Following Lee Webster's fantastic efforts in last year's London marathon in aid of the charity, one of LBW's local clients, who is also a close friend of Lee's, is attempting to beat Lee's time in the 2012 Virgin London Marathon.

Kevin West stepped forward to run the Marathon on behalf of Lee who is unfortunately unable to run this year due to injury. Kevin is hoping to raise significant monies towards LBW's target. To show your support for Kevin by way of sponsorship, please visit http://www.justgiving.com/Kevin-West2. All support shown for Kevin will be greatly appreciated by himself along with all at LBW.

Entrepreneurs’ relief allows business owners to pay a lower rate of capital gains tax on the proceeds of business sales. The entrepreneurs Capital Gains Tax rate, for qualifying disposals, is effectively 10% for the first £10M of business disposals.

Example 1

Soletrader with £60K annual taxable profits

A local builder has been trading a sole trader since January 2006. His taxable profits are approximately £60,000 per year. He decided to incorporate on 6 April 2011.The goodwill that will be sold to the Limited Company has been valued at £100,000. Taking advantage of Entrepreneurs Relief, his capital gains tax liability would be £8,990 (an effective rate of less than 10%).

The £100,000 would be credited to the builders loan account with the company which can be drawn down TAX FREE.

Example 2

A two partner partnership with £500K annual taxable profits

A two partner partnership has annual taxable profits of £500,000 per year. At this level of profit, each partner would have an annual income tax liability of approximately £110,000 (£100,000 of the profit would be taxed at the 50% upper rate level = £50,000 tax). If the partnership incorporated and the goodwill was sold to the Limited Company at say a value of £2.5M, the individuals would benefit from Entrepreneurs Relief and would pay tax on the capital gain at a rate of 10%. £1.25M would be credited to the individuals Loan Account with the company and could be drawn down TAX FREE.

This month’s topics:

2011 Round up and How to enjoy a tax efficient Christmas

Round up for 2011 – All topics covered in our newsletters

This month represents the end of our second year at LBW and wewould like to take this opportunity to detail the various topics we have covered in our newsletters throughout that period.

All of these topics can be read in alternate newsletters from LBW:

A Tax efficient Christmas

On a more festive note, Christmas is coming and thoughts turn to the annual Christmas staff party. Indeed the party may well have been booked many months ago perhaps without any thought given to the taxation consequences. We will explore those consequences with a view to ensuring that you do not incur an unexpected tax liability and with careful planning ensure that you comply with the regulations and thus avoid any unnecessary charge.

Employee benefits

There is a £150 (average cost per person) per tax year limit under which no benefit in kind arises on the employee in respect of attendance at a staff party/function. There is no requirement for the function to take place at or around Christmas, although many do. The employer has to identify the average cost per function per person and if there is more than one function the employer has to establish to which if any of the function or functions the exemption applies.

To determine the average cost per person you include of VAT, accommodation and any transport costs and then divide the total by the total number of people attending, including non employees, for example spouses or partners. Each function must be open to all employees generally, although in larger organisations it can be restricted to employees from a department, division or site. If any staff are excluded from any particular function it would result in that function being taxable in full on the employees attending, and there is no exemption available for that function.

If there is one function and the cost per person exceeds £150, it is a taxable benefit as the limit has been exceeded. The full amount of the cost is taxable and there is no ability to deduct £150 from the benefit in kind arising.

If there is more than one function and the overall total cost exceeds £150 then the exemption is only available on the function or functions which in total amount to £150 or less. For example if there are two functions at £120 and £85. Assuming that the employer determines that the £120 function is exempt but the £85 function is taxable in full then if an employee only attended the £85 function, they would be taxed on the £85 benefit in full. If the employee attended both functions they would still only be taxed on the £85. Obviously, if the employee does not attend either function or just the one with a cost of £120, no taxable benefit would arise.

Note that the £150 annual function exemption (and the various points below) has no impact on the tax position of the employer. The exemption is a relief from an income tax benefit in kind charge for employees. The expense is allowable in the employer’s tax computation no matter what the impact on the employee. In addition the employer can recover VAT incurred in respect of attendees who are employees (but not in respect of other attendees e.g. partners of employees, customers, suppliers etc). This employer related relief has no limit but clearly common sense should prevail. Recording in the books and records of the business as the staff Christmas party (including any ancilliary costs) will make identification easy to determine and thus ensure the relief is not overlooked.

Class 1A National Insurance contributions would be payable by the employer on any benefit in kind which is charged on employees and must be included on forms P11Ds.

Gifts

Most gifts from an employer to an employee are taxable in full. If the gift can be classed as immaterial, say one bottle of wine a year, it will be non-taxable on the basis of triviality but regular gifts or one high value gift would have to be declared on form P11D (except in the case of non director employees earning at the rate of less than £8,500 per annum) and these give rise to a tax liability on the employee and a Class 1A National Insurance liability on the employer. Precisely how much is trivial can be a matter of debate but clearly any alcohol acquired as part of a Christmas celebration could be regarded as part of the overall Christmas party celebration/function and therefore careful recording of the costs involved would be needed.

Entertaining

The entertaining of customers/potential customers/other business contacts by an employer is not a tax deductible expense for an employer. The employer cannot reclaim VAT on the costs relating to entertaining events unless the event is predominantly for staff in which case VAT can be recovered on the costs of staff attendees (but not in respect of non staff attendees e.g. partners). Entertaining is defined as including any hospitality whatsoever and therefore would include such items as tickets for concerts or football matches in an executive box. The cost incurred on entertaining is not a taxable benefit on the employee so long as the cost is incurred wholly, exclusively and necessarily in the performance of their duties.

This test is generally satisfied if the employee in question can be said to have acted as a host or guide to the employer’s guests.

Following on from the above it should be noted that if VAT is recovered on an item of entertaining on the basis that it relates to staff entertainment then the item is likely to represent a taxable benefit in the employee’s hands (unless the annual function £150 exemption applies). Where the staff act as hosts to the employer’s guests this should not give rise to a taxable benefit but VAT incurred will be irrecoverable.

As you can see this particular area can be a minefield of what is and what is not allowable for both direct and indirect taxes. Careful planning and structuring the event before it happens will ensure the most tax efficient outcome.

Reminders for tax payments & miscellaneous updates

A couple of reminders for you.

PAYE & National Insurance

Employers PAYE & NI payments (including construction industry payments) for the month of November 2011 (which include any salary pay days between 6th November 2011 and 5th December 2011) will be due for payment by 19th December 2011 or 22nd December 2011 if payment is made electronically.

Corporation tax liabilities.

Companies with a year ending 31st March 2011 will be required to make payment of corporation tax on or before 1st January 2012. Late payment will entail an interest charge. Payment can now only be made electronically (which does include payment via your own bank or the post office using the payslip issued by H M Revenue & Customs for this purpose).

H M Revenue & Customs business payment support helpline is still open for those who are unable to settle the full amount by the due date and wish to enter into an arrangement to settle the outstanding tax in instalments. If you wish to take advantage of this please contact Steve and he will discuss the process as well as any perceived changes in H M Revenue & Customs attitude to the use of this scheme with you.

A couple of reminders for your throughout the month of July 2012.

PAYE & National Insurance

Employers PAYE & NI payments (including construction industry payments) for the month of June 2012 (which include any salary pay days between 6th June 2012 and 5th July 2012) will be due for payment by 19th July 2012 or 22nd July 2012 if payment is made electronically. This month 19th July 2012 falls on a Thursday but 22nd July falls on a Sunday and thus payment will need to be made by Friday 20th July 2012. We would also advise that H M Revenue & Customs now use the "Faster Payment" scheme for electronic payments which will mean payment can be made later than previously without penalty.

Corporation tax liabilities

Companies with a year ending 31st October 2011 will be required to make payment of corporation tax on or before 1st August 2012. Late payment will entail an interest charge. Payment can now only be made electronically (which does include payment via your own bank or the post office using the payslip issued by H M Revenue & Customs for this purpose).

H M Revenue & Customs business payment support helpline remains open for those who are unable to settle the full amount by the due date and wish to enter into an arrangement to settle the outstanding tax in instalments. If you wish to take advantage of this please contact Steve Sharp and he will discuss the process as well as the current H M Revenue & Customs attitude to the use of this scheme with you.

Many years ago (1999) H M Revenue & Customs issued legislation known as IR35.

This legislation was designed for specific purpose namely to counter an NI avoidance arrangement whereby an individual who was employed one day (and paying employee NI as well as the resulting employer NI) was then trading through his own limited company the next and by a careful structure of his remuneration could reduce the NI paid without impacting on the net income that is available for the individuals lifestyle. This perceived abuse was seen most frequently by H M Revenue & Customs in the computer programming industry as well as certain engineering industries.

Over the years H M Revenue & Customs have found that the initial legislation as well as subsequent adjustments have proven ineffective. As a consequence a thorough review has been undertaken and although the matter had been passed to the "Office for tax simplification", a body designed to simplify (in some cases by abolition) the tax system it has come back again with new guidelines over the operation of IR35 and with specialized teams of staff to police the legislation.

H M Revenue & Customs propose to risk assess personal service companies to ascertain whether or not the legislation will apply and they have published those tests and the score they will attach to each test to determine the overall score and thus the risk category to see if further investigation is required. Thus it is important that companies in this area attempt to achieve as high a score as possible to reduce the risk of review and potential attack from H M Revenue & Customs. A summary of the scoring categories are detailed below and low risk is achieved with a score of 20+.

What these test are aiming to achieve is to demonstrate the independence or other wise of the company, the more independent the better. Whilst these tests do not paint the complete picture, they will be used as indicating whether or not a company should be looked into further.

 If you wish to book a meeting to discuss the impact of this new move by H M Revenue & Customs please contact Gary Cullen who will be glad to consider the matter with you.

There has been much made in the press recently of wealthy individuals paying very little tax on their income. This was highlighted in the recent cases of entertainers Jimmy Carr and Frankie Boyle.

Whilst in both cases a low rate of tax was paid, the distinction that can be drawn is the fact that the Frankie Boyle case followed a legitimate commercial decision and there was no artificiality about the process. A liquidator was appointed and the company concerned was formally wound up. This is commonplace at the end of the economic life of the company and is perfectly acceptable. The low rate of tax is a by-product of the commercial decision. This can be contrasted with a designed tax avoidance scheme used by Jimmy Carr to reduce the level of his income exposed to income tax whilst at the same time enabling him to have access to substantial sums of money.

We would suggest to our clients that they do not make use of any marketed schemes which suggest they are able to reduce tax as such schemes will usually be brought to the attention of H M Revenue & Customs and could result in enquiries.

In 1929 Lord President Clyde was quoted in a tax case to suggest 'No man in this country is under the smallest obligation, moral or other, so to arrange his legal relations to his business or to his property as to enable the Inland Revenue to put the largest possible shovel into his stores. The Inland Revenue is not slow — and quite rightly — to take every advantage which is open to it under the taxing statutes for the purpose of depleting the taxpayer's pocket. And the taxpayer is in like manner entitled to be astute to prevent, so far as he honestly can, the depletion of his means by the Revenue'. This was followed in 1935 by Lord Tomlin in a case involving the then Duke of Westminster that: 'Every man is entitled if he can to order his affairs so that the tax attaching under the appropriate Acts is less than it otherwise would be'.

Here at LBW we make use of the tax consequences which arise from commercial decisions or processes. In fact the process by which Frankie Boyle reduced his tax is a process we have used over many years quite successfully when a limited company has reached the end of its useful life. We considered this matter in more detail in our August 2011 newsletter (this is available on request).

We would emphasise that the approach we use is not that of using tax avoidance schemes, we make use of the relevant legislation to make commercial decisions. If there are two ways of achieving the same commercial result we will then advise of the most tax efficient of the two options, and as a result you can rest assured that the likelihood of any matters coming to the attention of H M Revenue & Customs is greatly reduced.