What if you write off an intercompany or directors loan? 1

with computer

Connected party loans are a problem area especially if the loan is impaired (ie the borrower may not be able to repay the debt)

Individual Loans written-off

If an individual makes a loan to a company and this is subsequently written-off, the company will have a non-trading loan relationship credit equal to the amount written off.

If the loan was made to an unquoted trading company, the individual will crystalise a capital loss equal to the amount of the loan written off. This will be available to set off against capital gains arising in the year of write-off or in subsequent years.ACCA

The situation, however, becomes more complicated where the parties are connected. The general rule is that where the debtor and creditor in a loan relationship are connected in any part of an accounting period and the whole or part of a loan is written off, then this is effectively a ‘tax nothing’, ie the creditor company cannot claim relief for the amount of the loan written off and the debtor company does not incur a taxable loan relationship credit.
There is, however, an exception to the above when the creditor company is in insolvent liquidation; a creditor company may claim an impairment loss in these circumstances.

 

Loans swapped for Shares

Often Loans are swapped for equity and then subsequently a claim for negligible value is made.

A negligible value claim enables you to set a capital loss against your income (or against other capital gains if you have them) for earlier years and claim a tax refund.

Many negligible value claims are made by shareholder directors whose company has failed. Their claim is to offset the loss on the shares in their company against their directors’ wages for earlier tax years.

When a taxpayer owns shares which become of negligible value the taxpayer may make a claim under s24 TCGA 1992, resulting in a deemed disposal and reacquisition, which crystallises a capital loss.

Intercompany Loans

Accounting standards require companies to assess their assets at the end of each period to ascertain whether there is objective evidence that particular assets are impaired.  So if a loan can’t be repaid it would be impaired and may require a provision for bad or doubtful debts at the year-end which may well lead to the eventual release of the loans in question.

The problem is that for connected businesses this can create a double whammy on tax! tax relief is denied in respect of the debit to the creditor company’s profit and loss account.  The credit recognised in the debtor company’s accounts can be taxable.

Where the creditor and debtor are connected companies, the connected party rules will apply to the release. This means that the release debit in the creditor’s accounts will not be allowable, because of CTA09/S354. Similarly, the credit in the debtor company’s accounts will not be taxable, since CTA09/S358 applies, unless the release is a ‘deemed release’ as defined in CTA09/S358(3) (CFM35440) or a ‘release of relevant rights’ under CTA09/S358(4) (CFM35510).

Since the release is, for both parties, dealt with under loan relationships, the priority rule in CTA09/S464 means that the creditor’s loss cannot be claimed, nor the debtor’s profit taxed, under the normal provisions for trading income. Nor can the credit in the debtor’s accounts be taxed under CTA09/S94 (debts incurred and later released).

Trade debts or loans between companies within a group may not uncommonly be released when either the debtor or the creditor company (or both) is dormant, as part of a ‘tidying-up’ exercise to enable dormant companies to be struck off. If this is all that happens, HMRC would take the view that the recording of an accounts profit – which is not taxed – in a dormant debtor company does not result in that company starting to carry on a business, and therefore does not start an accounting period under CTA09/S9. HMRC CFM41070

Two companies are connected for an accounting period if one controls the other or both are under the control of the same person (s 466) and companies are connected for the whole of their respective accounting periods if the control test is met at any time during those periods.

One possible solution could be a Deed of Release or Waiver executed in the accounting period in which the loan is released, but this would need to be properly drafted. The credit to the debtor company’s profit and loss account will then be able to be treated as non-taxable and as such avoid the double tax treatment.

steve@bicknells.net

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4 Tips for Choosing Cloud Accounting Software Reply

Tablet

There are lots of brilliant accounting solutions on the market, so how can you decide which one will work best for your business?

Features

The first thing you need to decide is what features you need:

  • Projects
  • Stock
  • Construction Industry
  • Payroll
  • Invoicing
  • Automated payments – PayPal etc
  • Bank Feeds
  • Quotes
  • VAT Schemes
  • Document Storage
  • Accountant Access
  • Access – Apps, Devices, Mac’s
  • Contact Management
  • Reports

Don’t pay for things you don’t need!

Future Proof

As your business grows, will the software grow with you

  • Can you add users
  • Can you set access levels
  • Are there upgrade products
  • Can you add in other products (Apps) such as scanned receipts

Cost

How much does it cost? Normally working with an accountant will reduce the overall cost and provide a package deal

  • Monthly Software Subscription
  • Accountancy Fees
  • Book Keeping Costs

Ask for Help

Just because you have cloud based software it doesn’t mean you won’t need an accountant! you might think you don’t need help but an accountant will help you choose the right VAT Scheme, claim tax reliefs and comply with reporting requirements.

Accounting Clients

Cloud Checklist

 

steve@bicknells.net

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Are you paying enough? New Minimum Wage Reply

Business people group.

From the 1st October 2015 the new National Minimum Wages (NMW) will come into force

Year 21 and over 18 to 20 Under 18 Apprentice*
2015 (from 1 October) £6.70 £5.30 £3.87 £3.30
2014 (current rate) £6.50 £5.13 £3.79 £2.73

With a further increase in April 2016 for over 25’s to £7.20 per hour. The April 2016 wage will be called the Living Wage.

Penalties for non compliance are already harsh and as reported by the BBC on 1st September 2015 they are getting tougher…

These include doubling penalties for non-payment and disqualifying employers from being a company director for up to 15 years.

The government also announced plans to double the enforcement budget for non-payment and to set up a new team in HMRC to pursue criminal prosecutions for employers who deliberately do not pay workers the wage they are due.

Penalties for non-payment will be doubled, from 100% of arrears owed to 200%, although these will be halved if paid within 14 days. The maximum penalty will remain £20,000 per worker.

Are you paying enough?

steve@bicknells.net

 

 

The Pensions Regulator introduces Auto Enrolment Toolkit for Basic PAYE Tools users Reply

Business Accountant

The Pensions Regulator estimates that 1.8 million small and micro employers will reach their staging date within the next two years. These employers include an estimated 200,000 HMRC Basic PAYE Tools (BPT) users.

HMRC AE

To date, BPT users have not had access to software functionality that can help them carry out their auto enrolment duties. Assessing the workforce and calculating contributions manually could lead to errors, burden and non-compliance.

Although free and low cost software is available to support auto enrolment, a high volume of BPT users are unlikely to switch to commercial software as many are concerned that they will be persuaded to buy additional products and services. Whilst there is no legal obligation to have software in place, it is evident that it improves employer compliance.

Auto Enrolment Toolkit
The Pensions Regulator are working to release an auto enrolment toolkit by November 2015. As it is a government provided…

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Why taking a dividend now, could save tax – Dividend Tax Calculator 1

Dividend Calculator 2

When you take dividends has never been more critical due to changes in the Summer Budget 2015, so if you have distributable reserves you might want to take more dividends this tax year, try the Dividend Calculator above to see how much difference it could make.

Dividend tax rates before April 2016

Tax band Effective dividend tax rate
Basic rate (20%) (and non-taxpayers) 0%
Higher rate (40%) 25%
Additional rate (45%) 30.56%

 

This will change from April 2016, see the table below

Dividend tax rates after April 2016

Tax band Effective dividend tax rate
Tax Free £5,000 0%
Basic Rate Tax Payers (20%) 7.5%
Higher Rate Tax Payers (40%) 32.5%
 Additional Rate Tax Payers (45%)  38.1%

 

The new rules are easier to follow, the 10% tax credit in the current rules is hard for most people to follow.

There is a Dividend Allowance factsheet which helps to explain how dividend tax will be calculated.

But be warned!

While these rates remain below the main rates of income tax, those who receive significant dividend income – for example due to very large shareholdings (typically more than £140,000) or as a result of receiving significant dividends through a closed company – will pay more.

So far we don’t know how much more!

steve@bicknells.net

Breaking up is hard to do? (Demergers) Reply

Break-Up 3d Words Divorce Separation Split Partnership

A demerger is a form of corporate restructuring in which the entity’s business operations are segregated into one or more components. (Wikipedia)

Demergers are not defined in Tax Law but can be successfully used by Trading Companies and do get special tax treatment.

CTA10/S1075 & TCGA92/S192

A demerger is a series of transactions which have the effect and purpose of dividing the trading activities carried on by a single company or group of companies between two or more companies or groups of companies. CTA10/S1075 and TCGA92/S192 provide special tax treatment if certain conditions are met. Companies may seek advance clearance under CTA10/S1091 that proposed transactions will be an exempt demerger. CTM17200 onwards gives further guidance on the action to be taken by local offices in dealing with demergers.

Basically there are 3 ways to do Demergers

  1. Distribution in specie – CTM17250
  2. Liquidation
  3. Reduction in Capital

Property Investment Companies are not trading companies so demergers are extremely complicated as explained in this article in Taxation

steve@bicknells.net

Will CIS apply to my property ‘refurb’? do Landlords need to register? 1

Group of construction workers. House renovation.

Many small scale property developers don’t realise that the Construction Industry Scheme (CIS) applies to them.

HMRC are also looking very closely at Landlords (Investors) to see if they should register too…

Terrace Hill (Berkeley) Ltd v HMRC [2015] UKFTT 75 (TC) TC 04282

Until now property investment has been excluded from CIS but HMRC say this is under review

http://www.hmrc.gov.uk/manuals/cisrmanual/cisr12080.htm

For now let’s focus on Property Developers, here are a few facts:

  • Property development is a trade it includes building new buildings and improving or refurbing existing buildings
  • Property developers will be contractors because they employ subcontractors – bricklayer, carpenters, painters, electricians, plasterers etc
  • There is no lower limit below which you do not have to operate CIS
  • Subcontractors, especially Labour Only subcontractors need to have their employment status tested
  • Subcontractors need to be verified with HMRC to determine their tax status before they can be paid
  • Each month the Developer will need to file a return with HMRC of subcontractor deductions
  • Each month the subcontractors must be given a deduction statement
  • CIS applies to all types of Developer – Individuals, Partnerships and Companies

Failure to comply means big penalties

CIS Penalties

Here are some penalty horror stories!

Brian Parkinson a gardner and lanscaper who used occasional subcontractors and got £31,500 in CIS Penalties!

The FTT heard evidence that little or no loss of tax resulted from this omission, as the amount of tax Parkinson ought to have deducted under the CIS was put at £837.90. [Brian Parkinson and the Commissioners for Her Majesty’s Revenue & Customs TC04526; Appeal number: TC/2013/00224].
This comprised £6,000 (5 x the £1,200 maximum) charged under the Taxes Management Act 1970 (TMA 1970), s98A(2)(a) and also month 13 penalties of £25,500 charged under TMA 1970, s. 98A(2)(b). – See more at: https://www.accountancylive.com/partial-win-gardener-over-%E2%80%98excessive%E2%80%99-cis-penalties#sthash.zJA59Gjv.AfCNNGRJ.dpuf
Or how about CJS Eastern an installer of lightning conductors

INCOME TAX – subcontractors – appellant company contracted with a third party provider to supply “operatives” – third party provider “net” for CIS purposes – company’s failure to make CIS returns  – fixed monthly penalties of £28,500 – Month 13 penalties of £56,500 – whether reasonable excuse – held, no – whether disproportionate as a breach of A1P1 – Tribunal’s jurisdiction and interaction with mitigation –  Bosher followed – fixed penalties upheld – Month 13 penalties set aside as excessive – appeal allowed in part

https://cases.legal/lang-en/act-uk2-156151.html

If you’re a property developer make sure you register for CIS with HMRC!

If you need help contact us

steve@bicknells.net

 

 

Would you like to pay less VAT? have you tried Flat Rate? 1

Flat Rate Calculator 2

Google Docs Link https://docs.google.com/spreadsheets/d/1NyVN2XW3hjpcAYFdjGPCrbeMa-HyfOcgy3eKnNj2wi0/edit#gid=68376799

Usually, how much VAT a business pays or claims back from HM Revenue and Customs (HMRC) is the difference between the VAT they charge customers and pay on their purchases.

With the Flat Rate Scheme:

  • you pay a fixed rate of VAT over to HMRC
  • you keep the difference between what you charge your customers and pay over to HMRC
  • you can’t reclaim the VAT on your purchases – except for certain capital assets over £2,000

To join the scheme your VAT turnover must be less than £150,000 (excluding VAT) and you must apply to HMRC.

You can join the scheme:

Confirmation you’ve joined the scheme is sent to your VAT online account (or in the post if you don’t apply online).

In your first year as a VAT-registered business the rate is reduced by 1% until the day before your registration anniversary.

The Flat Rate Scheme has its own Cash Basis and Retail Systems. (VAT Notice 733)

Try our calculator to see if you could save money!

steve@bicknells.net