Category Archives: Tax issues

Chancellor’s Autumn Statement – Initial reaction for Owner Managed Businesses

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Pretty much business as usual for owner managers

Most owner managers should be reasonably pleased with the key proposals announced in Mr Osborne’s Autumn Statement. As the UK is still grappling with unparalleled debt and the ripples of the Eurozone crisis, they could not really expect any large tax hand-outs.

Following the Autumn Statement, the owner managers’ tax landscape looks relatively unchanged and, more importantly, relatively unscathed. They are still able to extract dividends from their companies at modest tax rates (with a maximum effective rate of 30.6% from 6 April 2013) and spousal dividend planning remains robust. Companies continue to provide effective tax shelters for ‘surplus profits’, enabling those profits to be retained at low corporate tax rates.

In recent years, there has been considerable debate about the use of aggressive partnership structures and the possible legislative weapons that HMRC could use to nullify their effectiveness. Businesses that have opted to use these structures are likely to be concerned about the proposals for a detailed HMRC study in this area. Thankfully, the Government has opted not to introduce yet more complex legislation to tackle personal service companies, although companies vulnerable to IR35 challenges should be prepared for more vigorous HMRC policing in this area.

For larger owner managed companies, business, the planned reduction in the main corporation tax rate to 21% from April 2014 will also be welcomed. Many will ponder whether this will ultimately lead to a single corporation tax rate (and the chance to get rid of ‘associated companies’ (!)). Or will the chancellor be looking to retain a commensurately lower tax rate for ‘smaller’ companies?

Probably the most welcome proposal is the ten-fold increase in the Annual Investment Allowance (AIA) from the current £25,000 to £250,000 from 1 January 2013. This effectively reverses the reduction in AIA to £25,000 that only came in from April 2012 so there are likely to be complications for accounting periods straddling the changeover date. The new £250,000 AIA limit is scheduled to last for a two year period, but will give many owner managed businesses an immediate tax write off on all or most of their capital expenditure. Businesses planning to incur significant capital spending should now wait until the new year.

Pension funds have always been an easy target for tax raids but, in my view, the reduction in the annual allowance to £40,000 and lower lifetime cap from 2014/15 is likely to affect relatively few owner managers. Anecdotal evidence suggests that most of them gave up on traditional forms of pension provision some time ago, preferring to control their own ‘pension’ pot by investing funds through personal investment companies or suitable property investment. A properly structured family investment company still remains a pretty effective vehicle for retaining and controlling wealth.

Many will be dismayed to learn that the Government intends to push ahead with its controversial and impractical proposals to allow shares to be issued to employees in exchange for giving up many of their employment rights.  But at least, we now have an announcement that the beneficial rule enabling entrepreneurs’ relief (ER) to be claimed on all post-5 April 2012 EMI options (irrespective of size) will be revised.  Thus, for EMI options granted after 5 April 2012, the relevant 12 month holding period for ER will run from the date the option is granted (as opposed to the date when the option is exercised, as was originally proposed).  This will enable the benefit of the 10% ER CGT rate to be available for the vast majority of exit-based EMI option schemes.

The owner managed business sector will be thankful that it has avoided the spotlight, which has been reserved for large multinational groups. Following intense media coverage about tax avoidance by a number of multinationals, this sector is likely to bear the brunt of HMRC scrutiny. The Treasury clearly believes there are substantial tax revenues waiting to be collected in this area.

New edition of my book on Tax Planning For Family and Owner Managed Companies

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I am delighted to announce that Bloomsbury Professional has just published the latest 2012/13 edition of my book – Tax Planning For Family and Owner Managed Companies’ – which has been heavily updated for all relevant tax development and changes. The book can be ordered from Bloomsbury Professional (at www.bloomsburyprofessional.com), Amazon or any other reliable book seller.

Tax Planning For Family and Owner Managed Companies – 2012/13

Tolleys Tax Awards – 24 May 2012

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We all had a thoroughly great time at the Tolleys Tax Awards 2012 at London’s Hilton Park Lane Hotel. The event, now probably the biggest event in the ‘Tax Calendar’, was attended by over 700 guests – a full house.

We had our own table of 11 for our friends and clients. We had been nominated for the ‘Best Single Office Tax Practice Award’, which was a great achievement in our second full year of practising.  Alas, we were unlucky on the night but maybe next year!

Many of our guests have already emailed to say how much they enjoyed themselves. The food was tasty (an achievement given the number of diners).  Our entertainer and raconteur, the comedian and actor – Marcus Brigstocke, was a great choice and very funny.  Marcus also presented the various tax awards to recognise excellence in the tax profession and it was great to see many of our friends take well-deserved awards, including Anthony Thomas – (President of the Chartered Institute Of Taxation) who received “The Tax Personality Of The Year Award”.

Some of our gathering then made their way to the post-awards casino entertainment (with  ‘paper money’), fairground attractions, and the live jazz band. Two of our guests, Paul Walden and Derek Nicol from The Flying Music Group, had a great run on the black jack table and Paul also excelled on the large scalectrix circuit!

We hope to be back next year…

R.I.P. ESC C16

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We had to say goodbye to our ‘old friend’ ESC C16 on 29 February 2012,when it was abolished by HMRC.

Historically, the ESC C16 concession enabled distributions made to shareholders before a DISSOLUTION to be treated as beneficial ‘capital gains’ receipts, provided they were made before the directors applied to strike the company off. In effect, HMRC permitted
the distributions to be treated as capital distributions – applying the same tax treatment as if they had been paid out during the course of a winding-up – provided certain assurances were given. For example, HMRC had to be satisfied that the company:
• Had no intention to carry on the trade/business in future;
• Intended to pay off/discharge its debts (including its corporation tax liability) and distribute its remaining assets to its shareholders (or had already done so);
• Did not intend to transfer its business to another ‘commonly controlled’ company – HMRC clearly seeking to prevent unacceptable ‘phoenix’ arrangements.

The story of ESC C16’s demise can be traced back to the House of Lords ruling in R v HMRC Commissioners ex p Wilkinson [2005] UKHL 30. This case reviewed the scope of HMRC’s discretion powers to make extra-statutory concessions. As a result, HMRC was forced to review all its published concessions and, as part of this process, The Enactment of Extra-Statutory Concessions Order 2012 replaced ESC C16 with new legislation (s1030A and s1030B CTA 2010) from 1 March 2012 onwards.

On 1 March 2012, ESC C16 was replaced by the more restrictive statutory rules in s1030A CTA 2010. The new legislation provides that distributions made in contemplation of a dissolution under the Companies Act 2006 will not be taxed as ‘income’ distributions provided:
• When the distribution is made, the company has or intends to collect the amounts payable from its debtors and has satisfied or intends to repay all its creditors (known as ‘condition A’); and
• Importantly, the amount of the distribution or distributions does not exceed £25,000 (known as ‘condition B’).
In such cases, the distribution would be treated as a ‘capital distribution’ under s122 Taxation of Chargeable Gains Act 1992 (TCGA 1992), which effectively triggers a CGT disposal of the relevant shareholding. However, the imposition of an effective £25,000 ‘cap’ on the amount eligible for CGT treatment will now prevent many owner managers extinguishing ‘their’ companies under the dissolution route (remember the predecessor ESC C16 had no monetary limit!). Consequently, companies with net assets of more than £25,000 will now be forced down the formal liquidation route, and will have to bear the significant costs of a formal winding-up.

In the vast majority of cases, paying CGT will be more favourable than income tax, especially where the recipient shareholder is able to claim the beneficial 10% entrepreneurs’ relief (ER) CGT rate.

Where a company is formally liquidated, any distribution made to shareholders during the course of the winding-up is not taxed as income (s1000 CTA 2010). It therefore falls to be treated as a capital distribution under s122 TCGA 1992, triggering a deemed disposal of (an interest in) the relevant shares. The same beneficial tax treatment is available for pre-dissolution distributions provided they do not exceed £25,000.

Steve Wright’s Golden Oldies – Thursday 2 February 2012

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I was absolutely surprised when my name was mentioned by Steve Wright on the air last Thursday – I had been chosen to select the Golden Oldies (1/2 hour slot from 3pm) that day (I sent a list of 30 songs some three weeks before and had almost forgotten about it).

Some of you have asked to see my personal selections, so here goes:

(Note – Steve played the songs marked *)

If I Had A Hammer….Trini Lopez
Telstar…The Tornadoes
All The Love In The World…The Consortium
California Dreamin’…Jose Feliciano *
No Milk Today…Hermans Hermits *
The Crying Game…Dave Berry *
This Guys in Love With You…Herb Alpert *
Hey Jude…Beatles *
Friends…Arrival
Sympathy…Rare Bird
Bridge Over Troubled Water…Simon & Garfunkel
Home Lovin’ Man…Andy Williams *
Falling Apart At The Seams…Marmalade
What’s Going on…Marvin Gaye
Brandy (You’re A Fine Girl)…Looking Glass *
Lightning Tree…The Settlers
If You Could Read My Mind…Gordon Lightfoot
Come And Get It…Badfinger
Your Song…Billy Paul
I Don’t Believe In Miracles…Colin Blunstone
Everything Changes…Lindsay Duncan
Star…Stealers Wheel
Young, Gifted And Black…Bob & Marcia
I Only Want To Be With You…The Tourists
Soley, Soley…Middle Of The Road
Fade To Grey…Visage *
Through The Barricades… Spandau Ballet
Smooth Criminal…Michael Jackson
Toy Soldiers…Nikita
You’re Gorgeous..Baby Bird
You’ll Never Walk Alone…Gerry & The Pacemakers (original version)

I’ve also ‘pasted’ an extract from the show’s website – showing my part of the playlist for the day

Steve Wright_Golden Oldies_PR tracks_Feb 2012

Be aware of the 5% ER shareholding trap(s)

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Over the last year or so, I have come across a few situations where owner-managers have unwittingly invalidated their qualifying entrepreneurs’ relief (ER) status by failing to appreciate the precise requirements of the 5% shareholding test, which has created all sorts of problems on the sale of their company.

Section 169I, Taxation of Chargeable Gains Act 1992 (TCGA 1992) requires the seller to hold at least both:

• at least 5% of the ordinary shares (which is measured in terms of their ‘nominal value’) and
• at least 5% of the voting rights.

There are no ‘associate’ rules here, so the 5% must be held by the shareholder in their own right.

In one particular case, the two main director shareholders had issued 10,000 10p variable rate preference shares to a number of key employees. They failed to indentify that the ‘preference shares’ – which carried variable dividend rights – would be classified as ordinary shares for the purposes of the ER rules. (All shares are ordinary shares except fixed rate preference shares – see s 989, ITA 2007 (s 169S, TCGA 1992)). The fact that they each continued to hold 50% of the voting power was insufficient by itself.

It would have been possible to correct the situation for the future, for example, by arranging for an appropriate bonus issue of ordinary shares to the director-shareholders. However, they suddenly received an unexpected £8m offer for the purchase of ‘their’ company. As things stood, they could not sell their shares with the benefit of ER!

In real life this ER problem was fortunately resolved with the acquiescence of the purchaser . However, the purchaser wanted to book the acquisition ‘Day 1’ so it was not possible to use ‘put and call’ options. Instead, the purchaser created a ‘bid-company’ (Bidco) which was also structured to be the ‘seller’ director-shareholders’ ‘personal company’ for ER purposes. They then took their sale consideration in the form of non-qualifying corporate bonds issued by Bidco so they had to wait another 12 months for their money!

Sometimes, purchasers will not be willing to complicate their acquistion. Owner managers must fully fully understand the wider ER implications of issuing shares to employees and venture capitalists!

Split year non-residence concession ESC A11 and s811 ITA 2007

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Many tax advisers will be familiar with the ‘split-year’ residence treatment offered by ESC A11. This will include cases where an individual leaves the UK to work under a full-time employment contract abroad (spanning at least one UK tax year). A word of warning as some have not looked at the small print of the concession. It does not affect the UK tax treatment of dividends paid after someones leaves for the purposes of a long term employment contract abroad. ESC A11 specifically says that the concession does not apply to for the purposes of s811 ITA 2007 which applies to limit UK tax on UK dividends etc received by a non-residence. This only applies for complete UK tax years and is not therefore subject to the ESC a11 split year treatment. This can have an important impact on the timing of UK dividend payments after someones goes abroad and claims non-resident status for the remaining part of the UK tax year of departure. Overseas tax and treaty relief also needs to be factored in.