Author Archives: Lauren Quinn

Nurturing Family Business Talent

Nurturing the next generation is an important consideration for family business owners, says Michael Farrell.

When family businesses plan for the future, transferring control to the next generation is a frequent succession choice. However, since no individual is born with the skills and experience to successfully lead a business, it is important to nurture talent well before the current leader’s planned retirement or exit date.

 

Potential future leaders need to be fully committed to their role and should undergo a period of formal training and mentoring to prepare them for their future responsibilities.

 

Experience suggests that there are a number of practical ways to nurture talent when planning for family business succession. These include:

 

• Be a positive role model. Leaders should lead by example, demonstrating that they are open to learning as the business develops and grows.

 

• Encourage potential successors to get involved in the business informally from a young age. Examples include internships, volunteering for charity events, attending family board meetings to observe.

 

• Where appropriate, encourage potential successors to gain appropriate qualifications/experience outside the business.

 

• Recruit potential successors on merit. Family members should join the business be on the basis that they have the necessary qualifications and skills for their current role which can be further developed over time. Special roles should not be created just to bring a family member into the business.

 

• Set a clear business strategy and align individual goals with the overall business plan. This includes listening to, and respecting, individual expectations and career plans.

 

• Monitor individual performance and give honest feedback so that everyone can improve.

 

• When things go wrong, turn problems into learning opportunities.

 

• Invest in continuous education and development, not just in the technical areas that are relevant for your business, but also in soft skills such as communication and interpersonal skills. Like all businesses, family businesses evolve over time. Future leaders must be able to balance the sometimes conflicting interests of employees and family members actively working in the business, external investors, family shareholders who do not work in the business, and so on.

 

• Create a culture where mentoring and coaching helps each individual to reach their full potential.

 

Keep in mind that sometimes picking the right future leader may require looking outside of the family business.

 

Whatever the circumstances, selecting future leaders is an important decision which should always be based on sound business reasons rather than on emotional factors.

 

The most successful transitions occur when family business owners invest in building strong partnerships with the next generation based on mutual respect.

 

PKF-FPM host regular development seminars for family business owners. If you are not already on our mailing list and would like to receive an invite to a future event, please contact a member of our team.

 

 

Michael Farrell l Director
m.farrell@pkffpm.com

Before your year ends

Question.

 

I have a small family business that is operated through a limited company with a 30 September year end. With less than a month to go to our year end, are there any things that I should be attending to?

 

Answer.

 

As a director of and shareholder in a limited company there are many items that you should attend to before your year end. A couple of important ones are set out below:

 

1. Directors loan accounts and dividends.

 

This area is probably the least understood by people in your situation. Most shareholder directors in the UK remunerate themselves by taking a small salary to preserve their national insurance record and then the majority of their remuneration comes in the form of dividends which not only are exempt from National Insurance but also enjoy a much lower level of income tax. For cashflow reasons, many companies declare a dividend and then credit the total dividend to a directors account with the director drawing the dividend down monthly. The chorography of this process is essential. The dividend must be declared BEFORE the director starts to withdraw the money. If for example you draw down an amount monthly and enter ‘dividend’ in your accounting system (posted often to the wages account!) BEFORE you declare and post the dividend to your directors account, you will have a very difficult experience when a PAYE inspector visits your company as he/she will have a very strong argument that the ‘dividends’ are in fact wages and the company will face a hefty PAYE & National insurance bill along with interest and a penalty.

 

Equally you cannot end the year with an overdrawn directors account and then vote a dividend ‘retrospectively’ and post it to your accounting system to clear your indebtedness – this is illegal. Dividends must be declared ‘in year’ and are only valid if they comply with company law.

 

I strongly recommend that you have your accountant review your directors account with the company BEFORE the year end. If it is overdrawn, then subject to company law, a dividend could be declared pre-year end to clear it. You may have an income tax bill for the period of indebtedness however it will probably be relatively modest.

 

 

2. Pensions – If you intend to make a pension contribution and want tax relief for it ‘in year’ then it must be made before 30 September. Pensions cannot be relieved for tax on an ‘accruals’ basis.

 

3. Capital expenditure. – There are generous tax reliefs for investment in plant and machinery. The first £200k of capital expenditure may be offset against profits however the company must buy the plant before 30 September. Interestingly, if the company acquires the asset before the very last day of your year-end even via hire purchase (but not leasing) the entire cost of the plant is still available for offset against profit.

 

4. Stock – On the closing of business on 30 September you need to undertake a stock count. Where stock is a significant figure in your business then it’s over/under statement will seriously distort your profit.

 

Finally remember HMRC’s “Making Tax Digital’ era starts next April, and you must move your accounting system into one that will enable you to comply with the new regime.

 

The days of presenting your Accountant with an egg box of books 6 months after your year end are over. Engage with your Accountant/Tax advisor BEFORE your year end, they will save you money and help make sure that you are ready for the challenges ahead.

 

 

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 Paddy Harty via email p.harty@pkffpm.com

 

Charities Governance & Culture

Keeping abreast of best practice and regulatory changes is vital for charity trustees. A number of recent publications provide useful insights and guidance, says Teresa Campbell.

 

Earlier this year (March 2018), the Charity Commission for Northern Ireland published guidance to help charity trustees comply with their legal obligations and best practice. Running your Charity provides useful advice in five key areas:

 

• duties and responsibilities of charity trustees,
• public benefit requirement ( a legal requirement under the Charities Act (Northern Ireland) 2008 that all charities must have charitable purposes that are for the public benefit);
• finance, funding, reporting and accountability;
• governance;
• risk and insurance.

 

The purpose of the guidance is to provide general information for existing trustees and/or individuals who may be thinking of becoming trustees of charities in Northern Ireland.

 

Compliance issues

In the Republic of Ireland, a recently published compliance report by the Charities Regulator lists a number of common issues that affect the ability of charity trustees to manage and control their charities. According to this report, issues identified which relate directly to trustee duties and responsibilities included:

 

• Charity trustees not aware of their legal duties and responsibilities;
• Charity trustees lack knowledge of the requirements and conditions in their charity’s governing document;
• Charity trustees not holding meetings/trustees not attending meetings;
• Charity trustees making decisions without documenting those decisions in formal Board minutes;
• Charity trustees making significant decisions without seeking out specialist advice;
• Charity trustees allowing one or a group of trustees to control the charity;
• Charity trustees not aware of their legal obligations to the Charities Regulator around:
⁃ Making an annual return;
⁃ Keeping their details up to date on the public Register of Charities;
⁃ Disclosing suspected offences under the Criminal Justice (Theft and Fraud Offences) Act, 2001.

 

Other themes to emerge among the common issues identified related to managing conflicts of interest, internal financial controls, transparency, fundraising, and unregistered charitable organisations. The report, published in August 2018, covers the Charities Regulator compliance activities in 2017.

 

Internal challenge

In another recent report (April 2018) the Charity Commission regulator for England & Wales urged charities to foster a culture where staff, trustees and volunteers are reminded of the need to challenge any concerning behaviour and not turn a blind eye when internal processes aren’t followed.

 

According to this report, placing excessive trust in individuals and lack of internal challenge and oversight contributed to 70% of insider frauds in a sample of charities analysed by the Commission.

 

Previous analysis by the Commission found that a third of frauds committed at charities and reported to the Commission were suspected to have been committed by charity staff, trustees or volunteers.

 

For more information …

 

To support our clients working in the charities sector PKF-FPM organises regular seminars and briefings providing updates on best practice and regulatory developments. If you are not already on our mailing list and would like to be notified of forthcoming events, please contact a member of our team.

Teresa Campbell l Director
t.campbell@pkffpm.com

 

 

PKF-FPM Charity Seminar

“Great things never come from comfort zones”

The climate for charities has been volatile over the last few years, to put it mildly. Will the next few years be any better? PKF-FPM Accountants, in conjunction with nfpSynergy and the Charities Regulator, invite you to step out of your comfort zone and explore the challenges and opportunities facing the charitable sector on the Island of Ireland today.

 

PKF-FPM are delighted to continue our support of the not-for-profit sector by bringing you the leading charity experts the country has to offer, in this highly engaging free event that should not be missed.  Aimed at connecting the leading minds of the Charity Sector, we will look at the different forces at play for charities both in the Republic and the UK and explore topical emerging issues, major risks, future challenges and strategic initiatives.

Who will Benefit?

This event is a must for for all Charity CEOs, Trustees and members of the Senior Management Team.

 

 

 

 

To confirm your FREE place contact Teresa Gill 003531 6913 500 or email t.gill@pkffpm.com

 

 

Warning to disclose unpaid offshore tax or face severe penalties

Question.

 

I read somewhere that HMRC have provided an opportunity for taxpayers to disclose offshore tax liabilities before the end of September or face much stiffer penalties. What is this opportunity and what happens if a taxpayer doesn’t meet this deadline?

 

Answer.

 

Taxpayers have only a few weeks left to disclose undeclared offshore tax liabilities to HMRC or risk a stiff penalty. Taxpayers who need to make a disclosure or are unsure about making a disclosure need to act before the 30 September deadline.

 

The Requirement to Correct requires individuals with undeclared offshore tax liabilities relating to income tax, capital gains tax and inheritance tax to disclose them to HMRC on or before 30 September 2018. HMRC’s guidance provides information and examples about who has a Requirement to Correct, when a correction must be made, which tax years are in scope and what the penalties are for non-compliance. It also gives details of HMRC’s policy regarding penalties for taxpayers who notify HMRC that they have something to disclose either on or very near the 30 September 2018 deadline.

 

The penalties for failing to correct offshore non-compliance by 30 September 2018 are much higher than existing penalties, at a maximum 200 per cent of the tax involved with a minimum penalty of 100 per cent of the tax involved. They apply irrespective of the type of behaviour that led to the non-compliance.

 

Tax rules relating to offshore matters can be complicated and anyone who is unsure if they have any undeclared offshore tax liabilities should check their position and, if necessary, take advice from a tax professional. Anyone who has taken advice in the past about an offshore matter should consider if they need to re-visit this advice and, if necessary, obtain a second opinion. Ultimately, it is the taxpayer’s responsibility to check whether they need to make a disclosure under the Requirement to Correct or not, and with the deadline approaching fast, time is running out to act.

 

The 30 September 2018 deadline coincides with the date by which more than 100 countries will exchange data on financial accounts under the Common Reporting Standard (CRS).

 

From this date HMRC will be receiving a huge amount of information from other tax jurisdictions and taxpayers and tax advisers have been left in no doubt that they will use it to launch investigations and, in some cases, criminal prosecutions against individuals who have not made a correct and complete declaration of their offshore income and assets to the UK tax authority.

 

The days of HMRC being ‘in the dark’ about UK taxpayers’ offshore bank accounts and other interests are almost over. This makes it all the more pressing that taxpayers check their positions now to ensure that they minimise their risk of receiving a penalty for failing to correct, or worse, put themselves at risk of a criminal prosecution.

 

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

Overdrawn Director’s Loan Account

Question.

 

I have an overdrawn director’s loan account in my limited company. What are the tax implications if I do not have the funds to pay this back?

 

Answer.

 

An overdrawn director’s loan account may create tax implications for both the company and its director.

 

When a director who owns at least 5% (or less and loan greater than £15,000) of the ordinary share capital of a company, is given a loan which is not repaid 9 months of the company year end, the company will be required to pay tax under s455 CTA 2010. Section 455 tax is payable at 32.5% of the outstanding loan balance and is due 9 months and one day after the end of the accounting period in which the loan was provided.

 

For personal tax purposes, the director will also incur a benefit in kind charge if the loan exceeds £10,000 at any time during the tax year however if the director pays interest to the company then the benefit can be reduced and even eliminated if the interest is paid at HMRC’s official rate. The taxable benefit is required to be reported on a form P11D and Class 1A NICs will also be payable by the company at 13.8%.

 

If the loan is later written off. The director is treated as receiving a dividend equal to the amount of the loan. The amount written off is also subject to Class 1 NICs and is not an allowable expense for corporation tax purposes.

 

When the loan is written off completely or repaid by the director, the company will then obtain a refund of the s455 tax previously paid, 9 months and 1 day after the end of the accounting period in which the loan is repaid.

 

Where a loan is repaid and then a similar sum is advanced shortly after i.e. within 30 days, the repayment may be matched to the later advance, the effect being that there is no actual repayment and no refund of S.455 tax.

 

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 Emma Murphy via email m.murphy@pkffpm.com

What business clothes can I include in my expenses?

Question.

 

I work as a consultant in a specialist and high risk sector and I wear my own protective clothing when I am visiting manufacturing plants. Am I allowed to claim the cost of these clothes that I wear to work?

 

Answer.

 

The purchase of general clothing is not an allowable deduction for tax, as it could be worn for non-work purposes – the fact that you may choose not to wear the clothing for non-work purposes is irrelevant. Therefore the only items of clothing that can be claimed for are those which fall into the categories of protective clothing and/or uniforms.

 

As you work in a specialist manufacturing sector, items such as steel capped boots, flourescent vests, hard hats, protective gloves and goggles could be claimed for, as could the cost of any overalls purchased.

 

Most clothes don’t full under the category of wholly and exclusively as a business expense. HMRC uses the phrase “everyday wardrobe” with regards to clothing expenses. Any clothing that could conceivably form part of your everyday wardrobe, i.e. could be worn outside of the work environment, is not allowed. It does not matter whether you do or don’t actually wear the item outside work, what counts is whether you could.

 

Protective clothing required for your work such as high-vis vests, helmets, safety boots, overalls, trousers with padded knees etc. These type of items would normally be bought from a specialist supplier or builders merchant.

 

HMRC are a little cagey around clothing that has a company logo put on it. Fixing a permanent and conspicuous badge to what would otherwise be ordinary clothing may be enough to make it a uniform, but each case must be considered on its merits. If you do need some t-shirts, fleeces, jackets etc specifically for work, the safest option is to get them permanently and conspicuously logo’d. Ideally this will be allowable as a work uniform, but it could also be considered to be an advertising expense.

 

There are some additional complications for limited company directors, who are considered to be employees of the company. Clothing provided to employees is one of the items that should be reported on the annual P11D form as part of the company payroll process and it may be considered to be a personal taxable benefit.

 

If the company provides clothing it must be reported on the P11D whether allowable or not. The allowable clothing (uniform and protective clothing) is not taxed, but any other clothing is considered to be a taxable benefit to the value of the clothes purchased.

 

If you only provide allowable clothing you can apply for a dispensation from the P11D reporting via the P11Dx form.

 

 

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

Family Property Planning

Question.

 

I own a property which I have rented out for many years. It’s become a burden as there are endless maintenance issues to deal with and it’s becoming increasingly difficult to find reliable tenants. Ideally, I’d like to sell it as soon as possible. It was bought at the peak of the property boom so I will certainly make a loss on the sale. My husband also has a couple of apartments which he bought a few years ago in an area which has recently seen quite a significant rise in property prices. He wants to hold on to the properties for another few years, but he would sell one of the apartments now if it was possible to offset the loss on the sale of my property against the profit on his sale. If we can do this should we sell both properties in the same tax year?

 

Answer.

 

The members of a married couple or civil partnership are taxed separately. Their income is taxed separately and each spouse or partner is entitled to their own personal allowance. Capital gains are also taxed separately, each spouse or partner being entitled to the annual exempt amount, which is currently £11,700. This means that the first £11,700 of capital gains chargeable on an individual each tax year is free from tax. Unfortunately, losses of one spouse or civil partner may not be set against gains of the other. So your husband’s capital gain cannot be reduced by offsetting it against your capital loss.

 

It may be possible, however, to carry out some tax planning before the sale of the properties, which may benefit your combined overall tax position, as long as you are both living together. Transfers of assets between spouses or civil partners who are living together benefit from the ability to transfer assets to one another free from capital gains tax. The acquiring spouse or civil partner takes over the other’s acquisition cost. This has no relevance to assets acquired by a surviving spouse or partner on the death of a partner or spouse, as these death gifts are transferred at probate value. The rules relating to spousal lifetime transfers enable couples to plan in advance and make appropriate transfers one to the other before negotiating a disposal to a third party, so that, for example, one does not have gains in excess of the annual exempt amount when the other has unrelieved losses. Such transfers must, however, be outright gifts.

 

Stamp duty and stamp duty land tax is not normally charged on the value of assets transferred between spouses or civil partners, however, if the property transferred is mortgaged property and the spouse or partner to whom the property is transferred takes over responsibility for the mortgage the mortgage debt is liable to stamp duty. This charge can be avoided if the spouse or partner who is transferring the property continues to take responsibility for the mortgage payments.

 

So, while you cannot benefit from the ability to transfer capital losses to your husband to reduce his capital gains tax exposure, with careful planning it may be possible to reduce your combined tax exposure by making carefully timed spousal asset transfers before a sale to a third party so that the same spouse is disposing of both assets. This means that the capital gain on one disposal can be reduced by the capital loss on the second property disposal.

 

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 your family business needs a formal agreement

Having a formal family business agreement provides clarity and assists with buy in from intergenerational family members which can help manage conflict, says Michael Farrell.

Like any other business, family businesses become more complex as they develop and grow. This is particularly true as more people are brought into the business, regardless of whether they are family members or other individuals recruited to meet specific business needs. Wherever people work together, conflict can arise due to differing expectations and standards of behaviour, inter-generational tensions, conflicting objectives, inequities in responsibility, performance management, remuneration, and so on.

A well thought out and effectively communicated family business agreement can help overcome these problems giving you more time to focus on your core business.

So, what is a family business agreement?

Essentially, a family business agreement is a roadmap for the successful transition of the family business to the next generation. It sets out the plan for the business and the skills required to ensure the next generation is adequately equipped for the successful succession of the business. It is based on family trust, mutual respect and the mantra “If you look after the business, the business will look after the family.”

Key elements of a family business agreement?

The family business agreement includes items such as:

• Funding plan for the future financial well being of the senior generation
• Timeline for exiting the business and managing the transition period
• Listing of family assets and details of the plan for how these will be transferred to the next generation
• Roles and responsibilities of the next generation focusing on building an effec-tive team to maximise the success and long term sustainability of the business
• HR policies covering recruitment, remuneration, company cars, reporting lines, bringing family members into the business and performance management.
• Employment contracts for all staff, including family members
• Criteria for a Shareholders agreement dealing with all aspects of ownership, including valuation and exiting the business
• Procedures for lasting power of attorney
• Action plan and timeline for succession.

Securing buy-in

To be truly effective, it is vital that your family business agreement is understood and supported by all your stakeholders. Previously on this blog, I have shared tips on how to go about this. The ability to provide good communication, clarity about individual roles and meaningful feedback are important aspects of effective leadership and will help you to secure buy-in.

 

Even the most informal family businesses will benefit from having a family (business) agreement. Taking the time to develop this document can be the key to long term sur-vival and success.

 

For more information on PKF-FPM’s family business services, please contact a member of our team.

 

Michael Farrell l Director
m.farrell@pkffpm.com