.

First, the granting of options allows a level of protection for existing shareholders. The options will lapse if the beneficiary chooses to leave, which gives reassurance and reduces the burden on the business of costly shareholder disputes.

Another point to note is that trigger points or ‘conditions’ can be built into the arrangements. Usually the options can only be realised when the business has moved beyond certain profit thresholds. As a result, your employee is strongly motivated to help the company grow. And although current owners might lose some shareholding, they are compensated by the overall increase in value.

For Entrepreneur’s Relief to apply in normal circumstances, a director or employee must hold more than 5% of the voting share capital in a business for more than the 12 months preceding the sale of the shares. With EMI options, you can still qualify for relief with a lower percentage shareholding and the 12-month clock starts when the option is granted and not when it is exercised. It is therefore possible to exercise the option immediately prior to a sale and still benefit from Entrepreneur’s Relief. It’s a flexible system that gives you a lot of control, provided you are a business with fewer than 250 people and the options aren’t worth more than £250k at the date of grant.

A typical scenario might be an owner of a business who hopes for a trade sale in a few years and who has one or more employees that will be critical in growing the value of the company. The business owner can grant options which trigger when specific targets have been met. The staff member involved would then exercise the options prior to the sale. This either provides a share in the overall value on exit or provides an amount which the employee could use to support a management buy-out.

The agreement itself doesn’t necessarily need the involvement of lawyers and can often be handled by your accountants. So if you’re looking for a way to incentivise key staff members and grow your business, why not talk through the possibilities?

If you would like to discuss anything related to this article please do not hesitate to call Barnett & Turner on 01623 659659 or email Jonathan at jwilson@barnettandturner.co.uk

The dividend that comes with sensible remuneration planning

When you’re running a small business, it’s all too easy to end up paying more tax than you actually need. One of the problems, of course, is that you’re very much focused on the day-to-day priorities of the company and ensuring its success. And if your enterprise is a family concern, with joint ownership between a husband and wife, even keeping up with your cashbook accounting and VAT can sometimes be a challenge if you’re pressured for time and worrying about securing the next sale. It’s definitely worth creating a space to talk to your accountant about remuneration planning, however. Some very straightforward steps can help to minimise your liabilities and get the most out of the business you’re trying to grow.

An example might be a company in which a husband and wife are both paying themselves significant salaries. Perhaps one partner is a director on £75,000, while the other takes home a pay cheque of, say, £26k. In this scenario, two problems arise straight away. The first is the high level of PAYE and National Insurance within the company and the second is an unnecessary burden of extra personal tax. The spouse on the lower salary is not using up their basic rate band, while the higher earner finds themselves in the higher-rate tax bracket.

The solution here might be to reduce both salaries to the level at which no national insurance is due and for the two business owners to both take dividends up to their basic rate bands instead. Rather than a 20% levy on the £26k salary, there would be a 10% tax on dividends under the basic-rate band. The director, meanwhile, would end up paying less tax on their dividends than they did via PAYE.

This strategy would provide a significant additional joint net income of approximately £19k a year to the director and their partner, while the cost to the company would remain the same.

If you’re in any doubt about whether your own affairs are arranged in the most efficient way, then a conversation with your professional adviser is the first starting point. A small amount of planning can potentially reap a big reward.

If you would like to discuss anything related to this article please do not hesitate to call Barnett & Turner on 01623 659659 or email Jonathan at jwilson@barnettandturner.co.uk

When you’re thinking about school fees, it pays to do the maths.

  Parents understandably want to give their kids the best possible start in life and, for some, that means digging deep into their pockets for private education. At the moment, around one in every fifteen children attends a fee-paying institution, according to the Independent Schools Council (ISC), but the percentage climbs quite rapidly once you reach the post-16 age group. In fact, 18% of young people are privately educated after they’ve completed their GCSEs.

If you’re thinking of sending your own son or daughter to an independent school, it’s probably a good idea to have a chat with your accountant first, as you’re actually making a significant financial decision. Although some schools may offer discounts if you’re able to pay up front or have more than one child to educate, average fees for day pupils in the UK are over £3,300 a term, so unless you’re incredibly wealthy, you need to be doing some forward planning to cover the costs.

Of course, your capacity to shoulder the financial burden is closely inter-related with your other household outgoings. Perhaps you need to look again at your mortgage, for instance, and think about the way of getting the best possible deal. With some renegotiation, you might find you can change your payments or switch to a more advantageous rate.

What about ISAs? Remember that the limit for investment was raised this tax year to £15,000 (from 1July 2014), so make sure you make the most of your tax-free allowance. Every extra saving you can make is going to make a difference if you’re taking on a new and significant expense.

Although it’s obviously always good to take professional advice about your own finances, there may be other people in the equation too. Grandparents may be able to assist with fees and can possibly reduce their inheritance liability. They should also consider using a trust to make any contribution if they’re looking to maximise the tax advantage.

The overriding message is to plan ahead. Even if you might not intend to invest in private education for some years yet, it pays to start the discussion now.

If you would like to discuss anything related to this article please do not hesitate to call Barnett & Turner on 01623 659659 or email Jonathan at jwilson@barnettandturner.co.uk

Some big news on ‘small pot’ pensions: up to £1,500 is up for grabs

This year’s budget included a few eye-catching announcements, including the decision to increase the ‘small pot’ pension fund from £2,000 to £10,000. Part of the government’s drive to make pensions more flexible, the new rule also had the effect of creating an interesting opportunity for shrewd investors. Although we’re talking about a loophole that has actually been acknowledged by HMRC, it won’t be formally addressed until April 2015. And that means you have a perfectly legitimate window in which to act, if you’re currently employed and aged between 60 and 75. Let’s take a scenario in which you open a personal cash stakeholder pension and pay £8,000 into it. HMRC will top this up to £10,000, accounting for the automatic base tax relief of 20%. It’s possible – after a cooling-off period – to take the balance as cash under the small-pot rules. Previously, you were allowed to draw it as a lump sum on two occasions, but under the new rules, you’re able to do it three times.

Now for the maths. Because only 75% of the £10,000 is taxable, £2,500 remains tax free. And after you’ve paid £1,500 on the remaining £7,500 (at the 20% basic rate), you’re entitled to the £6,000 that’s left.

Your total pot is therefore worth £8,500, giving you a profit of £500. So if you go through the process on two further occasions, you’ll be £1,500 wealthier before provider charges. (If you pay tax at the highest rate, you would actually have a potential gain of £3,375, although there’s a delay in tax relief as it would be processed via your next return.)

The truth is that this loophole always existed, but with the £2k cap on the small pot, pension investors were unlikely to see any significant benefit. Now the figure is five times as high, people are paying attention for the first time.

One word of caution. If you approach a pensions adviser about this arrangement, it’s likely their fees would eat substantially into any potential profit. A more sensible course of action might therefore beto speak to your accountant. Although we’re not authorised to advise on specific products, we’re always happy to give you general advice and talk you through the tax implications.

If you would like to discuss anything related to this article please do not hesitate to call Barnett & Turner on 01623 659659 or email Jonathan at jwilson@barnettandturner.co.uk

£30k in tax-free income for married pensioners? It’s not a pipedream.

When we think about tax planning, it’s tempting to see it as the preserve of the wealthy. The reality, however, is that the process can be just as important – if not more so, in fact – for people on lower incomes. After all, a relatively small saving in tax can make a big difference to someone on a budget. £1,000 might be a well-deserved holiday, for instance. And there are perfectly legitimate ways of minimising your tax burden if you take some good advice at an early stage. Recent government announcements on the Personal Allowance and Starting Rate Band spell good news for many people, particularly pensioners. In tax year 2014/15, the personal allowance has finally reached the magical £10k threshold and is set to increase in April 2015 by another £500. To put the figures in context, this represents more than a 100% increase over the amount allowed just a decade ago. Of course, the amount we can all save in tax-free ISAs has increased to £15k per annum as well.

The current basic state pension is approximately £5,800 pa, which potentially leaves a married couple with £5,000 each of unused Personal Allowance to set against other income. It’s important to ensure that you divide your income where possible to make the best use of each spouse’s allowance and rate band.

Imagine a scenario, for instance, in which there’s a modest amount of bank interest each year and a gross annuity payment of, say, £400 each month. The two pensions wouldn’t attract tax, as they would broadly fall within the level of the Personal Allowance. The interest is usually paid net of 20% tax and with a 10% Starting Rate Band of £2,880 to set against investment income, tax on £3,000 worth of interest would work out at approx £300 rather than £600.

From April 2015, the news gets even better. At that point, the Starting Rate Band will increase to £5,000 and the tax reduces from 10% to zero. By managing tax affairs sensibly, each partner in the marriage could receive pensions to the value of around £10,500 and another £5,000 in gross bank interest without paying tax.

If you’ve saved throughout your working life and have a modest income now, you might not necessarily see the need to retain an accountant on an ongoing basis. But it’s certainly worth having an initial consultation to look at your particular circumstances and discuss the options. That small investment could produce a considerable return, allowing you to get even more enjoyment out of your retirement years.

If you would like to discuss anything related to this article please do not hesitate to call Barnett & Turner on 01623 659659 or email Jonathan at jwilson@barnettandturner.co.uk

Thinking of becoming a limited company? Time to go goodwill hunting...

It’s a conversation that many sole traders periodically have with their accountants. Is it a good idea for me to incorporate as a limited company? Although the answer isn’t always clear cut and can depend very much on individual circumstances, there are clearly a number of potential advantages. The rate of corporation tax for small companies is attractive, of course. There are savings on national insurance. And by finding the optimum balance between salary payments and dividends, you can manage your tax affairs more efficiently.

Often accountants will present the transition as being very straightforward, which at many levels is exactly right. The paperwork is fairly minimal and you can simply transfer the assets of your sole proprietor business and move on. But this might turn out to be a missed opportunity.

Forward-thinking advisers will take advantage of the change in status to undertake a tax planning exercise. By making use of existing rules, it’s sometimes possible to save substantial sums in personal tax by capitalising the future earnings of the business. This idea of accounting for ‘goodwill’ on incorporation can often be missed, but it’s a simple idea. Your business is actually worth more than its tangible assets and this should be taken into account in any valuation.

You should always feel confident your accountant has a good, current understanding of the tax regime and recognises the opportunities that potentially exist. With the correct adjuster clause in a legal agreement, you’re protected even in the unlikely event of there being a dispute over the figures. The valuation can simply be readjusted and reflected in the records of the business.

So although it’s important not to let the tax tail wag the commercial dog, if you decide that incorporation is the right route for your business, make sure you look at all the possibilities. We even managed to save one client enough money to help him invest in a new house. It’s just a question of thinking that little bit bigger.

If you would like to discuss anything related to this article please do not hesitate to call Barnett & Turner on 01623 659659 or email Jonathan at jwilson@barnettandturner.co.uk

In a partnership or LLP? New tax rules have big implications.

Partnerships have long been an attractive structure for people running small businesses. They’ve been particularly favoured by owners of professional practices – from solicitors and accountants through to architects and dentists. The fluidity of the arrangement allows partners to change with few tax implications – something that becomes more problematic within the confines of the traditional limited company. From 6th April 2014, new legislation came into  effect which has led many businesses to think again about their partnership status.

The first issue concerns the use of ‘corporate’ partners as a way of managing the tax affairs of the partnership. Given that the corporation tax rate is significantly lower than higher-rate income tax, it made sense to have a company around the boardroom table – helping to manage cashflow and allowing some profit to be taxed at 20%, until such time as it was taken by the individual partners. HMRC perceived this to be a loophole and it’s now no longer an option for either partnerships or LLPs.

The second new regulation applies to LLPs specifically and it concerns the status of the partners themselves. Since the LLP vehicle was first introduced back at the turn of the century, partners have tended to classify themselves as self-employed. Now, this is much more difficult for those with a fixed share of profit. The Revenue expects them to go on the payroll and account for tax under PAYE.

Unless you’re able to demonstrate clearly that you have sizeable influence in the business, have invested capital or there’s a significant variable element to your remuneration based on the overall profitability of the business, then it’s no longer possible to claim self-employment. Although the motives of HMRC are clear enough – to clamp down on more extreme cases of tax avoidance – many observers feel that a sledgehammer is being used to crack the proverbial nut.

The ‘double whammy’ of these two changes is serious enough to prompt a number of LLPs to consider whether they’d, in fact, be better placed as a limited company. If it’s an issue that’s concerning you right now, the first port of call should be your professional accountancy advisers. They’ll be able to give you more detailed advice, assess your options and come up with the solution that’s most appropriate to your particular circumstance.

If you would like to discuss anything related to this article please do not hesitate to call Barnett & Turner on 01623 659659 or email Jonathan at jwilson@barnettandturner.co.uk