AX Key erms of Occupation Lease Key s Rent & Other Charges Joint Ventures JV Commercial Business Equity Employees E Managing Risk Accounting & Assurance AA Grants Intellectual Property Key Rights Exploiting Protecting Development D Handbook ax S Share Unapproved Share SO Exit Planning Employment axes Acquisitions Funding Litigation VA Corporation ax Planning For he Future PF Out of Court Settlement Dispute Resolution DR ax Reliefs Strategic Plan Directors Company CF Formation Articles of Association Shareholders Agreement SCINAPSE
AX ax may not be high on the list of priorities for a busy entrepreneur. However, it is important that you understand the tax obligations of your company. It is also important to ensure that your company establishes procedures to deal with HM Revenue & Customs ( HMRC ) at an early stage to avoid incurring interest and penalties. You may also wish to find ways to minimise your own personal tax liability as your company grows in value. he main UK taxes payable by companies are employment taxes (income tax and National Insurance contributions), corporation tax and VA. EMPLOYMEN AXES he cost of employing staff is usually one of the largest items of expenditure for a new company. INCOME AX Income and fees from employment or serving as a director of a company are charged to UK income tax. Income tax is also charged on benefits in kind from employment, such as company cars and medical insurance premiums. PAYE he PAYE or Pay As You Earn method of deducting income tax from salaries and wages applies to all income from employment and fees paid to directors. he employer has a duty to deduct the income tax at source from the employee s pay and pay the tax deducted to HMRC. If an employer fails to deduct and pay the tax to HMRC, it will be required to pay the tax which should have been deducted plus interest and penalties. An employer must register with HMRC under the PAYE system and complete tax returns to HMRC recording all income and benefits in kind paid to employees. In addition, the employer must provide pay information (such as an annual P60) to its employees to enable them to complete self-assessment tax returns if necessary. here are strict time limits regarding the supply of information to both HMRC and employees. he PAYE system now operates on a Real ime Information ( RI ) basis and requires employers to provide up to date payroll and tax information to HMRC at least once a month rather than at the end of the tax year. RI requires a robust payroll system to ensure that the relevant information can be provided to HMRC. NAIONAL INSURANCE CONRIBUIONS (NICs) Both employer and employee have to pay NICs in relation to the employee s wages. Above a threshold of 162 per week for employees aged 21 and over, and 892 per week for employees under the age of 21, employers pay Class 1 NICs at a rate of 13.8% of the wages in the tax year 2018/19 with no upper limit. Employer s NICs are also payable on some benefits in kind (such as private medical insurance). An employer is Managing prohibited from Riskpassing the employer s NIC liability on to the employee except in the case of share options. It is common for employers Accounting to obtain an indemnity Grants AA from employees & Assurance in relation to the employer s NIC liability on share options. he employee s NICs must be deducted at source by the employer and paid to HMRC. Employee s Exit NICs Planning are paid at a rate of 12% of wages above the primary threshold of 162 per week and up to the upper earnings limit of 892 per week Acquisitions and at 2% on any wages above the upper earnings limit. here is a 3,000 employment allowance available to reduce employer s NICs Planning which can For be PF he Future claimed through your payroll software. DIVIDEND SRAEGY Strategic Plan Once your company is profit making, as a shareholder you may consider taking dividends instead of, or alongside, salary and bonuses as part of your overall tax planning. Dividends are generally more tax efficient based on current tax rates. However, there are limits on what can be achieved. HMRC can apply anti-avoidance legislation if it considers payments made by dividend to be remuneration for employment. In addition, there are complex company law requirements which apply when a company wishes to pay a dividend, including a requirement that the company has undistributed profits available to cover the dividend. A person s entitlement to social security benefits can also be restricted if that person is not earning a salary. Equity Com For
Key s Rent & Other Charges Joint Ventures JV Commercial Business VA CASH AOUNING Using standard VA accounting, you pay VA on your sales whether or not your customer has paid you. Using cash accounting, you do not need to pay VA until your customer has paid you. If your customer never pays you, you never have to Key pay the Rights VA. You can use cash accounting if your Exploiting estimated VA taxable turnover during the next tax year is not more than 1.35 million. Intellectual You can continue to use cash accounting Property until your VA taxable turnover exceeds 1.6 million. VA REURNS Once it has registered for VA, generally a company must make a VA return to HMRC every quarter. he VA due is paid to HMRC less the amount of VA charged to the company by its suppliers. Businesses that are in a repayment position (in that their input tax regularly exceeds their output tax) may request monthly VA returns to improve cash flow. he reclaiming of VA on supplies is one of the reasons why a company with supplies below the VA registration D threshold may wish to voluntarily register for VA. VA on the cost Protecting of supplies can be offset only if the supply is made in relation to taxable supplies made Development by the company. A company making exempt supplies will therefore be restricted in the amount of VA that can be offset. here are special rules for companies that export goods or services to customers located in countries elsewhere in the EU or outside the EU. Maintaining a sufficient cash flow to meet VA liabilities is extremely important for growing businesses. HMRC has very little hesitation in using the insolvency procedures to Litigation enforce payment of VA liabilities. For Funding businesses struggling to pay VA debts, early dialogue with HMRC is crucial. VA is an extremely complex tax and companies often seek Employees professional advice on compliance. HE FLA RAE SCHEME he Flat Rate Scheme is designed to help small businesses Handbook by taking some Share of the work out of recording VA sales Option and purchases. Businesses using the scheme apply Unapproved a single percentage to Share their turnover in a VA period. he result is the VA due to HMRC. Businesses using the Flat Rate Scheme S do not recover input tax or VA on imports or acquisitions. An allowance for input tax is built into the flat rates. he main benefit of ax the scheme is the time saved recording VA on sales and purchases. his can also take some of the stress out of Employment axes completing VA returns at the quarter end and help manage cash flow. VA he scheme is for businesses with a turnover of no more than Corpor 150,000 a year, excluding VA. E Out of Court Settlement Dispute Resolution DR Directors VA REGISRAION pany mation CF A company making taxable supplies of goods and / or services with a value over 85,000 per annum (in 2018 / 2019), must register for VA with HMRC. he company must pay VA on all its taxable supplies to HRMC. VA is added to the price paid by the customer to whom the supply is made although the obligation to pay the VA to HMRC may arise before the customer makes payment. Companies that make taxable supplies below the VA on a voluntary basis. his would usually be done to facilitate VA recovery on costs (for example at start - up phase). ax Employment axes VA Corporation ax ax Reliefs
Equitt Managing Risk CORPORAION AX A UK incorporated company is liable to UK corporation tax on all its profits and chargeable gains, whether made in the UK or worldwide. Companies with annual taxable profits above 1.5 million pay corporation tax at a rate of 19% via quarterly payment instalments. Companies in the tax year (2018 2019) with profits of 1.5 million or less pay corporation tax at a rate of 19%, however the tax liability is not due until nine months and one day after the company s period end. If two or more companies are associated due to common ownership or control, then the above 1.5 million profit limit for determining whether quarterly instalments are due is reduced proportionally. CORPORAION AX DEDUCIONS In calculating its corporation tax liability, a company is allowed to make certain deductions from its income and capital gains. hese deductions include: Revenue expenditure incurred by the company wholly and exclusively for the purposes of its trade (for example, utility bills). However, entertaining and certain capital expenditure are specifically disallowed as deductible amounts. Capital expenditure on plant and machinery. his is deductible in accordance with special rules known as the capital allowances regime. From 1 January 2016, all companies are entitled to deduct the first 200,000 of expenditure on capital equipment (known as the annual investment allowance). Capital expenditure above that limit can be offset against profits in order to reduce the company s corporation tax bill, but only at a specified rate over a number of years. Most capital expenditure is pooled, and deducted at a rate of 18% per annum. he value of the pool therefore reduces over time, unless further expenditure is incurred. Balancing charges may arise if plant and equipment on which capital allowances were claimed is sold. Special rules apply to plant and equipment incorporated into a building or which has a long economic life (over 25 years). Capital allowances can be claimed for this type of expenditure, but only at a rate of 8%. here are also special rules for expenditure on energy saving and water saving equipment. Deductions for interest incurred on borrowing to fund the company s development. Deductions for shares and share options awarded to employees in the company. RESEARCH AND DEVELOPMEN AX RELIEF Companies that undertake R&D activities are able to claim an enhanced tax deduction for all qualifying expenditure incurred. he current rate of this enhanced tax deduction for small and medium sized companies is 230%. herefore, for each 10,000 of expenditure Accounting AA & Assurance incurred a company would be treated as having spent 23,000 for tax purposes, simply by submitting an R&D claim. his equates to an additional tax saving of 2,600 for a small company. In addition, if a company is loss-making Exit Planning it can claim a tax free cash receipt of 33.35 pence for each pound of qualifying expenditure incurred. Acquisitions he large company R&D relief is called Research and Development Expenditure Credit ('RDEC'). RDEC provides companies with a 12% credit on their qualifying expenditure i.e. for expenditure of 10,000 a credit of 1,200 would be available to the company. his credit can be paid to the company if it does not have taxable profits in the period. he credit is taxable so that the net benefit is approximately 8.8%. here are a wide range of costs that potentially qualify, including staffing costs, consumables (including power, fuel and water), computer software, contracted out activities, the use of agency workers and payments to the subjects of clinical trials. he definition of R&D for this purpose is much wider than people imagine and could include any activity to improve or develop a process or products rather than purely blue sky development. Identifying all qualifying projects, activities and costs should ensure that any claim is maximised. Grr
Commercial y Emplo D Handbook ants Intellectual Property Key Rights Exploiting PAEN BOX Protecting Development he Patent Box tax regime was introduced on 1st April 2013 and established sane effective 10% corporation tax rate for eligible profits derived from patented technology (and certain other intellectual property). here is a key Government initiative design to increase the tax competitiveness of the the UK for innovative high-tech companies, and is run in conjunction with the existing Research and Development tax relief scheme. he Patent Box was phased in over a number of years until April 2017 when 100% of eligible profits will be taxed at an effective 10% rate. Significant tax savings will therefore be possible, given the lowest UK corporation tax rate is currently 20%. if your company holds patents or is considering making patent applications the you could be entitled to the reduced rate of tax on your profits arising form sales of the patented items. he current Patent Box rules are very generous and allow companies to include the profits on the sale of products even if only a small part of the product is patent protected. ax Unapp Share S Employ V he Patent Box rules have been subject to changes due to challenges by the European Union. he UK leaving the EU coudl lead to further changes to the Patent Box. we recommend planning at an early stage to obtain the greatest tax benefit from the R&D and Patent Box legislation. We and the accountants we work with have vast experience in making claims for these generous innovation tax reliefs and would welcome the chance to discuss this with you further. Company Formation CF
Jo V Equity Managing Risk CHARGEABLE GAINS If a company sells an asset at a profit it will normally be subject to corporation tax on the profit element. he company may be able to roll over the chargeable gain into buying new plant and equipment or land and buildings, in which case the tax liability is deferred until the new asset is eventually sold. his is known as roll-over relief. Different rules apply to the sale of intangible assets. LOSSES rading losses may be offset against profits or capital gains made in the same accounting period as the trading loss. Unused trading losses may be carried back against profits arising in the previous 12 months in order to obtain a repayment of corporation tax. hereafter, any remaining losses may be carried forward indefinitely and set against future profits arising from the same trade. CLOSE COMPANY RULES here are special rules affecting companies that are controlled by five or fewer shareholders. A company in this situation is known as a close company. he most important implication for a close company is that if it lends money to Accounting a shareholder the company will be required AA & Assurance to pay corporation tax at 32.5% on the amount of the loan. he corporation tax is repaid by HMRC once the shareholder repays the loan to the company. his is an anti-avoidance mechanism Exit Planning since loans by a close company to its shareholders are often eventually written off and HMRC views this as a disguised Acquisitions distribution of profit to shareholders. CORPORAION AX FILING A company is required to file its corporation tax return within 12 months of the end of its accounting period. he return must be filed online and using the ixbrl format. Strategic Plan However, the company is required to pay its corporation tax within 9 months of the end of the accounting period. Companies with profits of more than 1.5 million per year are required to pay corporation tax on a quarterly basis with a proportion of the corporation tax being payable on account in advance of the end of the accounting period. A company is liable to interest on corporation tax paid late and penalties for failure to comply with the relevant filing requirements. Small companies often seek assistance with the tax compliance procedures from a special adviser such as a payroll agent or accountant. Planning For he Future PF Grants Company Formation CF
Key erms of Occupation Lease Key s Rent & Other Charges int entures JV Commercial Business Exploiting Intellectual Property Key Rights CHECKLIS Employees D Handbook Share Protecting Register with HMRC for both corporation tax and payroll purposes. Unapproved Development Share Consider registering for VA with HMRC. If you will be making taxable supplies of more than 85,000 per annum S in value, you will have to register. Consider outsourcing payroll function to deal with PAYE obligations. ax E SO Employ competent professional advisers to assist with preparation of statutory accounts and corporation tax Employment axes returns. Litigation VA Funding Build tax planning into your overall business strategy. Corporation ax Out of Consider Court whether Dispute you could benefit from the R&D and Settlement Patent Box Resolution regimes. DR ax Reliefs Directors Articles of Association Decide how best to retain and reward your employees, including consideration of share options (see Share booklet). Shareholders Agreement
Key erms of Occupation Lease Key s Rent & Other Charges Joint Ventures JV Commercial Business Equity Employees E anaging Risk Accounting & Assurance AA Grants Intellectual Property Key Rights Exploiting Protecting Development D Handbook ax S Share Unapproved Share SO Exit Planning Employment axes Acquisitions Funding Litigation VA Corporation a Planning For he Future PF Out of Court Settlement Dispute Resolution DR ax Relie Strategic Plan Directors Company Formation CF Articles of Association Shareholders Agreement 0844 736 0006 scinapse@geldards.com his briefing note is intended solely as an overview of the law in England and Wales. It was last updated on 12.03.18. No responsibility can be accepted for the completeness or accuracy of this briefing note and professional advice should be taken in relation to any specific matters. Geldards LLP is a limited liability partnership registered in England and Wales (OC313172) and is authorised and regulated by the Solicitors Regulation Authority. A list of Geldards LLP members is available for inspection at our registered office at Dumfries House, Dumfries Place, Cardiff CF10 3ZF. We use the word Partner to refer to a member of the LLP or an employee of an equivalent standing and qualification. In this document, PwC or PwC UK refers to PricewaterhouseCoopers LLP, which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity. his document is for general information purposes only, and should not be used as a substitute for consultation with professional advisors. GV020615v22