Having spent many years building a business, entrepreneurs can still look forward to a maximum tax hit of just 10% when they sell their business, as long as they have organised their business affairs so that they qualify for the CGT Entrepreneurs’ Relief.

The following announcements were posted to the GOV.UK website last month. They provide details of some of the compensation being offered to businesses affected by last month’s flooding across the UK:

 

Employers that provide a company car and pay for the employees’ private fuel create tax, NIC and administrative issues for both parties.

1. Employers will be liable for Class 1A National Insurance charges on the taxable benefit created by the provision of the car and payment of private fuel; unless the employee fully reimburses the private fuel costs, and
2. Employees will suffer a benefit in kind charge for the use of the car and the private fuel provided. The car fuel charge can be reduced, or eliminated, if the private fuel costs are reimbursed.

But what happens if the fuel provided by the employer for private use is electricity?

Electricity does not count as fuel for this purpose. So, for example, where an employer enables an employee to recharge his car at work, or at home, and the employer pays the bill, there is no taxable benefit even if the car is available for private use.

In a recent tax tribunal case a tax payer was denied Capital Gains Tax relief for the cost of improvements to a property as he could provide no evidence of his expenditure to the court.

The court came to the conclusion that the taxpayer had made improvements and were somewhat dismayed by his inability to provide evidence.

This is a timely reminder that it is not only trading businesses that need to keep documentary evidence. Property owners should also ensure that they keep records of property purchases and sales together with copy invoices or other evidence of expenditure to improve their property.

There is a situation where you might be advised to make an election to pay tax. It arises if you sell your company and accept payment in the form of shares (or certain types of loan notes) from the buying company.

Let’s say that you own all of the shares in your company X Ltd and the original cost of the shares five years ago was £1,000.

You are approached by Z Ltd who offers to purchase your shares for £1m and offers you shares in Z Ltd as consideration for the transaction.

What are the tax consequences?

Basically, the share swap is not a chargeable event for Capital Gains Tax purposes. Your holding in Z Ltd will be deemed to have a base cost of £1,000 (the original cost of the X Ltd shares). This tax treatment is automatic. No election needs to be made. No tax is payable.

Why might you want to elect to pay tax now?

The issue that might encourage you to elect to pay Capital Gains Tax when the share swap is completed is Entrepreneurs’ relief (ER). To qualify for ER certain criteria need to be met. For example:

• You will need to be a director or employee
• Hold at least 5% of the ordinary share capital and voting rights
• Have held the shares for at least a year, and
• The company must be a trading company or the holding company of a trading group

The possible benefit arises if you are uncertain that your new holding in Z ltd will qualify for ER when you dispose of the shares at some future date. Any gains that qualify for ER, either now or in the future, would be taxable at 10%; gains that do not qualify would be subject to tax at 28% (based on present rules).

In order to work out the best way forward you should consider your options before completing the sale.

If you are self-employed, as a sole trader or in partnership, and if we assume that your business year end is 31 March, then the profits you earn in the year to 31 March 2014 will form the basis of your tax payments on account for the tax year 2014-15 (unless the year to 31 March 2014 was your final year of trading).

Problems may arise if profits, year on year, fluctuate significantly; either up or down.

Your tax payments as a self-employed person consist of two payments on account and a final settlement on the 31 January following the end of the relevant tax year. For example you will make equal payments on account for the tax year 2013-14 in January and in July 2014. If this is insufficient to cover the total tax and Class 4 NIC due then you will have a top up payment to make in 31 January 2015.

Payments on account are initially based on your Self Assessment liability for the previous tax year – in the above example, the January and July 2014 payments will be based on your actual taxes due for 2012-13.

If your trading profits have not increased or reduced significantly, the payments on account will usually cover tax due and there will be perhaps a small difference, under or overpaid, that will need to be sorted out in the following January.

However, if your profits have significantly increased or reduced, then cash flow considerations need to be taken into account.

If your profits for the year to 31 March 2014 are likely to be higher than the previous year:

In this case any payments on account you make January and July 2014 are unlikely to cover taxes due for 2013-14 and a balancing payment will arise on 31 January 2015.

If your profits for the year to 31 March 2014 are likely to be lower than the previous year:

In this case any payments on account you make in January and in July 2014 are likely to be more than you need to make to cover taxes due for 2013-14 and a balancing overpayment will arise on 31 January 2015. This can be addressed by making an election to reduce the payments on account to a more appropriate amount.

If either of these scenarios is likely to apply to your self-employed business profits, we advise you to have your accounts drawn up as soon as possible after your year end. The tax advantages can be summarised as:

• If your profits have been increasing, you will have the maximum period to create a cash reserve to cover any shortfall in taxes due on 31 January 2015.

If your profits have been reducing, you can make an election to reduce the second payment on account for 2013-14, due on 31 July 2014.

HMRC do not send communications to tax payers by email. If you receive an email purporting to be from HMRC, it will be some sort of “scam” and should be ignored (deleted from your PC).

Do not under any circumstances open any attached files or disclose any personal information. Typically, the email will offer you a tax refund if you send your bank details, or some other inducement to part with similar information.

HMRC will either call you or send a letter if they need to communicate with you.

Where employees are provided with living accommodation, a car or a van, any private use is usually subject to specific scale charges or other rules. This article considers the provision of two further classes of assets provided for an employee’s or director’s personal use.

The cash equivalent of the asset provided is the annual value of the asset’s use, plus expenses (other than costs of acquisition) incurred in connection with the asset that would not have been incurred without the provision of the benefit.

1. Land: the annual value of the asset’s use is the greater of the gross rateable value when the property was last rated, and any rent paid by the provider.
2. Assets other than land: the annual value of the asset’s use is equal to 20% of the asset’s market value when it was first used to provide a benefit. If the provider paid rent for the asset that was more than the 20% calculation, then the higher figure is used.

If an asset is provided for part of a tax year the above cash equivalent figures would be adjusted accordingly.

For example:

A company buys a boat for a director’s private use on 6 April 2013 for £25,000. It takes out a loan to buy the boat and interest charges are £4,500 in the year to 5 April 2014.

Running costs paid by the employer in the year are £2,400 and the director makes a contribution of £1,500.

The benefit would be £5,900 (20% of £25,000 plus expenses £2,400, less £1,500 made good by the director).

The bank interest charges are disregarded as they are part of the cost of acquisition.

Although we are now at the beginning of a new calendar year we are in the last quarter of the current tax year.

Whether you are a business person, property landlord or pay significant amounts of tax as an employed or retired person there is now a short window of opportunity to examine your likely earnings for the 2013-14 tax year and, more importantly, see what can be done to minimise those liabilities.

It is impossible to outline all of the possible tax planning issues that could be of benefit. We have listed below a few and would suggest that you give us a call to discuss your individual circumstances.

• Have you maximised your ISA investments this year?
• Have you maximised your pension contributions?
• If possible have you utilised your Capital Gains Tax personal exemption? Currently £10,900 for 2013-14.
• If your employer still pays for the private fuel used in your company car you can effectively avoid the car fuel benefit charge if you repay your employer for the private fuel before the end of the tax year. It may be worth crunching the numbers as the tax on the benefit in kind is expensive and the private fuel refund may be less.
• For Inheritance Tax purposes each person can give £250 a year to any number of recipients, as well as £3,000 annually over and above that amount. They can also make regular gifts out of their income (not capital) that should fall to be exempt.
• If you are married or in a Civil Partnership and one partner/spouse has a much lower level of earned income, consider transferring income producing assets to the lower income earner. With Income Tax rates at a maximum 45% this current tax year, savings could be significant.
• If you or your partner/spouse are affected by the Child Benefit claw back for high income earners, have you considered equalising your income (if possible) to avoid the charge, or have you considered your obligation to file a Self Assessment tax return to disclose your liability?
• If your income is likely to exceed £100,000 this tax year have you considered the potential reduction or loss of your personal tax allowance?
• If you are a high income earner paying tax at the 45% additional rate could you take advantage of charitable donations reliefs or other planning opportunities to defer, reduce or eliminate the impact the 45% rate?
• Is it likely you will have business tax losses for 2013-14?

As indicated above every person’s circumstances are different and the above list is by no means exhaustive. Please call if you would like to organise a review of your tax planning opportunities for 2013-14.