Dividend allowance, CIS issues, Tax Credits

Last week we examined how shares held in a micro-company can be used to spread income among family members and save tax. We also analysed the current problems with the HMRC online service for CIS, and the fixes available. Finally, we had a reminder about tax credit claims which need to be renewed this month.  

This is an
extract from our topical tax tips newsletter dated 21 July
2016 (5 days before we publish an extract on this blog). You can obtain future issues by registering here>>>
  
Dividend allowance 
From 6 April 2016 every individual can receive up to £5,000 of dividend income per year, tax free, whatever their marginal rate of tax, by using the dividend allowance. Spreading dividends among family members can save tax, but only if the correct company secretarial procedures are followed. 

The spouse, child, or other relative of the company owner, can only receive a dividend from the company if they hold a share which entitles them to receive the dividend. In last week’s newsletter (14 July 2016) we examined what can go wrong if dividends are paid to someone who is not a shareholder. 

Your first step should be to examine the authorised and issued share capital for the company. Many micro-companies operate for years with only one share in issue. If the company owner wants to divide their shareholding with their spouse, the owner needs to hold sufficient shares in order to pass some shares on. 

This may mean more shares have to be issued. Different categories of shares will permit dividends to be paid at different rates and at varying times to each shareholder. To avoid the settlements legislation applying, the new shares should carry full rights to capital on a winding-up as well as variable dividends. 

A gift of shares between spouses or civil partners will be a no gain no loss transfer for CGT. Gains arising on gifts of shares to other individuals will be taxable, but small gains may be covered by the donor’s annual exemption (£11,100) or could be held-over under TCGA 1992, s 165. 

Shares given to employees of the company can subject to income tax as employment-related securities, but there is a general exemption from that legislation for gifts made as part of a family relationship. As an alternative to gifting shares, family members could subscribe directly for their shares. 

Although the dividend allowance taxes up to £5,000 of dividends at 0%, that dividend income is counted for the high income child benefit charge, and for £100,000 threshold that withdraws personal allowances. The tax effect on the recipient of the dividend should be calculated before the dividend is declared or paid. 

This is an
extract from our topical tax tips newsletter dated 21 July
2016 (5 days before we publish an extract on this blog). You can obtain future issues by registering here>>>
 
The
full newsletter contained links to related source material for this
story and the
other two topical, timely and commercial tax tips. We’ve been
publishing this newsletter weekly since 2007; it’s clearly written
and focused on precisely what accountants in general practice need to
know about each week.
You can obtain future issues by registering here>>>


Owner managed company, Alcohol wholesalers and producers, Labour providers warning

Now is a good time to help your clients plan their taxable income in 2016/17. The rules for NIC, and tax on dividends are changing, so all arrangements for extracting profit from owner-managed companies must be reviewed. Clients who sell alcohol wholesale need register with a new Government scheme, which you can help them prepare for. Finally, we pass on a warning about VAT fraud in labour supply chains.

This is an
extract from our topical tax tips newsletter dated 4 February 2016
(5 days before we publish an extract on this blog). You can obtain future issues by registering here>>>

Owner managed company 
The combination of tax and regulation changes coming into effect in 2016/17 mean that every small company should review the remuneration strategy for its owners. Let’s look at each factor briefly: 
  
Salary 
Paying a salary just below the NIC primary threshold of £8060 will preserve entitlement to the state pension, and incur no employee or employer’s NIC. Any payment above the secondary threshold (£8112) will incur employer’s NIC, but where the company has only one employee the employment allowance won’t be available to cover that NIC.   
  
Dividends 
Any dividends received by a shareholder in excess of £5,000 will create a tax charge for that person being 7.5% more than they paid on the same cash dividend in 2015/16. As the 10% dividend tax credit is abolished, the shareholder will be able to receive more cash as a dividend before tipping into higher rates of tax (32.5% on dividends). 
  
Rent 
Rent is taxed at the normal rates of: 20%, 40% and 45%, but without NIC. Where the premises the company trades from are owned personally by the shareholders, a payment of rent should be considered as an alternative to some dividends. The company will receive a tax deduction for the rent paid. But entrepreneurs’ relief on the gain arising on the premises could be restricted, if the building is sold alongside company shares in the future.     
  
Pensions 
As a person aged 55 and over has complete flexibility to withdraw cash from their pension fund (subject to charges), employer pension contributions are a very attractive option for the older director. The contribution is tax deductible for the company and attracts no tax or NIC for the employee, as long as the individual’s pension annual allowance is not exceeded. This favourable treatment of pension contributions may not last.   
  
The ideal combination of these factors will vary for each owner/ director, according to their personal income needs and the profitability of their company. Our personal tax advisers will be happy to talk through the implications of each type of payment in greater detail. 

This is an
extract from our topical tax tips newsletter dated
4 February 2016 (5 days before we publish an extract on this blog). You can obtain future issues by registering here>>>

The
full newsletter contained links to related source material for this
story and the
other two topical, timely and commercial tax tips. We’ve been
publishing this newsletter weekly since 2007; it’s clearly written
and focused on precisely what accountants in general practice need to
know about each week.
You can obtain future issues by registering here>>>


Liquidate the company, Renewals allowance, Payrolling of benefits

The Government
issued another 645 pages of draft tax legislation and notes last week.
We have picked out two issues from the draft Finance Bill 2016 which may
be relevant to your clients: whether to liquidate their dormant
companies and the new renewals basis for items used in let residential
properties. HMRC has also set a ridiculous deadline of 21 December 2015
to inform them about payrolling of benefits.

This is an
extract from our topical tax tips newsletter dated
17 December 2015 (5 days before we publish an extract on this blog). You can obtain future issues by registering here>>>

Liquidate the company


Where a company is
liquidated the proceeds received by the shareholders are treated as
capital, after the costs of the liquidation are deducted. The
shareholders pay CGT on those proceeds at: 18%, 28%, or 10% where
entrepreneurs’ relief applies. This is a huge tax saving compared to the
dividend tax rates of: 7.5%, 32.5% and 38.1% which will apply to
distributions from a company in 2016/17.


 


The Government
wants to prevent business owners from achieving a “tax advantage” (tax
saving), by liquidating their company and starting up the same or
similar business in another vehicle. There are already anti-avoidance
rules which can be used against such phoenixing, which are explained in
HMRC’s Company Tax Manual at CT36850.


 


The draft Finance
Bill 2016 includes a new targeted anti-avoidance rule (TAAR) that goes
further than the current rules. If the TAAR comes into effect as drafted
it will tax the proceeds from the liquidation as income rather than as
capital, where all these conditions are met:


a)     a close company is wound-up and an individual (S) receives proceeds from the shares;


b)     within two years of that distribution S continues to be, or becomes, involved in a similar trade or activity; and


c)     one of the main purposes of the winding-up is to obtain a tax advantage.


 


Condition b) will
apply where the same or similar business is continued as a company, or
as a sole-trader or as partnership, even on a much diminished scale.


 


The TAAR is due to
apply to distributions made on or after 6 April 2016. Thus to be sure of
falling outside of the TAAR, the liquidation must be completed before
that date. Liquidations can take many months. If your client has a
company which he intends to liquidate to pay CGT on the funds it has
accumulated, he needs to act fast to avoid being caught by this new
TAAR.


 


Our tax experts can
advise you on whether a proposed transaction involving a company’s
shares will be affected by the draft anti-avoidance rules in Finance
Bill 2016.

This is an
extract from our topical tax tips newsletter dated
17 December 2015 (5 days before we publish an extract on this blog). it was the last one of 2015. You can obtain future issues by registering here>>>

The
full newsletter contained links to related source material for this
story and the
other two topical, timely and commercial tax tips. We’ve been
publishing this newsletter weekly since 2007; it’s clearly written
and focused on precisely what accountants in general practice need to
know about each week.
You can obtain future issues by registering here>>>