Author Archives: Lauren Quinn

Tax Implications for commercial rentals

Question.

 

I have a Northern Ireland incorporated company which has recently acquired an Irish company which owns a rental property. I am considering renting the property out on a commercial basis and providing ancillary services such as meals, transport and cleaning. I was born in Northern Ireland and currently reside in the Republic of Ireland. What are the general tax implications of my situation?

 

Answer.

 

If your UK company owns an Irish subsidiary company which carries on an activity of renting a property, the Irish company will be subject to taxation within the Republic of Ireland at 25% on the rental profit which basically equates to the rental income less the expenses of maintaining the property, interest charges etc. In Ireland, normally if this profit is not distributed to shareholders then it is subject to a further surcharge tax. This tax can be avoided in your circumstances by declaring a dividend within 18 months of the financial year end up to the UK holding company. However, in the circumstances that you describe, the Irish company appears to be carrying on a hospitality trade in that it is not simply renting out the property, rather, it is providing services ancillary to the letting of the property. This activity is potentially classified as a trading activity and therefore subject to the lower Republic of Ireland corporation tax rate of 12.5%. If it is a trading activity then the surcharge rules do not apply to the trade. It will be therefore very important to ensure that your company is carrying on a trading activity rather than a company earning investment income as this will effectively reduce the tax rate by 50%. Note the hospitality activity will be subject to VAT.

 

Your personal circumstances also provide further opportunity for efficient tax planning. As you are resident in the Republic of Ireland but domiciled in the United Kingdom the Irish subsidiary company could pay a dividend up to the UK holding company equivalent to the net profit. If your company is deemed to be an investment company this would eradicate the Irish surcharge on the surplus rental income. If your company is a trading company then the dividend will pass the net profit up to the UK holding company. As a UK domiciled, Irish resident taxpayer you will be able to dividend this surplus income out of the UK holding company to you personally and provided you do not remit the monies back to the Republic of Ireland, the personal dividend is exempt from taxation.

 

Turning to the longer term, eventually one must assume that the property in the Republic of Ireland will be sold, the proceeds realised and distributed to the beneficiaries of your estate. The sale of the property, will be subject to Irish capital gains tax at a rate of 33% using current rates. This tax is unavoidable as Ireland, like the UK, charges capital gains tax on properties that are located within their country. You will then be left with an Irish company which has a single asset in the form of cash and this cash could be dividended up to the UK parent company, the Irish company liquidated and the UK parent company liquidated with proceeds being paid out as a capital distribution upon liquidation. This capital distribution will be subject to capital gains tax at either 20% or potentially 10% subject to the company qualifying as the holding company of a trading subsidiary. The disposal of the property is a very complex matter for taxation purposes and prior to the disposal of property you should seek tax advice as given the cross jurisdictional tax implications there is potentially a lot of tax at stake.

 

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.

 

Paddy Harty l Director
p.harty@pkffpm.com

Payslip law changes from April 2019

Question.

 

I operate a small business with 35 employees who work different shift patterns and hours each month. What payslip changes came into force in April 2019?

 

Answer.

 

The law requires that a payslip is provided to all employees each time they are paid. The exception to this legal requirement means that for the following there is no obligation to provide a payslip, non-employees: contractors, freelancers and workers. There are additional categories where a payslip is not required: police service; merchant seaman; master and crew of share fishing vessel.

 

When a payslip is required, it can be provided as a printed or written document, or your employer can provide it electronically. However, the payslip must be provided on or before the employee’s payday.

 

The legal requirements of the detail on payslips are limited, there are many styles and formats which vary from employer to employer and industry to industry. The concept of wage packet has increasingly reduced, with the onset of direct credit transfer into the employee bank accounts. Cash pay, once the norm, is now rare as are cheque payments.

 

So, the UK law on payslip requires at least the following to be shown (as a minimum):

 

• Earnings before and after deductions

 

• The amounts for deductions which may change from period to period

 

Where deductions are fixed amounts, the employer also needs to provide details although that may be provided as part of a separate statement. For the majority, the payslip would often show deductions along with further employer provided information. If a statement of deductions was used, then that statement must be issued before the first payment to a new employee and annually thereafter to all employees with such deductions.

 

Under new law laid before parliament comes into force from 6th April 2019. Employers will now be required to provide employees who are paid according to ‘time worked’, details of the number of hours being paid on their payslip this time.

 

In preparation for April 2019, employers must review their business and payroll data processes and to check compliance with this new law – amend their processes and configure their payroll operation, to enable the correct hours information to be provided.

 

These government initiatives better enable employees to identify what they are being paid and equate that with worked time. It will enable them to better identify if the employer is meeting their minimum pay obligations (National Minimum Wage and National Living Wage) and are not requiring added unpaid work-time.

 

For workers who receive a fixed salary each month, payslips will not need to display the worker’s hours as their pay does not vary based on the amount of time they have worked. Employers will also not need to include an hourly figure to reflect unpaid leave or statutory sick pay. However, if they work occasional overtime paid at an hourly rate, this would need to be shown. Hours can be shown as the total number of hours worked – making clear what period they were worked in – or broken down further into different types of work or different rates of pay.

 

A worker who thinks that they have not received a payslip, or that the payslip they have received lacks the required information, may bring a claim before an Employment Tribunal.

 

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.

 

Malachy McLernon l Director
m.mclernon@pkffpm.com

Do you need to shake up your business?

Recognising that it is time to shake up your business is often a necessary step to protect your future, says Director Michael Farrell.

If the thought of shaking up your business fills you with dread, you are not alone! Day-to-day pressures along with the comfort of familiar routines and fear of the unknown are barriers to change in many businesses. However, at a time when economic and digital drivers are disrupting our environment, your ability to lead and manage change is very important.

 

So, where do you start when you need to shake up your business?

 

Good practice is to set aside time for strategic planning. At a minimum, you should take time out at least once a year to review your business and benchmark your performance against similar businesses in your sector.

 

When conducting this exercise, make sure that you have the necessary information to check that your expenses are in line with, or better, than your competitors, that your costs are under control and profitability is being maximised.

 

Improving the financial strength of your business is a very effective way to ensure that you are ready to cope with the impact of any necessary changes.

 

Effective businesses have the resources to rapidly analyse financial information and performance indicators. However, you don’t have to be a large business to benefit from good management reporting. If you do not have an in-house accounting team, real time accounting services are a good way to overcome this problem.

 

Depending on the outcome of your business review, there may be positive reasons to introduce change. Alternatively, there may be warning signs that you need to shake up your business. Examples of these positive and negative indicators are set out below.

 

Positive reasons to shake up your business processes and/or structure

• You have outgrown your current business structure.
• You want to develop additional revenue streams or enter a new market.
• You need to raise capital to fund business development.
• Your competitive environment is changing and the time is right to acquire or merge with another business.
• You want to bring in the next generation, take on a new partner or recruit to enhance your management team.

Warning signs that you need to shake up your business

• You spend most of your time ‘fire-fighting’ day-to-day crises.
• You no longer have time to keep up with industry/market trends.
• You are losing customers and/or not achieving expected results.
• You have difficulty retaining employees.

Leading and managing change

Regardless of the size of your business, your ability to lead and manage change is the key to achieving success. While not everyone is a born leader, leadership skills can be acquired. Mentoring and personal development can be helpful in this regard. Likewise, bringing external expertise into your boardroom enhances objectivity and can help you make better business decisions. Consultants can introduce up-to-date knowledge and insights that can help you develop a more robust business strategy. While internal teams have valuable business and customer knowledge, it is often easier for external consultants to identify problems and confront obstacles such as resistance to changing the status quo.

 

When developing your strategy, remember to take into account the tax consequences of any planned business changes.

 

Update your business plan and communicate your vision clearly to your team. Check that the goals you set for yourself and your employees are aligned and monitored on an ongoing basis to ensure that everyone stays on track.

 

Finally, remember that change is continuous and shaking up your business should not be seen as a once-off event. By regularly benchmarking your performance and reviewing your business strategy and plan, you will optimise your ability to keep.

 

 

Michael Farrell l Director
m.farrell@pkffpm.com

Entrepreneurs Relief

Question.

 

I am considering selling shares in the family company and am not sure on availability of entrepreneur’s’ relief (ER) about different classes of shares in issue. A total of 11,000 shares are in issue made up of A and B shares. Mother and father own 10,000 A shares and I own the other 1,000 B shares.The A shares have full voting rights, full dividend and full rights on disposal of the company. The B shares have full voting rights, full dividend and no rights on disposal of the company.

 

Answer.

 

FA 2019 introduced new rules relating to the conditions that must be satisfied on the disposal of shares for them to qualify for ER. From 29th October 2018, the definition of a “personal company” for entrepreneurs’ relief has been amended in addition to the existing rules of being an officer or employee of the company and holding at least 5% of the ordinary share capital and voting rights of the company, the shareholder must now meet one or both of the following tests:

 

1. An entitlement to at least 5% of the profits available for distribution to equity holders and, on a winding up, would be entitled to 5% of the assets available, or

 

2. An entitlement to at least 5% of the proceeds in the event of a disposal of the entire ordinary share capital of the company.

 

The first of these new rules would have removed the availability of ER on the B shares were it not for the second test being available. It is necessary for the B shares to provide an entitlement in both the distributable profits and the net assets of the company on a winding up for them to qualify. If the articles of association were to be amended today to include the new conditions, these shares would be required to be held for the minimum period before being eligible for ER. From 6th April 2019, one of the changes relates to the minimum period throughout which these qualifying conditions must be met in order to claim ER, which has increased from 12 months to 24 months. The other change applies where an individual whose shareholding is diluted below the 5% qualifying threshold due to an issue of new shares. The shareholder can elect for there to be a deemed disposal immediately prior to the share dilution which will give ER on gains made up to the time of the dilution. Another election will allow the ER qualifying gain to be deferred until shares are disposed of.

 

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 Seamus McElvanna via email s.mcelvanna@pkffpm.com

 

Penalty warning for those who enrol too early for Making Tax Digital

Question.

 

I am VAT-registered and I have sales of about £200,000 per annum so I believe I have to register for Making Tax Digital for VAT. When must I do this by as I have read that there may be penalties applied if I register at the wrong time?

 

Answer.

 

The 1st April marked the introduction of Making Tax Digital (MTD) but businesses need to be aware that it is not the point at which those businesses effected by MTD need to sign up.

 

The sign up process can, and in many cases should, be completed at a later date. Businesses should only sign up for MTD once their last ‘pre-MTD’ VAT return has been filed using the existing Government Gateway.

 

It is important to note that once a business has signed up to MTD it must submit all VAT returns – including those for periods starting before 1 April 2019, using MTD-compliant software. This could cause problems if the business signs up to MTD before submitting its final return under the pre-MTD rules.

 

For example, a business which submits VAT returns on a calendar quarter basis will have to submit their VAT return for the quarter ended 31 March 2019 by 7 May 2019. If they have already signed up to MTD before submitting this VAT return then, even though the period predates the introduction of MTD, it must be submitted using MTD-compatible software or HMRC’s systems will not accept it. If the business has not planned for this they may encounter problems when it comes to meeting the submission deadline.

 

There is no soft landing with regards to MTD penalties. HMRC have said they will apply a light touch approach in the first year of MTD, but only in relation to record keeping penalties where the business has made a genuine effort to comply.

 

HMRC have been very clear that they want businesses to continue to pay their VAT on time under MTD, even where they have problems filing or keeping digital records. HMRC’s light touch approach to penalties does not extend to the payment of VAT liabilities.

 

Businesses which do not pay their VAT, or pay late, remain exposed to penalties in the normal way. We have been advising all our clients that those businesses who have signed up too early and now find that they are struggling to file their returns under MTD should prioritise paying their VAT on time to ensure that they do not receive a penalty.

 

They should contact their software provider and/or HMRC as soon as possible to try and resolve their filing problems. It is also advisable to document any problems encountered and collect supporting evidence in case they do incur a penalty which they later wish to appeal.

 

You must sign up for MTD at least one week before your VAT Return is due, and at least 24 hours after your last non-MTD VAT return was filed. Businesses that pay VAT by Direct Debit cannot sign up in the 7 working days leading up to, or the 5 working days after their VAT Return is due.

 

Getting the timing right to sign up to Making Tax Digital is vital.

 

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

Prior Year Review

Question.

 

 

I was paid a substantial bonus of £25,000 in my March salary which brought my earnings for the 2018/19 tax year to £124,000. I was disappointed to see the amount of tax taken off. I have been a 40% taxpayer, but I seem to have lost more than 40%. Is there anything that I can do now to get some of the tax back?

 

Answer.

 

It sounds as though you have fallen into the 60% tax trap. The official UK income tax rates on non-savings income are 20%; 40%; 45%. Each individual has a band of income that is tax free up to the personal allowance which was £11,850 for 2018/19. If your adjusted net income exceeds £100,00 the personal allowance is reduced by £1 for every £2 of income in excess of this limit – so someone with adjusted income of £123,700 or more will not be entitled to the 2018/19 £11,850 personal allowance. When this happens that slice of income between £100,000 and £123,700 is taxed at an effective tax rate of 60%. There are tax reliefs available which can operate to reduce higher rate tax, but most require some action to be taken within the tax year, the most popular being pension contribution. There are a few tax reliefs that can be related back to a prior tax year that you could consider. For example, charitable donations can be carried back to the tax year before the year of payment. A charitable donation reduces the level of net adjusted income and you can claim back the difference between the basic tax rate of 20% and the rate paid by you at 40% or 45%. The election to carry back must be made on or before the self- assessment return for the earlier year and, in any event, before 31 January following that year – so donations made between 6 April and the following 31 January can be carried back. If you are already committed to making gift aid payments to your favourite charity it may be worth making the carry back election. Also, an investment into an Enterprise Investment Scheme EIS, or Seed Enterprise Investment Scheme SEIS, can by election be treated as though it was an investment made in the preceding tax year. Income tax relief is available on the cost of shares subscribed for at 30% for EIS and 50% for SEIS. There are complex rules that apply to EIS and SEIS qualifying companies, so you should speak to an independent financial adviser to ensure that such investments are compliant and suitable for your needs.

 

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 Lauretta McGeown via email l.mcgeown@pkffpm.com

 

The risks of buying property for your children

Question.

 

I would like to help my daughter on to the property ladder, but I am concerned about the risks involved and the possible loss of family wealth if she enters a future relationship which fails. She has just finished university and is hoping to buy a house with her boyfriend. He’s still studying and can’t get a mortgage, so I would like to give her some financial help. Could you explain the main tax considerations I need to be aware of and some of the options open to me to ensure I take all steps possible to preserve the value of my loan or any other type of financial assistance I decide to give her.

 

Answer.

 

Helping one of your children on to the property ladder might seem like a good idea however it is extremely important to consider all the options and to be fully aware of the future risks, particularly the risk of future relationship breakdowns or divorce, which could force the sale of the property and risk a loss of family wealth.

 

Often the simplest way to help one of your adult children is to make a simple cash gift. This is likely to allow them to finance the deposit on their property acquisition which can then be supplemented with a commercial bank loan. This arrangement has several key benefits. Under this arrangement the sole ownership of the property will be in your daughter’s name and it will also be recognised for tax purposes as your daughter’s principal private residence (PPR). It will therefore be free from tax when she sells it in the future assuming of course that your daughter will live in the house during the period of ownership and will occupy the property as her main residence.

 

From your perspective, another advantage is that the gift of cash may reduce your current exposure to 40% Inheritance Tax, as the gift will fall outside your estate once seven years pass from the date of the gift. To determine the precise IHT impact of a gift of cash it is necessary to review your existing estate in more detail.

 

There is an important disadvantage in gifting cash, however. Your daughter will have outright control and ownership of the property, so she will have the power to sell the house whenever she wants or re-mortgage the property. The greatest risk of all is perhaps the risk that if a future relationship breaks down there is a chance of assets being lost to an estranged partner, your gift of cash may become irrecoverable and this would result in a loss of family wealth.

 

Very often, to reduce the potential financial risk associated with the breakdown of relationships, rather than giving a gift of cash, parents consider taking joint ownership of properties owned by their children. By paying directly for a part ownership share of a property the part of the property in the parent’s name is likely to be protected as joint ownership usually makes a future forced sale of the property more difficult as the agreement of all joint owners is usually necessary. There are some downsides to this option however. On a future sale, your share of the property would not benefit from capital gains tax PPR relief as the property would not be your principal private residence. You will also have continued IHT exposure on your ownership share, in comparison to a gift of cash which has the potential to fall outside your death estate in future years. The part of the property in your name may attract a 40% IHT tax on your death, depending on the value of your entire estate.

 

You might also wish to consider a loan, rather than an outright gift of cash. For this option you might consider getting your solicitor to draw up a simple loan agreement for an interest-free loan. If you choose to charge interest on the loan this would be taxable income in your hands and it’s important to be aware that the provision of a loan would be of no benefit in reducing your estate for inheritance tax as the value of the loan outstanding at the date of your death will be an asset of your state.

 

There are many considerations which fall outside the scope of this article which must not be overlooked. Stamp duty land tax (SDLT) considerations associated with joint ownership should be considered in detail before gifting or lending cash to your daughter for a house purchase. It may also be possible in some circumstances to acquire a property through a family trust, facilitating the ring-fencing and protection of wealth and alleviating some of the concerns associated with outright control of a property by a child. Professional advice should be sought to further explore options available utilising trust law and explore in more detail the merits and potential downside of financing a property by way of cash or loan. The optimum course of action will vary depending on your personal circumstances.

 

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.

 

Janette Burns l Associate Director
j.burns@pkffpm.com

Amortisation of Goodwill

Question.

 

I have heard that we can now get corporation tax relief for the amortisation of goodwill, is this true?

 

Answer.

 

Tax relief was withdrawn in 2015 for companies trying to write-off the cost of purchased goodwill and certain customer-related intangible assets. Before that time relief was available on business acquisitions for purchased goodwill, in the same way as for the acquisition of other intangible assets.

 

The Finance Bill 2019 provides relief for goodwill and relevant intangible assets acquired as part of the acquisition of a business on or after 1 April 2019, where they are acquired alongside qualifying intellectual property (IP) assets. The proposed relief applies at a fixed rate of 6.5% per annum on cost, on an amount up to 6 times the value of any qualifying IP assets that have been acquired. For the purpose of the new relief, the categories of IP that are eligible would broadly correspond to the existing definition of IP and include patents, registered trademarks, registered designs, and copyright or design rights.

 

The new legislation continues to restrict relief on amortisation of goodwill on an incorporation event. In addition, no relief would be available where the relevant asset is not acquired as part of a business acquisition or, where there is a business acquisition, but no qualifying IP assets for the continuing use in the business are acquired as part of the transaction.

 

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 e.murphy@pkffpm.com

Tax Implications of Shareholder Protection Insurance

Question.

 

I have formed a company with three other individuals and we have been advised to have a Shareholders Agreement prepared. We are also taking out Life Insurance (Shareholder Protection Insurance). What it are the tax implications of Shareholder Protection Insurance?

 

Answer.

 

You are very wise to have a Shareholders Agreement prepared and also to insure each other’s lives under a Share Protection Policy. A Share Protection Policy will enable the surviving shareholders to purchase a deceased shareholder’s share of the business from the deceased’s estate and the policy ensures that the deceased’s owners dependants have a willing buyer and cash instead of a share in the business.

 

It will be necessary to value the business and each shareholder’s shareholding in the business and to enable the agreement to be implemented, each shareholder will have to effect and maintain a policy of life assurance which is written in trust from the outset for the other shareholders. The Share Protection Policy will typically be covered by a document called a Cross Option Agreement which provides the basis of the share purchase and details how the purchase will be made in the event of death.

 

On death it is important that the shareholding of the deceased shareholder enters their estate so that it can benefit from Business Property Relief from Inheritance Tax (subject to various conditions). The problem that arises is that if there is a binding contract within a shareholders agreement whereby the deceased’s estate is forced to sell the shares and the company is forced to buy the shares this will disallow Business Property Relief with punitive Inheritance Tax implications. To circumvent this, an Option Agreement is entered into from the outset giving the deceased estate the option to “put” the shares to the remaining shareholders and the remaining shareholders will have the option to “call upon” the deceased’s estate to sell the shares to them and they will use the proceeds of the life assurance policy to fund the purchase. It is the drafting of this cross option agreement that does not create a binding obligation until one party exercises their option. This is not a binding contract for sale and therefore preserves valuable business property relief for the beneficiaries of the deceased’s estate.

 

When a cross option agreement is put in place it is very important that an agreed valuation method for the company and the deceased’s shareholders share is agreed at the outset. Valuation problems can occur where the shareholders agreement specifies that an open market method of valuation must be used as this creates a practical impossibility to provide the correct level of insurance when the valuation is unknown and fluctuating. More usually therefore a fixed value for the share in the business is used which enables the correct level of life cover to put in place initially and reviewed as the business may increase in value in the years ahead. It is usual for the business valuation to be reviewed at least every three years to make sure that the level of insurance is appropriate.

 

It is important that the premiums are paid by the individual shareholders and if the company pays the premiums on behalf of a shareholder these are classed as remuneration and returned annually on Form P11D subject to income tax.

 

From an inheritance tax perspective there should be no inheritance tax payable on the premiums themselves as they are considered to be a bona fide commercial arrangement provided all the owners in the business participate.

 

When the deceased shareholder dies, his or her shares enter their estate at market value and therefore the subsequent sale by the personal representatives to the remaining shareholders under the cross option agreement it is highly unlikely to cause any capital gains tax liability as unless there is a long delay, the shares will not have increased in value.

 

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