Taxing Times – October 2017

In this edition, read about:

  • The perils and pitfalls of companies lending money to their owner managers
  • Dates & deadlines for your diary
  • PAYE updates
  • Whats new in the world of tax?

FREE SEMINARS:

BACK by popular demand, we are holding two further cloud accounting seminars on Wednesday 11 Oct at The Shepherd’s Inn, Rosehill, Carlisle and then again on Monday 30 Oct at North Lakes Hotel, Penrith. Everything is going online and accounts, tax and payroll are no different – cloud accounting is here to stay and is the digital way forward. Get a head start before digital reporting becomes a legal requirement. There are lots of different cloud packages available, but which one works best for YOU and YOUR business? Click here for further information and details of how to book. This seminar is free to attend and is open to both existing clients and non clients of Dodd & Co.

Neither a lender nor a borrower be…

The situation of an owner managed company making loans to its owners and/or their relatives is very common.  But unless very detailed rules existed about how to treat those loans for tax and NIC purposes, this would be a way of getting money to individuals without them having to pay tax on it, which of course HMRC would strenuously object to!  Therefore, as you might expect, there are some specific tax rules concerning such loans.

Loans to participators – the main rules

The tax rules kick in when a “close company” makes a loan to its “participators”.   A close company is one which is controlled by 5 or fewer “participators” (including their “associates”) or any number of directors.   Participators are, broadly, the shareholders of the company, together with their “associates”.  Associates are spouses, blood relatives (parents and grandparents, siblings, children and grandchildren, but not aunts/uncles or nieces/nephews), business partners, and partnerships in which a shareholder or an associate is a partner.

The idea behind the close company concept is that if it is “close” its owners or directors (who are often the same people) can tell it what to do and control who it makes loans to.  So a shareholder could make the company give him (or his mum or his sister etc) a loan without any tax passing to HMRC if there were not some very specific rules to prevent this happening!

Therefore, the close company loans to participator rule kicks in to say that, if a loan to a participator is made and is NOT repaid to the company within 9 months of the year end, then a tax is levied on the company and has to be paid to HMRC.   Remember that a participator is mum, dad, relatives, business partners and not forgetting also partnerships related to the participators – so it is very widely drawn and extends past the actual shareholders themselves.

This tax charge is know as s455 tax.  The rate of s455 tax used to be 25% but is now 32.5%.  When the dividend tax rate increased in April 2016, making the effective rate for higher rate taxpayers 32.5%, HMRC also made the s455 tax rate 32.5% , as they didn’t want it to be cheaper to take a company loan and pay s455 tax than it was to pay a dividend.  Clever, those lads and lasses at the Treasury!

S455 tax is only a temporary tax charge as it is repayable once the loan is repaid, but it can only be claimed back 9 months and 1 day after the end of the accounting period in which the loan  is repaid. That means there can be a very long delay between paying the s455 tax and eventually getting it back from HMRC, which could cause the company cash flow problems, especially if it wasn’t expecting to pay the s455 tax in the first place!

For example:

A company has a year end of 31 August 2017. Its corporation due date is 1 June 2018 (assuming it is not a quarterly instalment payer).

Alex (a participator) takes a £100k loan from the company.

He repays it on 30 June 2018.

30 June 2018 is more than 9 months after the August 2017 year end so s455 tax is due of £32,500 (32.5% x £100k).

The s455 tax is due on 1 June 2018 along with the normal corporation tax liability.

The loan repayment date (30 June 2018) falls into the year ended 31 Aug 2018, so the s455 tax is due back 9 months and 1 day after the end of the accounting period i.e. it cannot be claimed until 1 June 2019 .

So in this example there is an 11 month delay between repayment of the loan and being able to claim back the s455 tax (plus the many weeks it will take for HMRC to actually issue the repayment!)

Anti avoidance rules on Bed & Breakfasting

Of course it would be very easy to imagine a scenario whereby the participator temporarily repays the loan to the company within 9 months of the year end, so that the s455 is avoided, but then takes it out again immediately (or in the near future) – so it isn’t a real repayment, just something done to avoid having to pay the s445 tax.  In the 2013 Finance Act, HMRC got wise to this and introduced specific legislation to prevent it.  Although it has been around for a few years now, it isn’t necessarily that well known, so here is how it works.  There are two circumstances in which the anti avoidance rule bed and breakfasting applies:

  • The 30 day rule – this says that if a person has a loan of more than £5,000 (but less than £15,000) and repays it then s/he or an associate withdraws an amount of more than £5,000 within 30 days, the repayment is “looked through” as if it had never been made. So the loan will not have ben cleared within 9 months of the YE and s455 tax will be due; and
  • The “anytime” (or “arrangements”) rule  – this rule is much more widely drafted and says that if the loan is more than £15,000, if it is repaid and then an amount in excess of £5,000 is drawn out again (by them or an associate) at any time, the repayment is treated for s455 tax purposes as if it had never been made.  It is necessary for there to have been an “arrangement” at the time of the repayment for the rule to apply but the concept of arrangement in this sense is very wide.  It could be making an arrangement to temporarily increase a bank overdraft so that funds are available to repay the loan (knowing that the funds will have to be withdrawn again to clear the bank overdraft).  Or borrowing funds from another business the shareholder is involved in (again knowing that the funds will have to be withdrawn from the company after repayment because the other business needs it for working capital).  Any situation where the repayment is made to the company in the knowledge that the shareholder cannot actually leave them there and/or the flow of funds is a bit contrived (borrowed from Peter to pay Paul, so to speak) is likely to trigger this rule.

With both of these anti avoidance rules, they are supposed to do what they say on the tin – protect against avoidance.  So what about people who genuinely repay a company loan rather than doing a bit of sleight of hand with “temporary” repayments? Is it possible now to repay a loan, escape the s455 tax then take a new loan further down the line without invoking the Bed and Breakfasting rules?  The answer is, yes it is, as there is a “get out” clause in the new legislation.   What we have with the Bed and Breakfasting rules is a particular section which effectively says that, where a loan repayment results in a charge to income tax,  then withdrawal of further monies from the company doesn’t trigger the Bed and Breakfasting rules.  The rationale behind this is that if someone is repaying a company loan out of income that they have to pay tax on personally, HMRC aren’t bothered about a further withdrawal from the company down the line because they have already had their tax out of the individual!

Therefore Alex (in the example above), could borrow £100k from his company, then repay it by a dividend from the company within 9 months of the year end (which is used to clear his loan account rather than paid out in cash), and then borrow another sum of money from the company after the repayment.  No s455 tax applies as he has repaid the loan within 9 months of the year end, and the Bed and Breakfasting rules do not apply as the repayment by dividend gives rise to an income tax charge for Alex in due course (though he will have a very high tax bill!).

Summary

The rules on taxing loans made by a close company to its participators (effectively shareholders and their relatives) have gotten increasingly complex, due to the fact that people were using them in convoluted ways to extract income without paying any tax.  Great care should be taken when dealing with loans to participators. In fact, the whole area of extraction from cash from the family company is one on which advice should be taken, preferably in advance!

If you want to talk through any of the issues mentioned above, please call your usual Dodds contact and let us help.

Dates and deadlines for your diary

 

PAYE update

Holiday planning headaches

Holidays are supposed to be relaxing…but for employers who need to plan for workloads and staff absences, they are often an administrative nightmare that can significantly impact service quality or production levels.

Take the case of Ryanair.

After deciding to move their holiday year end from March to December, pilots panicked and rushed to book their remaining holidays during September and October.  This resulted in critical levels of under staffing, with many pilots booking the same days off.  This has led to the cancellation of thousands of passengers journeys and a hefty compensation bill for the company which could run into millions of pounds!

When managing holidays it is vital to keep track of how many employees are off at one time.   You need to have a robust system in place to monitor this so you can also calculate the correct holiday pay.

Running your payroll in the cloud

Running your own payroll and processing the correct wages for your employees can be an onerous task at the best of times and under the rules of Real Time Information (RTI) reporting, you have to pay and report your payroll information to HMRC on or before you pay your staff whether that is on a weekly or monthly basis.  Historically, payroll software is located on your office computer hard drive so you have to be logged in at the office to process it.  But what happens if you want to take that well-earned vacation, or you have important meetings to attend and the payroll needs to be run.

A cloud based payroll system has many benefits that far outweigh any legacy system you may still be using.

Cloud payroll software is accessible anytime and anywhere.  All you need is a computer or mobile device with an internet connection.  You are no longer confined to your desktop PC.  When your payroll is in the cloud, the software provider can make automatic updates to make sure you are always compliant with the latest payroll legislation and rate changes.  Cloud payroll stores all your payroll records in one secure place and there is no need to take a manual back up on your PC ….your payroll history is not lost if your computer crashes !!

If you are already using a cloud based software for your accounting requirements then you can link your payroll information and streamline your systems avoiding duplication of work.

The benefits of moving your business to the cloud far outweighs the temporary inconvenience of migrating your data.  If you’d like assistance in migrating, or simply want to find out more about cloud based payroll or cloud accounting software solutions please give our cloud experts a call.

Motivational thought of the month:

Tax joke of the month

Which clients do short tax accountants like best?

Small businesses (boom boom)

What’s new in the world of tax?

Become a “national treasure” to escape tax scandal

Jimmy Carr has claimed that Gary Barlow received less criticism than him for using an aggressive tax avoidance scheme because the Take That frontman is a “national treasure”. The comedian was criticised by David Cameron back in 2012 after he used a scheme to shelter at least £3.3m. Around the same time, Barlow and two of his Take That bandmates were also exposed after pouring millions into another tax shelter.

Rise in UK millionaires

According to Barclays Wealth, rising house prices have led to the highest ever number of UK millionaires.  One  in 79 people is now a millionaire. Nearly half of all millionaires live in London and the South East, where houses are the most expensive.

Calls to make tax system fairer

The Commission on Economic Justice has declared Britain’s economic model “broken”.  The group, backed by the Archbishop of Canterbury and senior business, academic and trade union figures, says growth since 2008 has benefitted the rich while leaving the young poorer than their parents for the first time in generations. Most Reverend Justin Welby said: “We need a fairer tax system where those who benefit most from the economy – whether through income, wealth or investment – pay their fair share.” Meanwhile, Iain Duncan Smith is leading 44 Tory MPs in calls for a tax and benefit system that encourages marriage.

BBC stars facing tax hikes

Following pressure from HMRC, some of the BBC’s top presenters are facing tax increases on their earnings (at last – this issue has been broiling for some while!) Many of the BBC’s biggest names have routed their salaries through personal service companies so they paid only 20% (now 19%) corporation tax. The BBC has now sent letters telling them it would now tax some workers at source at the full 45% PAYE rate for salaries of £150,000-plus.

Warnings of phishing scams

Taxpayers should be vigilant of cybercrimes and phishing scams where criminals pretend to be HMRC in order to obtain sensitive personal details, especially as HMRC embarks on a number of taxpayer surveys and communications towards the end of 2017.

Sleep improves quality of life, not cash

A healthy amount of sleep has a far higher impact on wellbeing than a 50% increase in disposable income, according to a study by Oxford Economics and the National Centre for Social Research.

We are quite sure that is true, but it would still be nice to try that 50% uplift in spendable pay!

Not fast, but furious: Car dealership gets 10-year ban for scamming customers

The director of a Bangor-based car dealership has been disqualified for 10 years after scamming customers out of nearly £1m by not providing the vehicles that they had paid for.  Gwyn Merion Roberts, director of Menai Vehicle Solutions Limited, took money from customers but then failed to provide the vehicles that had been paid for and also failed to pay customers for vehicles sold on their behalf.

The company was overtrading, selling new vehicles for less than the cost incurred by the company in purchasing them from dealers. This encouraged new custom but resulted in the company becoming unable to meet its liabilities, resulting in customer deposits being used to finance the purchase of vehicles for older customers.

No such thing as a (tax) free lunch

Employees who leave the office to buy a sandwich could pay many different tax levies during the process: income tax, NIC, VAT, the carrier bag tax and eventually the upcoming sugar tax…..Best to stay in the office then!

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