Author Archives: Lauren Quinn

Firm foundations for a new tax relief

Question.

 

Can you explain to me the new capital allowances relief announced in Budget 2018?

 

Answer.

 

One of the few surprises in Budget 2018 was the introduction with immediate effect of a new class of capital allowances – Structure and Buildings Allowances (SBAs). In outline, SBAs will provide relief on a straight-line basis for qualifying expenditure on new non-residential structures and buildings incurred on or after 29 October 2018. This is good news for businesses, as such expenditure has often not qualified for relief since the abolition of Industrial Buildings Allowances (IBAs) in 2011.

 

SBAs are available for the direct costs of constructing new commercial structures and buildings (including any necessary demolition or land alteration), new conversions or renovations, and the acquisition of an unused asset from a developer.

 

There are a number of key exclusions to be aware of. In particular, SBAs are not available for:

 

• Land and land-related costs (e.g. stamp duty, planning permission).

 

• Shared areas in mixed commercial / domestic buildings (SBAs differ from normal capital allowances in their treatment of communal areas).

 

• Work spaces in domestic settings (e.g. a home office).

 

• Structures or buildings where the claimant does not have an interest in the land on which they are constructed.

 

Where there is mixed qualifying / non-qualifying use of a building (e.g. a mixture of commercial and residential accommodation) expenditure will need to be apportioned. However, there will be no SBAs at all where ten percent or less of the overall construction costs would qualify.

 

The buildings and structures can be in the UK or overseas, provided that they are used for the purposes of a business within the charge to UK tax.

 

Relief is given for both income tax and corporation tax purposes at a flat rate of two percent per annum of the original construction expenditure, meaning that full relief will be available over a 50-year period. There are no balancing charges or adjustments where an SBA asset is disposed of – instead, the purchaser continues to claim two percent per annum of the original cost of the asset over the remaining portion of the 50-year period.

 

There is therefore no ‘step up’ in value for SBA purposes for the purchaser if an asset is sold for a profit. Some extra complexities will also be introduced into asset sales, for example:

 

• Sellers will need to deduct the amount of SBAs claimed from the base cost of the asset when calculating their chargeable gain or loss; and

 

• Purchasers will need to establish what level of SBAs have been claimed and over what period to establish the remaining relief available to them.

 

Another important point to note is that, unlike regular capital allowances, there is no opportunity to disclaim SBAs and carry them forward – if you don’t claim them you lose them.
SBA expenditure is not eligible for the annual investment allowance (AIA), although expenditure on integral features and fixtures can continue to qualify for normal capital allowances, including the AIA. SBAs can only be claimed once the structure or building comes into business use (provided no more than seven years has elapsed since the expenditure was incurred). Any expenditure undertaken after that time may qualify for SBAs in its own right, but as a separate allowance over fifty years – there is no pooling of expenditure on an asset.

 

Whilst we await further details on the new rules in early 2019, it is worth highlighting that the Budget may have brought businesses an early Christmas present – albeit they will need to wait 50 years to get the full benefit of it.

 

 

The advice above is specific to the facts surrounding the questions posed. Neither PKF-FPM nor the contributors accept any liability for any direct or indirect loss arising from any reliance placed on replies.

 

Get in touch with Feargal McCormack via email f.mccormack@pkffpm.com

The dividend versus bonus debate

Question.

 

I’ve decided to pay my employees and shareholders a January bonus or a dividend as a thank you for all their hard work in 2018. Given the tax advantages of dividend payments I’m wondering whether I should be considering bonuses at all or whether I should just pay everyone a dividend? Are there any pitfalls in paying dividends instead of bonuses?

 

Answer.

 

The dividend versus bonus debate is not always straight forward. For many years the dice has been loaded in favour of dividend payments but you may want to consider the following factors before you decide which method of payment to make to your shareholders and staff.

 

There are many occasions when a dividend payment is not only less tax efficient than a bonus, but also unlawful. At the outset it is important to remember that dividends can only be paid to shareholders. A salaried employee, even if registered as a company director, is not entitled to dividends unless he or she is also the registered holder of company shares. If a company has more than one class of shares extra care is required, particularly if each class of share carries different dividend rights.

 

It is important to remember that once a dividend has been declared it must be paid to all the shareholders in proportion to their percentage shareholding. If shareholder A owns 10% of the company shares and another family member, shareholder B, owns 90% of the company shares it is not possible to declare a £10,000 dividend to shareholder A and not also make a £90,000 dividend payment to shareholder B. Often, shareholders try to circumvent these rules by using ‘dividend waivers’ which involves one or more shareholders waiving all or part of their entitlement to a dividend. There is, however, much case law and anti-avoidance legislation associated with this type of tax planning and extra caution is recommended to avoid HMRC challenge. Another method of tax planning to avoid the requirement to pay a dividend to all shareholders is the use of what is commonly termed ‘Alphabet Shares’. Again, this type of tax planning, if put in place correctly, can provide an effective method of facilitating and simplifying varied dividend payouts. This is complex planning however and advice should be sought before changing existing share structures.

 

From a legal perspective it is necessary for a company to have sufficient “distributable reserves” from which to make a dividend payment. Distributable reserves are typically the cumulative post tax profits of a company, less any dividends paid out during the life of the company. It is illegal under Company law to pay a dividend if there are not sufficient distributable profits; this is a very important point to understand. The difference between cash held by a company and the distributable profits figure is an important distinction to grasp. If a dividend is found to be unlawful the recipient may be deemed to have received a loan from the company and this could have adverse tax implications as the loan may be taxed as a benefit in kind. In comparison with the administrative simplicity associated with bonus payments, it is necessary to follow procedures for voting and documenting dividend payments. If the required paperwork is not completed correctly a payment to shareholders may not be treated, or taxed, as a dividend under Company law, resulting in unexpected additional tax charges.

 

Finally, dividends are not treated as ‘earnings’ for tax purposes. This may have an impact on the level of pension contributions that an individual can make. If an individual’s salary is reduced to a low level and topped up or substituted by a dividend this can also affect the individual’s state pension entitlement. Very importantly from a company’s perspective, dividends do not count toward the national minimum wage and dividends are not treated as qualifying expenditure for some very valuable corporation tax reliefs such as Research & Development tax relief.

 

Despite the possible hurdles and difficulties associated with dividend payments it remains the case that generally dividends are more tax efficient that bonuses. Nevertheless, all company owners should regularly review how best to structure one off payments to staff and employees to ensure those payments are lawful and tax-efficient.

 

The advice above is specific to the facts surrounding the questions posed. Neither PKF-FPM nor the contributors accept any liability for any direct or indirect loss arising from any reliance placed on replies.

 

Get in touch with Janette Burns via email j.burns@pkffpm.com

What to cover in an investment pitch

When deciding what to cover in an investment pitch, being clear about the benefits you will offer investors is vital, says Director Michael Farrell.

 

In our work with entrepreneurial businesses across the island of Ireland, the question of what to cover in an investment pitch often crops up. To target the right investors, you need to know what type of funding is right for your business. However, the funding landscape can be confusing—particularly if you are navigating it for the first time—so the first step is understanding the main types of private equity. These are:

 

• Seed capital: Start-up or early stage finance that is typically used prior to bringing a product to market (e.g. for research or to develop a business plan). In 2017, Northern Ireland had a higher proposition of seed capital deals (64 percent) than any other region in the UK.

 

• Angel investors: Wealthy individuals who invest personal capital in high potential start-ups/early stage businesses. High-potential businesses are businesses that aim significantly grow their turnover within 3–5 years, usually by expanding into markets beyond the island of Ireland.

 

• Venture capital funds: Corporate financiers that invest in early-stage companies with strong growth potential. For a list of venture capital funds who provide equity funding for growing unquoted companies, see the Irish Venture Capital Association website, (www.IVCA.ie).

 

• Growth capital: Finance for the development/expansion of a company that is trading profitably.

 

 

Deciding who to target

Depending on what stage your business is at, there may be several potential private equity options to consider. PKF-FPM can help you identify the best targets. Our corporate finance team has a wealth of experience supporting entrepreneurial businesses and we have an extensive network of contacts across the island of Ireland and further afield. An important consideration when deciding who to target is the benefits that you will offer in return for private equity. Remember to highlight any relevant tax reliefs as these can be very valuable for investors. Keep in mind that private equity funders usually want to realise a return within 3–5 years so it is also important to think about the exit strategies that you will offer. Again, our corporate finance team can provide advice in this regard.

Preparing your investment pitch

Your investment pitch needs to explain what your product is, the market need that it fulfils, who your competitors are, your revenue model and your route to market.

You need to have a strong business plan, robust financials, and a credible management team capable of delivering your vision. Often, early stage businesses have a skills gap on their leadership team. This can be compensated for by bringing in external expertise at board level.

Investors will want to see that you understand your sector and have a vision for its future. They also know that things don’t always go as planned, so they will expect you to have a robust contingency plan in case things go wrong for your business.

Using Powerpoint in your investment pitch

Most investment pitch presentations use Powerpoint slides. A good rule of thumb is to have a maximum 5–10 slides with no more than 3 bullet points per slide. Do not read the slides aloud during the presentation. Instead, use them to support what you are saying or to answer a question raised by a potential investor. Rehearse your presentation and seek feedback from colleagues, friends and your accountant before you make your investment pitch. This will both improve your delivery and highlight questions a potential investor may ask. Keep in mind that not every investment pitch is successful but each is a learning opportunity. Use the experience and feedback to revise and strengthen your presentation for the next time.

Further information

This short article covers just some of the points to consider when deciding what to cover in your investment pitch. For more information and advice on raising private finance and/or identifying investment opportunities, please contact a member of our corporate finance team.

 

(1. British Business Bank/Beauhurst. Small Business Equity Tracker, 2018.)

 

Michael Farrell l Director
m.farrell@pkffpm.com

The tax minefield of giving a property to my daughter

Question.

 

A few years ago, my wife and I bought an apartment in Belfast for my daughter to live in. As she was only just starting work we bought it in our names. We would now like to transfer it into her name when the five-year fixed period for the mortgage completes, so that she can take it on in her own name. Will there be tax implications (e.g. stamp duty land tax, capital gains tax) when we transfer it into her name? She has lived in the property as her main residence during the entire period of ownership.

 

Answer.

 

Unless you can establish that your daughter had beneficial ownership of the apartment until now, if you transfer it to your daughter now, there will be capital gains tax consequences for you, and stamp duty land tax consequences for your daughter. The fact that she has lived in the apartment as her main residence during the entire period of ownership may help you in establishing that she had beneficial ownership until now.

 

Capital gains tax is payable when you sell an asset that has increased in value since you bought it. The rate varies based on a number of factors, such as your income and size of gain. For residential property it may be 18% or 28% of the gain (not the total sale price).

 

All taxpayers have an annual CGT allowance, meaning they can earn a certain amount tax-free.

 

In 2018-19, you can make tax-free capital gains of up to to £11,700. Couples who jointly own assets can combine this allowance, potentially allowing a gain of £23,400. You’re not allowed to carry this forward, so if you don’t use it, you’ll lose it.

 

Therefore, capital gains tax will be payable on the gain by you and your wife on any gain above £23,400.

 

Your daughter may also have stamp duty land tax to pay on the current market value of the apartment.

 

However, you may have no tax to pay if you can prove that your daughter always had beneficial ownership of the property. When a piece of land is conveyed from one person to another, the names shown on the conveyance will be those of the legal owners before and after the transfer. However, they will not necessarily be the holders of the beneficial interest in the land and it is this interest which is normally relevant for capital gains tax purposes. Establishing the true owner or owners of the beneficial interest in land can be a difficult matter. There is no single factor which determines beneficial ownership. Each case must be considered in the light of its own particular facts, but the following are indicators that a person has beneficial ownership of land:

 

• they hold legal title (in the absence of any contrary evidence the legal owner will normally also be the beneficial owner);

 

• they occupy the land;

 

• they receive any rental income from the land;

 

• they provided the funds used to purchase the land;

 

• they received the sale proceeds from a disposal of the land.

 

The second bullet point may be helpful in proving that the beneficial ownership of the property was always your daughter’s. Other evidence may also be required to demonstrate beneficial ownership.

 

The tax implications are complex on the sale/transfer of properties between family members and specialist advice should be taken in all cases.

 

The advice above is specific to the facts surrounding the questions posed. Neither PKF-FPM nor the contributors accept any liability for any direct or indirect loss arising from any reliance placed on replies.

 

Get in touch with Malachy McLernon via email m.mclernon@pkffpm.com

 

Pay your tax bill early. It might be helpful!

Question.

 

I am employed by a large local business but I complete a tax return each year because I have a portfolio of rental properties that I declare each year. I have additional tax to pay of c£2k on each year. Each year my accountant completes my tax return in January and I pay the tax to HMRC. Can I spread these payments?

 

Answer.

 

For those completing tax returns under Self-Assessment, there is always a tendency to leave everything to the last minute, but You can pay your Self-Assessment bill through your PAYE tax code as long as all these apply:

 

• you owe less than £3,000 on your tax bill
• you already pay tax through PAYE, for example you’re an employee or you get a company pension
• you submitted your paper tax return by 31 October or your online tax return online by 30 December.

 

HMRC will automatically collect what you owe through your tax code if you meet all 3 conditions, unless you’ve specifically asked them not to (on your tax return). In this way you spread your tax payment over 12 months rather than paying a lump sum in January.

 

You will not be able to pay your tax bill through your PAYE tax code if:

 

• you do not have enough PAYE income for HMRC to collect it
• you’d pay more than 50% of your PAYE income in tax
• you’d end up paying more than twice as much tax as you normally do.

 

The tax you owe will be taken from your salary or pension in equal instalments over 12 months, along with your usual tax deductions.

 

The real benefit with this is the spreading of the tax payment. January can be a tough month anyway with people spending on their credit cards in the run up to Christmas.

 

They are also often paid early, meaning they have almost six weeks till their next pay cheque. The opportunity to spread tax seamlessly over 12 months would be a major benefit to many.

 

There is an important thing to remember with this though. If people do this, then when they come to complete their tax return next year, they will need to include the amount of tax that was collected through their tax code on that form.

 

Otherwise the tax calculation will probably show a repayment, and they might think next year’s Christmas has come early.

 

However, if you miss the 30 December deadline or you do not qualify for the tax you owe to be collected by your PAYE code you need to make sure your tax return and payment of outstanding tax is filed, submitted and paid by 31 January 2019. There are lots of ways to pay your tax bill eg online, bank transfer, direct debit etc but please bear in mind how long each payment method takes to ensure your payment is received by HMRC on time.

 

The advice above is specific to the facts surrounding the questions posed. Neither PKF-FPM nor the contributors accept any liability for any direct or indirect loss arising from any reliance placed on replies.

Feargal McCormack l Managing Director
f.mccormack@pkffpm.com

Cyber Security

Please be aware of businesses in Northern Ireland and Ireland being targeted by scammers who contact companies requesting credit card details to successfully complete the delivery of a parcel. The amounts requested will usually be very small, and they may use the name of another business known to you to connect you to the delivery. Delivery companies will never contact you to request payment details – they will either return the parcel or ask for cash on delivery if additional payments are due.

 

Other Top Cyber Security Tips: 

 

• Don’t open emails from people you don’t know
• Hover over links to see the real websites you are being taken to
• Look out for spelling or grammatical mistakes in unusual emails
• Review your bank and credit card accounts regularly for suspicious transactions
• Use Strong Passwords – combinations of uppercase and lowercase letters, numbers and special symbols
• Keep your software up to date – both on your computers and mobile devices
• Use anti-virus software and firewalls (and update them regularly!)
• Create difficult mobile passcodes – not your birthday or bank card PINs

 

Remain vigilant and safe this Christmas!

R&D Tax Relief

Question.

 

What does my business have to do to qualify for Research & Development tax relief and how is this tax relief given?

 

Answer.

 

The government’s Research & Development tax relief incentive allows companies to claim additional tax savings on the research costs they incur. The enhanced relief was established to encourage innovation in the UK however many innovative companies are still not claiming it. The relief can help fund the technological advances needed to keep a company competitive, by reducing its tax bill or providing the company with cash, if the company is loss making. It can be claimed by a range of companies that seek to research or develop an advance in their field. According to recent statistics provided by HMRC the average claim made by small and medium sized companies in the UK in 2016/17 was £53,876, but for many companies it was much more.
There is a common misconception that R&D tax relief is associated with work carried out by scientists in laboratories and that the innovation required needs to be ground breaking or revolutionary in order for a company to qualify. Sometimes the various everyday activities of a business can qualify as innovative. The government has deliberately kept their guidelines very broad in an effort to encourage as many companies as possible to benefit from this tax break. So, if a company is using science or technology to create a new product, process or service – or working to improve those already available – it is likely that it could qualify. Most companies are unaware of the diversity of projects which qualify and therefore fail to claim their tax relief entitlement.

 

R&D tax credits are available to small and medium-sized companies (SME’s) and also to large companies. An SME is a company which has fewer than 500 employees and either a turnover of less than €100m or a balance sheet of less than €86m. The tax relief given to an SME is 230%. Alternatively, an SME may claim a payable R&D tax credit for an accounting period in which it has a loss. This means that if your company is profitable and has incurred R&D costs of £100,000 the company’s corporation tax liability will be reduced by £43,700, assuming a 19% corporation tax rate, giving the company an effective tax relief on the actual expenditure, of 43.7%.

 

If, on the other hand, your company is making losses, the £230,000 attributable to the R&D expenditure can be converted into a payable R&D tax credit. The rate of conversion is currently set at 14.5% so if there are sufficient losses to surrender, this could generate a payment to the company of up to £33,350.

 

Eligibility for this tax relief is through qualifying activities, rather than a specific industry or sector. A wide range of industry sectors have successfully made claims including digital technology, manufacturing, architecture, engineering, pharmaceutical, digital technology, food, ICT, construction and renewable energies, to name a few.

 

HMRC guidelines suggest that when making the claim for tax relief a company should consider whether there has been a scientific or technological advance as a result of the R&D activity and also whether any uncertainties have been resolved which were not readily deducible by a competent professional in the field. The normal time limit for making a claim for this tax relief is two years after the end of the relevant Corporation Tax accounting period.

 

The advice above is specific to the facts surrounding the questions posed. Neither PKF-FPM nor the contributors accept any liability for any direct or indirect loss arising from any reliance placed on replies.

 

Get in touch with Janette Burns via email j.burns@pkffpm.com

 

Why planning ahead is vital for family-owned businesses

Have you thought about when you might want to exit your family business? Most owners have at least some idea of when they intend to retire but many don’t have a formal exit plan. Indeed, even if they do have a plan, they don’t always share it with the people who will be affected by it. This can lead to conflict and tensions among family members and other stakeholders as the time for the business transfer approaches, says Michael Farrell.

 

The key to avoiding conflict is to develop a formal plan well in advance and agree the strategy with everyone who will be affected by it. Conflict can be avoided if family members and other stakeholders know that the plan is right for the business and is based on sound business reasons.

 

Not every exit plan involves passing the family business to the next generation. Sometimes, there isn’t an obvious successor so the exit strategy may be to sell the business or bring in a junior partner and develop them for a future role.

 

Generally, you need to think about the value of your business well before any planned transfer takes place. You also need to think about whether any structural changes may be needed before the business is handed over.

 

If you intend to sell the business, you will want to maximise value well in advance of the sale so that you have several years of strong accounts to show a potential purchaser. My colleague, Michelle Hawkins, recently shared some practical tips on how to prepare your business for sale.

 

When developing your plan, it is important to discuss the tax implications with your accountant as different strategies can have very different tax consequences. A good plan will optimise your operations and maximise the future benefits for your family, your business and yourself.

 

Whatever your plan for the future, it’s essential to communicate it to everyone involved.

Finally, remember to review the plan regularly as your business evolves.

 

PKF-FPM organises regular events for family-owned businesses. If you would like an invitation to our next event, please contact us on 02830261010 or email Lauren Quinn l.quinn@pkffpm.com

 

Michael Farrell l Director
m.farrell@pkffpm.com