Entrepreneur's Relief - the Basics

From 6 April 2008 disposals of qualifying businesses and business assets have been eligible for Entrepreneurs’ Relief.

In simple terms, it allows business owners to reduce their Capital Gains Tax liability to the equivalent of 10 per cent of the chargeable gain.

The following notes will give you some idea of the conditions attached to Entrepreneurs’ Relief. The list is not exhaustive.

1. Relief is only available to individuals;
2. Disposal can include all or part of a business;
3. Disposal must include the sale of shares in the owner’s company;
4. The person making the disposal needs to own at least 5 per cent of the voting shares and be an officer or employee;
5. The company must be a trading company; and
6. All qualifying conditions must be met for at least 12 months.

Relief does not apply:

• to the sale of assets without the sale of the business; or
• on the cessation of trade.

The relief will be available to set off against any number of qualifying gains up to a lifetime limit, which is currently £10 million.

HMRC Guidance

Tax Free Perks

The Government has continuously sought to limit the tax free perks that businesses can provide for their employees. However, there are some remaining. Here is an update on some of those still available.

Childcare

Childcare provision and childcare vouchers up to a weekly maximum (currently £55 per week). The system has changed for new entrants to an employer scheme from April 2011. See details here.

 A new childcare tax allowance scheme was announced in the 2013 Budget to come into effect in 2015.

Mobile Phones

There is no benefit in kind on the provision of a mobile phone to an employee, although this can prove an expensive perk to provide. If additional mobile phones are provided (e.g. where they are given to family members also), only one is exempt - you can choose which one. Note that this does not apply to devices such as iPhones and BlackBerries, as HMRC do not consider these to be 'primarily' mobile phones.

Homeworking Expenses

Employees can be paid up to £3 per week (unchanged since 2008/9) to cover the extra costs of working from home (not including business telephone calls). No receipts need to be kept. Employees can claim amounts in excess of this allowance via their tax return; however, evidence of the amounts spent will be required.

Staff Entertainment

No benefit in kind is chargeable on Christmas Parties and other employee functions, up to a maximum of £150 per head. The function has to be an 'annual event' and open to all employees to qualify for the exemption. The rules where more than one such function is held are complex - see HMRC's guidance for further information.

Subsidised Canteens

Subject to certain conditions, subsidised canteens create no taxable benefit. Luncheon Vouchers up to 15p per day are tax free.

Subsistence Payments

You can pay employees up to £5 per overnight stay in the UK or £10 if the business trip is abroad. Allowable amounts for foreign subsistence are being reviewed in 2010/11. HMRC offers guidance on subsistence payment in the UK here and abroad here.

Transport

It is often forgotten that the use of a qualifying pool car is not a taxable benefit, nor is free parking at the workplace.

Payments for travelling expenses in connection with work can be made according to 'scale rates' published by HM Revenue & Customs (HMRC). There are separate rates for cars, motorcycles, and bicycles and even for passengers sharing a car.

Share Incentive Schemes

There are a number of share incentive schemes which can be used to provide tax free benefits. Share Incentive Plans allow companies to give up to £3,000 worth of 'free shares' each year to employees. Recently, the Government has annoucned its intention to restrict the terms of such schemes.

Long Service Awards 

Non-cash awards for long service are tax free for employers, as long as the award marks at least 20 years' service and the employee has not received any previous long service awards in the last 10 years. Benefits of up to £50 per year of service are tax-free: if the benefit is worth more than this, only the excess over £50 is taxable. 

Employers' Pension Contributions

Payments to approved pension schemes, on behalf of employees, are not taxable.

Interest Free Loans

Loans of up to £5,000 can be made to employees without attracting a tax charge on the notional interest.

Professional Subscriptions

These are not normally taxable when paid by the employer, as long as the organisation being subscribed to appears on HMRC's List 3.

Sports Facilities

These are tax free, provided they are available to all employees (and aren't available to the general public).

Removal Expenses

The relocation expenses for employees who move in connection with their work can be paid, subject to limits.

Providing tax free benefits in kind can be an excellent way to increase staff motivation and attract and retain key employees. Employers should look at the range of options open to them to tailor attractive remuneration packages for their staff.

Guide to IHT and Small Business

Inheritance Tax (IHT) is payable on a deceased person’s estate at 40 per cent above £325,000 (2013/4 and 2014/15) – the current nil rate band. However, business property is treated differently from personal property and may qualify for  Business Relief, formerly called, and generally known as Business Property Relief (BPR). Businesses benefit from a more generous taxation system because of their role in providing economic growth.

BPR can provide 100 per cent relief from IHT on a sole trader’s business or partnership interests and can apply to shares in trading companies that are not quoted on a recognised stock exchange. Shares quoted on the Alternative Investment Market can also be eligible for 100 per cent BPR. There is no limit to the value of BPR which can be claimed. Business assets must have been owned by the donor for two years to qualify for BPR and the business in respect of which a claim is made must also be wholly or mainly a trading company. Investment companies and businesses dealing in shares, stocks, securities, lands or buildings do not qualify for BPR.

BPR at 50 per cent is available on land, machinery, plant and buildings used for business purposes, although they will need to have been owned and used mainly for business purposes within the past two years. It is also available for shares in quoted companies where the shareholder has a controlling interest of more than 50 per cent, although this is rare.

In the context of a family business, it may be preferable for a donor to leave IHT-exempt assets to a beneficiary other than their spouse or civil partner. There is no saving if business assets are passed to a beneficiary who would not be liable for IHT anyway. For example, a transfer of business assets qualifying for BPR to a spouse would achieve no IHT saving on that transfer, because transfers between spouses are normally exempt from IHT in any event. There are several issues to consider and expert advice is essential when undertaking IHT planning with regard to business assets.

No BPR is available where there is a binding contract for the sale of a business. This might occur where there are a small number of shareholders who have a shareholders’ agreement which requires that should one of them die, their executors will sell his or her holding to the remaining shareholders, who are required to buy it.

Even where shares would not qualify for BPR, the £3,000 annual tax-free allowance for IHT is available. A shareholder can use this to pass shares to anyone of their choosing. This can be used to give the beneficiary a gradually increasing interest in the company, reducing the IHT payable on the donor’s death. However, care should be taken because the values of ‘slices’ of the shareholdings can vary massively depending on what the voting rights involved are: never transfer shares without taking professional advice on the likely tax implications.

As an alternative approach, a person may choose to sell or wind up their business rather than leave it to beneficiaries in their will. They would then be able to leave liquid capital to their beneficiaries instead. This has the advantage that the value of the business would be precisely fixed and available in cash. However, cash does not qualify for BPR, so this approach has significant drawbacks.

The current law particularly benefits small businesses that are family owned trading companies. They will be likely to qualify for BPR and make the most of the possible IHT saving.

VAT on Business Assets With Private Use

It is very commom for a smaller business to have assets which have been acquired which are used for both business and private use.

Traditionally, this could be dealt with either by claiming only the percentage of the input VAT which corresponded to the percentage of business use or by claiming all the input VAT and then making a VAT charge (i.e. adding to the output VAT payable) for the private use on an ‘as you go’ basis. This latter method is called ‘Lennartz accounting’, after the VAT case that established the principle.

Following a Dutch VAT case, however, the use of Lennartz accounting has been considerably restricted and, in 2010, HMRC issued revised guidance on the correct  VAT treatment in such cases.

VAT and Electronic Goods - Take Care

In order to combat ‘missing trader’ fraud, which is estimated to have cost the Exchequer hundreds of millions of pounds, HM Revenue and Customs (HMRC) have introduced measures which can, in some circumstances, make a supplier (or customer) responsible for its customer’s (or supplier’s) VAT.

The measures will apply when the goods dealt in are any of a number of electronic goods and where you should have reasonable grounds to suspect that VAT will go unpaid. It is thought that this could lead to businesses being caught out as a result of taking insufficient care, rather than being complicit in VAT fraud.

In order to minimise risk to your business, if you deal in such items you need to take ‘reasonable steps’ to establish the integrity of those with whom you have dealings. To do so, you should consider the following:

• obtaining and checking their VAT registered number and, for a company, verifying its registration with Companies House;
• carrying out credit checks and obtaining third-party references; and
• checking that the business’s trading address exists and is a business premises, not a serviced office or PO box location.

HMRC recommend that extra care is taken when a deal is offered to you which seems to be particularly advantageous.

Making Waivers of Dividends Work

When a company is set up, it is common to divide the shares in it in approximately equal proportions amongst the subscribers. Whether or not this proves to be the most effective way to split them in the long run depends on a variety of factors, of which the effect on the governance of the company is normally the most significant. However, one problem which sometimes results is that where dividends are paid in proportion to the shareholdings, this can lead to dividends being payable to a shareholder who does not need them or who would have to pay higher-rate tax on them.

When a shareholder does not wish to receive a dividend, this can be effected by the execution of a dividend waiver. The use of such waivers can be an effective tool in tax planning, so it is unsurprising that HM Revenue and Customs (HMRC) are generally not keen on them. Unless a dividend waiver is executed in the right way, HMRC are likely to use anti-avoidance legislation to attack the scheme.

The essential steps are:

1. The dividend waiver must be a formal election by the person entitled to receive the dividend. It must be done on paper in appropriate form and dated and witnessed;
2. The waiver must be executed before the dividend is declared; and
3. It is always better if there is a commercial reason for the dividend to be waived – this will normally be to allow the company to retain funds for some specific purpose.

It is unwise to use dividend waivers too frequently. HMRC will look more closely at arrangements which are repeated and the practical effect of which reduces the overall tax payable – for example, where the shareholder executing the waiver is a higher-rate taxpayer and the shareholder who receives the dividend is not.

HMRC regularly attack such schemes - with mixed results. HMRC were recently criticised by the judge hearing their claim that an 'A'  and 'B' share structure in a husband and wife company was a 'settlement' of income by the husband on the wife...in the view of the judge, the income received by the wife was not commensurate reward for the financial risks she took.

VAT on Electronic Services: New Rules

If you supply electronic products (telecommunications, broadcasting and e-services) to non-business customers through online sales, you should start thinking about how you will comply with the new VAT 'place of supply' rules that will come into force on 1 January 2015. The rules will apply to sales within the EU, where different rates of output VAT apply.

In simple terms, such sales will now carry VAT at the rate applicable to the country in which the customer is located. So, the sale of a web-based product to a customer in France will carry VAT at 19.6 per cent and that VAT will need to be remitted to the French tax authorities.

For VAT purposes, a customer 'belongs' in the country in which they have a permanent address or usually live.

HM Revenue and Customs will be offering a 'Mini One-Stop Shop' (MOSS) service, which will assist UK businesses by collecting the VAT they charge on sales in all EU jurisdictions and remitting it for the taxpayer to the appropriate national tax authorities.

Businesses will be able to apply to register for the MOSS service from October 2014 and it will commence operating on 1 January 2015. Businesses that make intra-EU B2C supplies of telecommunications, broadcasting and e-services which do not avail themselves of the facility will be required to register and account for VAT in every member state in which they have customers.

If you will be affected by these changes, take advice now so that you are fully prepared by the time the changes are implemented.

VAT - Place of Supply of Services

With different rates of value-added tax (VAT) applying throughout Europe, the place that a supply is made (and hence the VAT rate which is applicable) can be a very important matter.

The basic 'place of supply' rule is that in normal circumstances (and subject to some exceptions), the place of supply for a service is the place where the supplier 'belongs' – in other words, where they normally do business. However, this has caused considerable problems where the supply is one of services, not goods. Accordingly, the rules were changed on 1 January 2010, such that the basic rule for the place of supply of a service is now where the customer belongs if the customer is a business.

The place of supply rules are complex and should be understood fully if they affect you.

The rules relating to the place of supply of electronic products to non-business customers will change on 1 January 2015. See the HMRC website for details.

How to work out your place of supply.

Tax Avoidance Disclosure Rules

UK tax law is almost unique in that it contains regulations which require professionals to advise HM Revenue and Customs (HMRC) of information regarding tax avoidance schemes (TAS). Failure to comply can lead to a penalty of up to £5,000 plus other charges.

HMRC regard a TAS that ‘distorts the tax system’ as being abusive and the purpose of the regulations is to enable them to respond quickly in order to block loopholes in the tax law. Where HMRC are advised of a TAS, they can attack it, if they think it involves an incorrect interpretation of tax law, or they can take measures to close it down by new legislation.

View the disclosure rules.

Since 1 August 2006, TASs have had to be notified to HMRC shortly after they have been implemented. A TAS must be disclosed when:

• it will, or might be expected to, enable any person to obtain a tax advantage;
• that tax advantage is, or might be expected to be, the main benefit or one of the main benefits of the arrangement; and
• it is a tax arrangement that falls within any description (‘hallmarks’) prescribed in the relevant regulations.

The hallmarks referred to are various, but the main ones are:

• it is kept confidential from other promoters of tax advisory services;
• it is kept confidential from HMRC;
• it is marketed with a premium fee; or
• it is a scheme involving manipulation of losses or loss schemes.

If one or more of the above criteria are satisfied, then the scheme is a TAS and must be disclosed. Similar rules apply where the scheme is an ‘in-house’ avoidance scheme.

Once HMRC have been advised of the scheme, they will issue an eight-digit scheme reference number which must be supplied to users of the scheme and which they, in turn, must include in a return to HMRC.

Despite the occasional claim by tax consultants, HMRC never 'approve' as tax-avoidance scheme.

HMRC have published a guidance note on such schemes which can be downloaded from their website.

HMRC are continuously seeking to obtain details of UK resident holders of foreign accounts from all banks throughout the world and have entered into a number of information sharing agreements with foreign tax authorities, including several well-known tax havens noted for their secrecy laws.

HMRC have recently announced that they are intending to seek to require taxpayers' agents to provide lists of clients who have undertaken certain types of tax avoidance schemes.

Employed or Self-Employed?

Whether you are employed or self-employed makes a substantial difference to how you are taxed and the income tax liabilities of an employed person can be very different from those of a self-employed person with similar levels of gross income. The National Insurance liabilities of the employed and self-employed are also calculated differently and entitlement to benefits, such as Jobseeker’s Allowance, also varies depending on one’s employment status.

It is therefore important for any working person to know their exact employment status. Sometimes, however, deciding whether someone is genuinely self-employed or an employee can be difficult and HM Revenue and Customs are unforgiving of those who ‘get it wrong’. However, they do produce fact sheets to help people make the correct decision.

The guidance, in the form of leaflet ES/FS1, is a short guide to the question and is helpful in that it deals with specific types of occupation (e.g. entertainers) where the normal income tax law may not apply.

It also provides links to advice on special circumstances (e.g. the working rights of non-residents and what to do if you have more than one job).

It is quite possible to set up a 'self-employed' relationship which is caught by the rules and will be treated by HMRC as an employer/employee relationship. The cost to the employer of having such a relationship 'redefined' as one of employment can be massive, so it is essential to make sure that any such arrangements are watertight. There is a special regime dealt with under IR35 which will bring some payments made to limited companies into the PAYE regime. 

In 2014 regulations were brought in to bring more contractors into PAYE to prevent the use of 'false self-employment' intermediaries, which typically involved schemes using an 'umbrella company' or an offshire company.

Brief Guide to the Administration of Troncs

The long-running series of disputes between employers in the hospitality industry and HM Revenue and Customs (HMRC) concerning the taxation of employees’ tips and their National Insurance (NI) status seems to have been concluded by the issue of guidance on the operation of ‘troncs’.

HMRC have, in effect, accepted the industry’s contentions regarding these. The following points have been clarified:

• no approval from HMRC is required for the appointment of a troncmaster;
• the troncmaster can be anyone other than ‘the employer, business partner, or official of the company’ (so a manager is acceptable);
• the business can retain discretionary service and non-cash tips without compromising the NI status of the tronc – only the sums passed to the troncmaster constitute the tronc; and
• any amount of tronc paid in excess of tips specified in the employee’s contract of employment does not incur a NI liability.

From 1 October 2009, tips have longer been counted as part of the National Minimum Wage, regardless of how they are paid.

Making Training Costs Tax Deductible

Most business owners and managers think that training costs aimed at improving skills or business profits automatically qualify for tax relief, but that is not necessarily the case. The complexities of the UK tax system mean that the availability of tax relief depends on who is paying for the training and what the training is designed to achieve.

For employees who pay for their own training, tax relief will not normally be given, even if the sole purpose of the training is to make them better able to do their job. If an employee needs training as a necessity to carry out their job (so that the training is ‘wholly, exclusively and necessarily incurred’) then tax relief will be given. The key word here is ‘necessarily’ as unless the training is necessary, its cost is not deductible. Any training designed merely to enable an employee to carry out a new job does not qualify for tax relief in their hands.

Employees who pay for their own training should bear in mind that expenses paid for by them and reimbursed by their employer constitute a benefit in kind which will be taxable.

The situation as regards tax relief for training paid for by employers is very different. By and large, any training which makes their employees better able to do their jobs (and this includes very general sorts of training which may not have an immediate impact on their ability to do the work) will be allowable.

Clearly, therefore, the sensible thing for an employee to do is to get their employer to pay for their training where possible, using a salary sacrifice if necessary.

For the self-employed, the criteria for determining if training expenses are allowable are somewhat different. Here, training expenses will be deductible for tax purposes if they are incurred ‘wholly and exclusively’ for the purposes of the trade, which is a much more liberal definition than that which applies for employees. However, a further consideration must be taken into account, which is whether the training is of the nature of an expense or an investment. If the latter (for example, the acquisition of know-how to enable new products to be developed) then, strictly, the cost is a capital item and tax relief should be claimed by way of capital allowances.

If you have a need to incur substantial training expenses, it is sensible to take professional advice on how best to structure the expenditure.

Employees have, since April 2010, had the right to request time off for training.

How to Reclaim Foreign VAT

It is commonly thought that within the EU, recovering VAT on expenditure made whilst abroad is merely a matter of calculating the VAT at the applicable rate and claiming it via your VAT return.

However, the right to recover VAT on a VAT return is limited to VAT incurred in the country of registration. Overseas VAT is reclaimed by submitting a claim directly to the country concerned (this is called an ‘8th Directive claim’). Typically it can take months (sometimes years) for these claims to be processed and the VAT repaid.

For more details on recovery of overseas VAT, see HMRC's website.

A number of firms offer a VAT reclaim service in exchange for a fee, which is normally based on a percentage of the VAT repayments received.

Overseas VAT which is incorrectly claimed as input tax on a VAT return can lead to an assessment for VAT over-claimed and possibly trigger a penalty.

HMRC - Overnight and Subsistence Expenses

HM Revenue and Customs (HMRC) are well known for their dislike of claiming expenses without complete documentation but the reality, as every businessperson knows, is that maintaining complete and accurate documentation for all transactions is a practical impossibility.

HMRC do recognise this and have recently revised their guidance on claiming reimbursement of employees’ expenses, where there is no documentation, by the use of ‘scale rates’ of reimbursement.

One of the core principles behind the use of a scale rate is that the expenditure must have occurred. So, for example, where a flat rate daily subsistence allowance is paid but the actual expenditure incurred is less than the allowance, this creates a tax liability in the hands of the employee.

HMRC had proposed that expenses could be reimbursed, without the need for the retention of detailed receipts by all employees, if a sampling procedure were carried out whereby ten per cent of all employees (chosen at random) were selected and required to keep detailed records of expenses for a month and those expenses were then used to calculate the scale rate for employees in general. By creating the new guidance, HMRC are tacitly recognising that this approach was too complex to be workable. The need for a comprehensive internal benchmarking exercise has therefore been removed. However, such an approach needs to be adopted if an employer wishes to agree with HMRC a ‘bespoke’ flat rate allowance, which it is possible to do.

It is worth mentioning that payments of incidental expenses (within tight limits) connected with business travel (such as the purchase of newspapers when away) are normally allowable for tax purposes despite not being business expenditure. However, the maximum sums which can be reimbursed for incidentals are only:

• £5 per night for overnight stays in the UK; and
• £10 per night for overnight stays outside the UK.

Any expenditure on incidentals in excess of these amounts makes the whole of the payment (not the excess over the limit) taxable as income in the hands of the employee.

The amount that can be claimed by home workers, by way of reimbursement of their additional expenses for working at home is £3 per week.

For information on recovering VAT on employee subsistence expenses, click here.