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TaxationWeb by Mark McLaughlin CTA (Fellow) ATT TEP

Mark McLaughlin CTA (Fellow) ATT TEP, offers 10 tax planning tips for family and owner-managed companies

1. Company tax rate

Consider pre-year end tax planning reviews (or ask your accountant!) to reduce the company’s effective tax rate, particularly if the company’s profits may be liable to corporation tax at significant levels (e.g. capital expenditure, pension contributions). If this is not possible, consider post-year end tax planning (e.g. the carry back of trading losses, or the payment of bonuses within nine months following the end of the accounting period). Corporation tax rates can be higher, depending on the number of active ‘associated companies’. Check this point with your advisers if in doubt.

2. Profit extraction v accumulation

What are your income requirements? Could profits be retained for future use in the company’s business (e.g. with a view to taking advantage of business asset taper relief when the business is later sold or wound up)? Consider the potential implications of profit extraction v accumulation, such as the effect on pension contributions and tax credits.

3. Extracting profits

Check whether funds are being extracted in the most tax-efficient way (e.g. salary, dividends, tax and National Insurance efficient benefits in kind, rent on personally-owned assets, interest on loans to the company). Does the 19% minimum non-corporate distribution rate (or ‘dividends tax’, as it is often called) potentially apply to profits distributed? If dividends are paid, ensure that all the paperwork is correct, and that payments are made out of distributable company profits (the latter being a company law requirement).

4. Loans from the company

If your company is closely-controlled (e.g. by five or fewer shareholders), are any close company loans to ‘participators’ (e.g. shareholders) outstanding at the end of the accounting period? The most common type of loan is an overdrawn director’s current account with the company. Consider the potential tax implications of loans if you are a director shareholder (not to mention the company law implications!) and check if any possible planning alternatives exist (e.g. a loan repayment or waiver within nine months following the end of the company’s accounting period).

5. Anti-avoidance

Consider whether HM Revenue & Customs could challenge any ‘arrangements’ involving the business owners etc under the ‘settlements’ anti-avoidance rules, if tax savings have resulted. Such arrangements can include dividend waivers and disproportionately large returns on share subscriptions. Other anti-avoidance rules to consider include the ‘IR35’ personal service company legislation, which affect ‘relevant engagements’ performed through such companies. Seek expert professional advice if in doubt.

6. Capital allowances

Small and medium sized companies are generally eligible for a ‘first year allowance’ of 40% on qualifying expenditure on plant and machinery. However, certain capital costs qualify for a 100% first year allowance, such as expenditure on energy saving plant and machinery. In addition, certain ‘low emission’ cars attract a 100% first year allowance, whilst only attracting low benefit-in-kind charges for a director or employee.

7. Taper relief (CGT)

If you are a shareholder, check the capital gains tax taper relief status of your shares in the company with your tax adviser. Is the company ‘trading’ for taper relief purposes? Or does the company carry on substantial investment activities? Do you potentially qualify for full business asset taper relief (i.e. reducing the effective tax rate to around 10% for a higher rate taxpayer)?

8. Business property relief (IHT)

Check with your tax adviser about the conditions for this potentially generous relief, including the company’s status. For example, is the company wholly or mainly trading? Is the relief potentially restricted in respect of ‘excepted assets’ (e.g. surplus cash or investments)? Are the shares subject to a ‘binding contract for sale’? Your adviser should be familiar with these relief conditions.

9. Exit planning

Is a company sale a possibility in the future? Consider your tax position as a business owner (e.g. will a disposal qualify for full business asset taper relief)? Contrast the tax position if the company’s shares are sold, with the alternative that the assets are sold and the company is wound up. Ask the company’s tax adviser about the implications of an informal winding up under Extra Statutory Concession C16, which can be very useful on a sale of company assets rather than shares.

10. Succession planning

Will the company’s shares be passed on to family members? Consider lifetime planning (e.g. transferring shares into trust for children or grandchildren), and estate planning for inheritance tax purposes. Do you have a current Will? How will the shares be dealt with on retirement or death?

And finally…think commercially!

Business decisions should be driven by commercial considerations, and not necessarily tax savings.

Conclusion

Tax savings can often be achieved with careful prior planning. Remember to involve your accountant or tax adviser at an early stage. Very often, the potential tax savings will far outweigh the additional professional costs. And if your present adviser is unable to provide the quality of tax advice that you require, do not be afraid to ‘shop around’ for one that can really help you. Good luck!

May 2005

Mark McLaughlin CTA (Fellow) ATT TEP
TaxationWeb