Changes in the Finance Act 2014 have tightened up the rules for “self-employed” workers supplying their services through UK agencies, employment businesses and other intermediaries.
From 6 April 2014 the agency must decide whether the way in which the worker does their work is subject to (or to a right of) supervision, direction or control by the end client or someone else. If it is then the worker will fall to be treated for income tax and national insurance contributions as an employee and the worker’s pay will be subject to PAYE and Class 1 employees/employers national insurance contributions.
HMRC have confirmed that the agency legislation will not generally apply where a worker is engaged via a personal service company (PSC). This is because the agency legislation will only apply when remuneration is received by the worker as a consequence of providing the services.
Dividends paid to the worker as a genuine consequence of their shareholding in the PSC will not normally constitute “remuneration” for the purposes of the agency legislation. Such workers will still potentially be subject to the “IR35” rules.
There are currently two very generous tax breaks for companies involved in research and development (R&D) , particularly those that go on to patent their products or inventions. Many such companies may not be claiming all the relief that they are entitled to.
Firstly, R&D tax credit relief provides companies with an enhanced corporation tax deduction of up to 225% for qualifying R&D expenditure. For example, £100,000 qualifying expenditure attracts a tax deduction of £225,000. Qualifying expenditure would include scientists’ and engineers’ salaries involved on the research project.
Many companies involved in R&D are making a loss in the early stages and rather than carry the loss attributable to the enhanced R&D spend forward they are able to claim a repayment from HMRC. The repayment was increased to 14.5% from 1 April 2014, turning the £225,000 loss into a £32,625 refund (32.625% of the qualifying spend).
The second generous tax break is the “Patent Box” which entitles the company to a lower corporation tax rate on profits from the sale, licensing or other receipts from patented products. This lower rate is currently being phased in but will decrease to just 10% from 1 April 2017. In order to qualify for the Patent Box the company must register a UK or European patent over their invention.
Although software development can qualify for R&D tax relief, it does not currently qualify for the Patent Box.
A recent VAT tribunal case illustrates how important it is to take proper advice on a business sale. The Ryford Arms was sold by Pontardawe Inn Limited.
The purchaser of the premises and goodwill of the Ryford Arms was a company known as Claden Limited; However the fixtures, fittings and equipment were acquired by the shareholders personally. Furthermore, the former employees were not taken on by the new owners. The tribunal held that this was the mere purchase of assets and not an undertaking capable of carrying on independent economic activity, and thus VAT was due.
Although there is currently a generous £500,000 Annual Investment Allowance (AIA) for businesses investing in plant and machinery this has never been available to partnerships or LLPs with corporate members. Consider the corporate member purchasing such equipment to qualify for AIA – it will also help to justify a larger share of profit being allocated to the corporate member going forward.
Last summer a consultation document was published setting the proposed counteraction by HMRC of artificial profit and loss allocation schemes involving partnerships and LLPs where some of the members are chargeable to income tax but others not. The measures were clearly intended to catch the situation where excessive profits are allocated to members who are limited companies where those profits would be taxed at a much lower rate than that payable by individual members. Individuals potentially pay tax on their share of profits up to 45% (plus 2% class 4 NICs) whereas company profits are taxed at 21%, and can be as low as only 20%.
Legislation in the latest Finance Bill will enact the changes which apply with effect from 6 April 2014. The legislation determines the maximum profit share allocated to non-individuals (in the main corporate members) and requires the excess profit share to be reallocated to individual members. The anti-avoidance however only applies where there is a connection between the individual and the non-individual (corporate) member. The amount of profit allocated to the corporate member in future will be limited to a reward for services provided, if any, plus a return on its capital at a commercial rate of interest (not a lot).
A recent case before the Tax Tribunal reminds us that where the right to dividends is waived this can create a “settlement” for income tax purposes such that some or all of the dividend waived may be taxed on the person waiving his right to the dividend. Mr Donovan and Mr McLaren each owned 40% of the shares in their company, with their wives owning 10% each. In year ended 31 March 2010 as the result of waivers by the husbands dividends of about £33,000 were paid to all four shareholders. The judge agreed with HMRC that a proportion of the dividends paid to the wives should be taxed on their husbands and that the exemption for inter spouse transfers tested in the case of Jones v Garnett (Arctic Systems Ltd) did not apply. An important consideration here is whether or not there are sufficient reserves to pay the full amount of dividend on all shares.
Recent relaxations in planning rules mean that, where the necessary conditions are met, farm buildings may be converted into up to 3 residential dwellings without obtaining the normal planning permissions. This relaxation of the rules will make developments easier and is likely to increase the value of some farms. However not all of the value will necessarily qualify for Inheritance Tax Agricultural Property Relief – check out the tax implications of your proposed plans with us.