Essential End of Tax Year Planning Guide 2013/2014 www.mooreandsmalley.co.uk
Welcome 2013 was a landmark year for tax planning. After many years of deliberation, the Government introduced a new General Anti Abuse Rule, to crack down on the more extreme forms of tax avoidance. But this by no means spells the end for tax planning. It remains entirely legal and acceptable to arrange your affairs in such a way as to minimise tax, provided those ways are not abusive. Our year end guide summarises some key tax and financial planning tips which should be considered prior to the end of the tax year on 5th April 2014. The planning tips set out in this guide are all statutory reliefs which can be used as Parliament intended to reduce a range of taxes without falling foul of the new legislation. www.mooreandsmalley.co.uk
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For the individual Income Tax The starting point in tax planning is to understand where your income is likely to fall relative to the tax thresholds. For 2013/14, the tax free personal allowance is 9,440 and the next 32,010 is taxed at 20%. Higher rate tax of 40% is charged on income above 41,450 and additional rate tax of 45% is charged on income above 150,000 The personal allowance is reduced by 1 for every 2 of income above 100,000. There is therefore no personal allowance at all where income exceeds 118,880. This also means that, over the income band 100,000 to 118,880, the effective rate of income tax is 60%. Or to put it another way, tax relief at 60% is available on pension contributions and Gift Aid payments in this income band. To make the best use of tax allowances, sufficient income should be generated where possible to fully utilise the personal allowance and basic rate band. This may be done by accelerating income in a family company, or distributions from a family trust. Married couples and civil partners have further opportunities for using their allowances and it should not be forgotten that children also have tax free allowances. Capital Gains Tax Use your Annual Exemption The annual exemption for 2013/14 is 10,900. This is a use it or lose it allowance; it cannot be carried forward to future years. It therefore makes sense to crystallise gains each year to the extent of the annual allowance, if possible. Note that under the bed and breakfasting rule, a gain does not crystallise for tax purposes if you sell shares and repurchase the same shares within 30 days. However, it is possible to repurchase the same shares through an ISA. Alternatively, a married couple can arrange for one partner to sell shares in the open market, and the other partner to buy the same number of shares. Rates of Tax The rate of capital gains tax is 18% where taxable gains plus taxable income are less than 32,010. Any excess is taxed at 28%. Use (or crystallise) Capital Losses Capital losses may be offset against capital gains in the same year. Unused losses may then be carried forward indefinitely and offset against future gains. A formal claim is required. The claim must be submitted to HMRC within four years of the end of the tax year of the loss, otherwise it will be time-barred. Hence, claims must be made by 5 April 2014 in respect of 2009/10 losses, if claims have not already been filed. When an asset becomes valueless or worth next to nothing, it is possible to make a negligible value claim in order to crystallise a capital loss. The claim can be related back up to two tax years in certain circumstances, allowing the loss to be offset against gains made in earlier years. However, the claim must be made before the asset ceases to exist (e.g. in the case of a company, before it is dissolved). Can your capital gains qualify for Entrepreneurs Relief (ER)? CGT is charged at 10% where ER applies, subject to a lifetime limit of gains totalling 10m. ER applies to the sale of a business, or to the sale of shares in an unquoted company, subject to a number of conditions being met for a period of twelve months before the disposal is made. However, it is all too easy to inadvertently breach the conditions, so early advice should be taken from your adviser before making a disposal of assets which might qualify, to ensure that the criteria are met. Determine your Main Residence The gain on your principal private residence is exempt from CGT. If you have more than one private residence, your main residence is, by default, the one you spend more time in. But it is also possible to determine that matter by nominating one of them as your main residence. This requires careful planning, since the flip side of a gain on one residence being treated as exempt is that a gain on the other residence will become chargeable. Written nominations must be submitted to HMRC within 24 months of any change in residences becoming available. www.mooreandsmalley.co.uk
The main residence exemption is not available on development projects, where a property is acquired with the overriding motive of selling at a profit, particularly where improvement works are carried out. Proactively manage the challenge of cash Everyone should keep some of their wealth in cash. After the economic turbulence of recent years, the need to hold some cash has never been clearer. The problem is that many so-called savings accounts offer pitifully low interest rates. Others offer a high bonus rate which disappears after six months or a year. Overall, it is extremely difficult and time-consuming to keep your money in competitive accounts. Savers are also concerned about keeping their money safe, covered by a bank deposit guarantee scheme and want to avoid all the paperwork in opening and closing accounts. The solution: Use a Cash Management service A Cash Management service is designed to ensure that: Your cash earns consistently competitive interest Your cash is secure You save time, effort and worry This is achieved by regularly reviewing the UK savings market and the aim is to select competitive accounts from reputable institutions. Money is moved when rates change and new opportunities arise. Paperwork is arranged and you are kept informed. The difference it makes can be dramatic. Utilise Individual Savings Accounts (ISAs) ISAs are an excellent investment for higher rate taxpayers and the maximum allowance for 2013/14 is 11,520 of which 5,760 can be deposited into a cash ISA, with the balance being deposited into a stocks and shares ISA. The overall ISA limit will rise to 11,760 from April 2014. Pensions April 2014 will see changes to both the annual and lifetime allowances that are applied in respect of your retirement planning. While at first glance, and for various reasons, you may not see this as something that applies to you think again. The allowances apply to everyone regardless of the type of arrangements you have, experience to date tells us that the bigger issues lie with members of final salary pension schemes. Annual allowance The total you can invest in a suitable pension arrangement each year will reduce by 10,000 on 6 April 2014. If you are planning to maximise payments that you make to your pension payments by carrying forward unused annual allowances from up to 3 previous years, this will also reduce by: 10,000 in 2014/15 20,000 in 2015/16 30,000 in 2016/17 The above figures are subject to your pension input period being aligned to the tax year but this may not be the case. If you leave it until the last minute, it may be too late. Should you breach the rules you will be subject to an annual allowance charge. Payment of this charge is the individual plan holder s responsibility and will be charged at your marginal tax rate. Lifetime allowance The amount you can accumulate during your lifetime within your pension plans, without being subject to an additional tax charge, will reduce by 250,000 to 1.25 million on 6 April 2014. Where the value of your accumulated funds is above this amount, the lifetime allowance tax charge currently 55% will apply. The rules of your final salary pension scheme dictate its value when calculating both the annual and lifetime allowances. If you plan using a company sponsored money purchase or personal arrangement, the end value is influenced by the growth of your fund as a result of sound investment decisions. In both cases your control is limited. There are ways to manage the effect that both the annual and lifetime allowance charges may have, however you need to act early. page 5
For the individual Consider investing in Enterprise Investment Scheme (EIS) and Seed EIS shares Capital Gains Tax may be deferred by reinvesting into EIS companies. The EIS investment must be made in the period starting 12 months before the date of the gain and ending 36 months afterwards. The deferred gain will become chargeable again when the EIS shares are later sold. The EIS shares themselves may be exempt from CGT and confer income tax relief at 30%, subject to detailed conditions being met. The Seed EIS scheme offers a different form of reinvestment relief for investors who subscribe for shares in small start-up companies. For 2013/14, the maximum qualifying investment is 100,000. Up to one half of the amount invested may be offset against a capital gain made in the year to reduce the CGT payable. This is a permanent tax saving provided that the Seed EIS shares are retained for at least three years. Alternatively, in the case of an investment made in 2013/14, some or all of the relief may be carried back to 2012/13, and set against gains in that year. The whole of the sum invested (and not just one half) may be set against those gains, subject to the cap of 100,000. The investment in Seed EIS shares also attracts tax relief at 50% of the sum invested. This rate of tax relief is given regardless of the rate of income tax paid by the investor, subject to tax relief being capped at the total tax paid in the year. The carry back facility outlined above applies to income tax as well as to CGT. A number of professionally managed EIS and SEIS investment funds exist which invest in a broad range of EIS and SEIS companies on behalf of investors, so the tax benefits of EIS and SEIS investments are available to any UK tax payer. Alternatively, consider investing in Venture Capital Trusts (VCT) VCTs are specialist tax incentivised investments that enable individuals to invest indirectly in a range of small higher risk trading companies and securities. VCTs are companies in their own right and, like investment trusts, their shares trade on the London Stock Exchange. Shares in qualifying VCTs offer the following tax incentives: Up front income tax relief at 30% of the amount subscribed, subject to a maximum investment of 200,000 per tax year. The investment must be held for a minimum of 5 years in order to retain the income tax relief. Note that income tax relief on the purchase of VCTs is available only where new shares are subscribed, and not to shares acquired from another shareholder. Dividends received on VCT shares are income tax free (including shares acquired from another holder). Capital gains tax exemption on the VCT shares (including shares acquired from another holder). Note that gains from other assets cannot be rolled into purchases of VCT shares. Married Couples and Civil Partnerships Spouses (and civil partners) may transfer assets from one to the other without any charge to Capital Gains Tax. A higher rate tax payer may therefore transfer shares to a non-tax paying or basic rate tax paying spouse, to make best use of their total income tax allowances and basic rate tax bands. Where child benefit is claimed, it is effectively clawed back through the tax system where income of either partner exceeds 50,000. The clawback operates on a tapered basis on income from 50,000 to 60,000 with the whole of the benefit being clawed back at the upper level. The income of the higher earning partner is relevant rather than their combined income. So where a couple s overall income is 100,000 and can be split 50:50 between them, the claw back can be avoided. A 60:40 split would, on other hand, cause the whole benefit to be clawed back. Where property is owned jointly by a married couple, the property is in most cases deemed to be owned 50:50 for tax purposes. In order to move the income to the lower tax payer, it is necessary first to change the actual ownership proportions (e.g. through a declaration of trust) and then to make a declaration of the actual ownership proportions to HMRC. There are exceptions to this rule, so please check before taking action. www.mooreandsmalley.co.uk
Children Children are entitled to personal allowances and annual exemptions in the same way as adults. However, there are rules to prevent parents gaining a tax advantage by gifting large sums of money to their children. The income arising from such gifts is taxable on the parent, unless the income is less than 100 in the tax year. Gifts from other relatives, such as grandparents, are not caught by this rule. Inheritance Tax Plan for the freeze in Inheritance Tax (IHT) thresholds The Government intends to freeze the IHT threshold of 325,000 until 5 April 2018. As part of a person s on-going Inheritance Tax planning, full use should be made of available exemptions. The exemptions are relatively small, but, over time the effect can be substantial: Charitable Giving If a higher rate or additional rate taxpayer makes a Gift Aid donation, further tax relief is available to the donor over and above the tax relief claimed by the charity. A Gift Aid donation of 80 is worth 100 to the charity. A higher rate taxpayer will qualify for further tax relief of 20 so that the net cost of the donation is only 60. For an additional rate taxpayer, the further tax relief is worth 25, so that the net cost of the donation is only 55. You need to keep a record of Gift Aid donations made in the year and this can include sponsorship. The tax benefit of a Gift Aid donation can be carried back to the previous tax year, if a claim is made. With the reduction in the additional rate from 50% (2012/13) to 45% (2013/14) affected taxpayers should consider carrying back Gift Aid donations made in 2013/14 to 2012/13, so as to maximise the further tax relief on the gift donations. Finally please remember that if you are not a UK taxpayer, you cannot make gift donations. Annual Exemption An amount of up to 3,000 can be given away each tax year and, if unused in a year, that amount can be carried forward for one year and utilised in that later year. Small Gifts Exemption You can give up to 250 to as many people as you wish each tax year. Gifts out of Income If your income regularly exceeds your expenditure, you can give away the excess every year. You do need to record the intention to make these gifts and you do need records of your income and expenditure. Lifetime Giving A person may also consider making lifetime gifts in excess of the above exemptions. A person must survive such a gift by seven years for it to fall out of their estates entirely, and the donor must not benefit from the assets once they are gifted. The gifts might be absolute gifts to family members, or they could be gifts into trust. Trusts can be very beneficial, but specialist advice is needed. IHT Efficient Investments Another alternative can be to place funds into IHT efficient investments, as such investments can pass free of Inheritance Tax after they have been owned for two years. Appropriate investment advice would be needed when considering such planning. page 7
For the business owner As the economy recovers, what is your financial strategy for growth? Whilst the strength of the recovery may be relatively uncertain, there does appear to be real momentum in the economy. Businesses and companies which have a strategy in place to maximise growth will be well placed to benefit from the upward trend in sales and asset values. However, the Government are also clear about challenging tax planning which they deem abusive. Our year end guide summarises some key tax and financial planning tips which should be considered prior to the end of the tax year on 5th April 2014. The planning tips set out in this guide are all statutory reliefs which can be used as Parliament intended to assist businesses and companies to improve cashflow for growth. Corporation Tax Rates Corporation tax rates are currently: Main rate = 23% Small profits rate = 20% The main rate will drop to 21% from April 2014 and the Government intends to reduce it to 20% from April 2015, aligning the main and small company rates at 20%. Income and expenditure The general tax planning strategy should normally be to defer income and make full use of all available allowances and deductions. The reduction in the rate of corporation tax from 24% to 23% from 1 April 2013, and then to 21% from 1 April 2014 will increase the value of this strategy. Income Income can be deferred in several ways: Ensuring that goods or services are sold in a later accounting period. Selling goods on consignment or on sale or return, so that the income need not be recognised until the goods are actually sold. Investing surplus funds in investments that give rise to deferred income (outside the loan relationships regime) or capital gains. If a company has a seasonal business, the company s accounting period could perhaps be extended or shortened to maximise the availability of tax relief for loss-making periods. Care must be taken to comply with company law, because there are restrictions on how often a company can change its accounting period, and in any case it cannot be longer than 18 months. In some cases a company could consider changing its accounting policies for specialised trading activities, for example, builders with long-term contracts. The current policies might not be the most appropriate way of reporting income for tax purposes. In certain situations, a change in policy can defer income to later periods. However, the accounting policies must be applied on a consistent basis from one year to the next, and this could restrict such tax planning measures. Expenditure There are several ways in which a company can maximise deductions for expenses in an accounting period. Planned expenditure, for example on repairs, could be brought forward or, in some instances, a provision could be made in the accounts for future costs. In general, tax relief is allowed for provisions made in accordance with generally accepted UK accounting practice. The following items merit particular review. www.mooreandsmalley.co.uk
Bad debts The debtors ledger should be reviewed in detail so that provisions and/or impairments can be made for bad debts. Stock The company can make a specific provision against slow-moving, damaged or obsolete stock, but a general provision is not allowed against tax. The company might be able to change the way it values stock, but great care needs to be taken. Closure/redundancy To obtain a tax deduction for redundancy costs not yet incurred, redundancy notices should be issued before the end of the accounting period. Bonuses It might be possible to bring forward remuneration intended for the following year, thus advancing tax relief. Bonuses to directors and staff could be paid before the year end, but the PAYE and national insurance implications for the company and the individuals concerned must be considered. Alternatively, bonuses could be accrued, but they must then be paid within nine months of the end of the period, otherwise they will be deductible only in the accounting period in which they are paid. Capital Allowances The annual investment allowance increased to 250,000 on the 1st January 2013 for a temporary two year period (this increase is time apportioned across your accounts period). The increase gives companies a time limited incentive to invest in plant and machinery with a benefit of tax relief to offset the cost of investment. If you are planning any capital expenditure in the near future, talk to us to see how you can gain the maximum benefit from this relief. Remember that if you are refurbishing an existing building or kitting out a new building, certain energy efficient plant and equipment and water technology could qualify for an immediate 100% deduction in addition to the annual investment allowance (if it is part of the enhanced capital allowances list at eca.gov.uk). Provide green company cars To encourage the use of green company cars, there are tax incentives for company cars which produce low amounts of CO 2 / km. These incentives allow cars to be provided which can give little or no Benefit in Kind for the employee and give the company a full first year tax deduction for the cost of buying the car. Many employers will opt for cash alternatives to company cars as an allowance is typically easier to administer. In addition, from 2014/15 the employer will be able to provide loans to employees of up to 10,000 without interest or a Benefit in Kind. Pension contributions If the company has a registered occupational pension scheme, tax relief is given for contributions actually paid in the year, rather than the amounts provided for in the accounts. page 9
For the business owner Claim enhanced tax reliefs available only to companies A company may be able to claim enhanced tax reliefs which give a tax deduction of more than 100% for a range of expenditure which HMRC are seeking to encourage, including: Research & Development Tax Relief where relief can be up to 225% Creative Sector Tax Reliefs where relief can be up to 200% Land Remediation Reliefs where relief can be up to 150% For loss making companies, the losses created by these reliefs can often also be surrendered to HMRC for a cash tax credit. Research and Development Companies should review the amount of their expenditure on Research and Development (R&D). From 1 April 2012, small and medium-sized companies (SMEs) are given tax relief of 225% of the actual costs. For large companies, tax relief is on only 130% of the costs. R&D means activities treated as such under normal UK accounting practice. The expenditure must be incurred on staffing costs, consumable stores, certain other costs such as power, fuel, water and software, or sub-contracted work. It must be related to a trade carried on by the company or be expenditure from which it is intended that such a trade will be derived. A company is small or medium-sized for this purpose if it, together with any other company in which it holds more than 25% of the capital or voting rights, has fewer than 500 employees and at least one of the following conditions is met: Annual turnover is not more than 100 million. Net assets are not more than 86 million. Relief is capped at 7.5 million for each R&D project. The annual expenditure limit is reduced for accounting periods of less than one year. Auto enrolment New workplace pension regulations came into force in October 2012, heralding the most significant changes to the pension sector in many years. There are still a lot of employers who do not think that the new pension rules apply to them. However, whether you operate as a limited company, partnership or sole trader, if you have one or more employees then you will have to comply with the new regulations. Failure to do so will mean financial penalties, and persistent offenders can be fined on a daily basis for ignoring the new regulations. You will be required to establish a qualifying pension arrangement with effect from your staging date and automatically enrol eligible employees. The workplace pension regulations also stipulate a minimum level of contributions that must be paid by both the employer and employee. The Department for Work and Pensions have stated the statutory minimum contributions are to be paid on earnings in alignment with the National Insurance contribution lower and upper limits (i.e. between 5,668 and 41,450). As you will see in the table, the contributions start at a low level but by October 2018 your business will be paying 3% and the employee 4%, with 1% tax relief on the employees contributions from the government. Minimum Contribution Levels* Up to October From October From October 2017 2017 2018 Employer 1% 2% 3% Employee 0.8% 2.4% 4% Tax Relief 0.2% 0.6% 1% *based on NI Band Earnings If the expenditure gives rise to an unrelieved trading loss, an SME can claim payment of a tax credit (R&D tax credit) instead of carrying the loss forward. Large companies will be able to claim R&D relief as a taxable Above the Line credit to the value of 9.1% of their qualifying R&D expenditure from 1 April 2013. www.mooreandsmalley.co.uk
Auto enrolment: The crucial dates Your legal obligations to auto enrol employees depends on your staging date and it is essential that all businesses have their auto enrolment scheme in place by their staging date. Staging dates have been determined by the Pension Regulator, based on the number of people in your PAYE scheme on 1 April 2012. If you have more than one PAYE scheme, the rules will apply to all your PAYE schemes from the first staging date. Staging dates run from 1 October 2012 to 1 April 2017 for existing businesses (new employers may have slightly later dates, up to 1 February 2018). The largest employers must comply first, with smaller employers joining later, on a sliding scale. The staging dates for those with fewer than 30 employees are spread over a couple of years and the exact date depends on the last two characters of the PAYE reference number. For example if the last two characters are 4A to 4Z the staging date is 1 June 2016, whereas for X1 to X9 the staging date is 1 February 2017. Use salary sacrifice to reduce the cost of Auto enrolment Auto enrolment compliant pension contributions can be made using a salary sacrifice arrangement and this is acknowledged by HMRC. Using salary sacrifice arrangements as part of the process of meeting the requirements of auto enrolment will help both the employer and the employee to manage the cost of making the auto enrolment pension contributions. Have you received notification of when your auto enrolment staging date is for the new pension legislation? Have you had any discussions about this to date? Our Wealth Management team have been talking to clients, at no cost, to make sure that they are aware of the options. The feedback tells us that 12 months prior to the staging date is the right time to plan the process and to start to put plans into motion, because at the moment pension providers won t look at anything with less than 6 months to the staging date. Let us know when your staging date is and how many employees you have, and we can start to help with planning your pension scheme. page 11
www.mooreandsmalley.co.uk @MooreandSmalley Moore and Smalley LLP Offices in Preston, Blackpool, Kendal, Lancaster, Nottingham Moore and Smalley LLP is a limited liability partnership registered in England and Wales: No. OC313896. Registered office: Richard House, 9 Winckley Square, Preston, Lancashire PR1 3HP. The term partner indicates a member of Moore and Smalley LLP who is not in partnership for the purposes of the Partnership Act 1890. A list of members is available from our registered office. Registered to carry on audit work in the UK by the Institute of Chartered Accountants in England and Wales and details of our audit registration can be viewed at www.auditregister.org.uk for the UK and www.cro.ie/auditors for Ireland, under reference number C001370248. Authorised and regulated by the Financial Conduct Authority and details of our registration can be viewed at www.fsa.gov.uk/register/home.do under reference number 448716. An independent member of MHA, a national association of UK accountancy firms. UK member of Morison International with independent member firms worldwide.