1. Are you operating with too many companies? It can seem like a good idea to set up different ventures in separate companies but this is not always tax efficient. Assuming all profits are paid out as dividends to the shareholders, a single company pays tax at only 19% on its profits provided they do not exceed £300,000. If the profits exceed £300,000, the rate of tax rises gradually until it reaches 30% for profits of £1,500,000 or more. If the same profits and dividends were spread among 10 associated companies, each company would pay 19% on up to £30,000 of profits, gradually rising to 30% for profits of £150,000 or more per company. This could also result in the companies being pushed into the payments on account regime such that corporation tax is due in instalments throughout the financial year. This can have an adverse effect on the cash flow of the business in particular where there is any seasonality.
2. Documentation is key, there must be a paper trail. The Revenue will only seek to charge the amount of tax that is legally due but this could be difficult without sufficient evidence. You could end up paying more tax than necessary, simply because you are unable to provide adequate supporting records. It does not matter how good the tax planning is if it is not documented. There should be written agreements between connected parties and all major decisions should be included in the minutes. In reality such decisions are the result of conversations and not formal meetings but the Revenue does rely heavily on minutes for evidence so it makes sense to minute all major decisions, in particular if assets are transferred between connected parties
3. Do you operate from your own building? If so, have you maximised your capital allowances claim? Capital allowances are often overlooked when a building is acquired. In most cases the building includes plant and machinery so part of the purchase price could attract capital allowances. Where the building was acquired a number of years ago it may not be too late to make a claim.
4. Dividends or salary - which is more tax efficient? - Each case should be looked at according to its own particular facts. However, it is normally sensible to take some as salary so that you pay enough national insurance to preserve your right to the State Retirement pension. You may also need to take a salary to pay into your pension plan. For companies earning less than £50,000 new tax rules mean that taking a dividend can result in a higher corporation tax liability.
5. The sale of your business could result in a tax charge of just 10% if business asset taper relief is available and the asset has been held at least two years. If this relief is not available the alternative is non-business asset taper, which at best could result in a 24% tax rate after ten years of ownership. Business taper relief is usually available on shares in unquoted trading companies. However, there can be a trap where a trading company has investment assets (including excess cash), as this could prejudice the business taper relief available. A regular review of the company's assets and activities is recommended so appropriate action can be taken to preserve business taper relief.
6. Who is your tenant? Generally, property held for investment only qualifies for non-business taper relief. However, where an investment property is occupied by a trading business the gain on a sale will be eligible for business asset taper relief.
7. Consider introducing a share option scheme to retain, recruit and incentivise staff. Enterprise Management Incentives (EMI) share option scheme represents an affordable scheme which offers significant tax savings to both employee and employer. A total of £100,000 of options can be granted to employees, normally options are granted at market rate value. No income tax or national insurance liability should arise on either the grant or exercise of the option. The only tax liability for the employee will be a capital gains tax liability on the ultimate sale of the shares. Business taper relief should apply from the date the option is granted. Furthermore, the company will obtain a tax deduction for the shares when the option is exercised. If the value of the shares on exercise was £100,000 and the company pays tax at 30% the tax saved would be £30,000.
8. Use Inheritance allowances. You and your spouse can each pass on assets to the value of £275,000 (the 'nil rate band') without paying inheritance tax. Therefore £550,000 of the family wealth is effectively inheritance tax free. However if you leave everything to each other, only one of you will use your tax free amount. This can result in tax of £110,000 being paid unnecessarily. Careful drafting of wills so that the nil rate band is left in a discretionary trust with the balance of the estate passing to the surviving spouse absolutely can save this tax.
9. New rules will be introduced for pensions with effect from 6 April 2006.Owner managers could consider making very large contributions to pensions now as sizeable contributions might not be possible post 6 April 2006. Also you could bring forward any plans to acquire commercial property through a pension scheme, as borrowing limits will be severely cut back in most situations after 6 April 2006. Acquisition of residential property could be deferred until after 6 April 2006 as from that date pension funds will be able to invest in residential property including buy to lets.
10. Still borrowing from the bank? This can be expensive taking into account interest and charges. Unquoted trading companies can raise finance via the Enterprise Investment Scheme (EIS) and the Corporate Venturing Scheme (CVS) which offers tax breaks to individuals and companies. Investors who have made a capital gain can defer the tax payable by making a qualifying investment in EIS/CVS shares. To ensure the reliefs are available advice should be sought before the investment is made.
Paula Tallon is Director of Direct Tax at Chiltern plc. firstname.lastname@example.org 020 7153 2494