Clarification of tax status

[tax_newbie]

I am working full-time a limited company, and all my earnings are currently taxed via PAYE. My salary and income-taxable bonuses are now over the 40% limit and I have another payment expected following the sell-off of my company.

I have two questions:

1) Since my earnings are now in the 40% bracket, should I be submitting a tax return each year? I have no income other than via PAYE earnings and what savings I have accrued are not earning much - I have an ISA, which has lost a fortune in the last two years and is now worth less than £1000, and various savings accounts, the combined interest from which is less than £200 per annum.

2) I have a 'share' in my company which is not a share in the stock market sense but a commitment to pay me a small percentage of my company's value if it is sold. The company is now being sold and I am led to believe I will be paid in the form of a 'loan note'. What does this mean in terms of CGT (or other taxes)? The amount concerned is tens of thousands of pounds before tax.

I am not a Director of my company.

Any advice people can give will be greatly appreciated.

[demetris]

If your income is taxed at source, ie PAYE and interest, usually you are not required to file a self assessment return, unless you are a director of the company.

In your case, as you will have a capital gain from the disposal of the share, you are expected to notify the IR of the gain.

As you are not going to be paid cash and therefore you will not realise the gain, I wouldn't think there is a taxable gain. Tax will be paid when you sell the stock to a third party for cash.

Nevertheless, this advice is given without having the complete facts and therefore it would make absolute sense to see a qualified accountant who will be able to offer proper an d responsible advice.

Demetris Savva BA FCCA
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[Huw Williams]

I am not sure I agree with Demetris entirely.

You will need to tell the Revenue if you think you have a tax liability and that could mean they will issue you with a tax return to complete. This is true even if you are paid under PAYE as you may have other income (dividends and interest perhaps) which is not within PAYE and on which you will have higher rate tax to pay.

On the "share" I am not sure if it gives rise to a capital gain. This would be true if you were selling a capital asset, but this sounds more like a bonus, which would be taxable as income. Without more information I do not know what the implications of a "loan note" are.

Huw Williams
enquiries@huwwilliams.co.uk

[Nigel Lord]

tax_newbie

1. If your earned income is all subject to PAYE and you have no other income and no Self Assessment return has been issued, you would not need to make a tax return. As you are already into higher rates, your ISA is irrelevant as it is exempt from income tax, however your interest is technically liable to higher rate tax. In view of the small amount involved (additional tax of about £40 per annum), you may feel that it is immaterial and prefer to take no action.

2. There is certainly an issue regarding your expectation of a 'share' in the gain from the sale of the company. The correct treatment depends on the nature of your 'share'. If you have a beneficial ownership in the share capital of the company, i.e. you are the real owner of some of the shares, then the transaction would probably be treated as a chargeable event for Capital Gains Tax purposes, and it may be possible to defer any liability if the 'loan note' is of an appropriate nature. However, if you are being rewarded for your endeavours as an employee, the 'loan note' would probably be subject to income tax and may require the operation of PAYE.

There is a substantial exposure to tax and you should seek urgent professional advice.

If you require any further assistance please do not hesitate to contact us, and we will be happy to act on your behalf.

Nigel Lord
Lord Associates
Taxation & Business Consultants
102 Smarts Lane
Loughton
Essex, IG10 4BS
020 8508 1642 & 07769 931852
lordassociates@ntlworld.com