CGT giveaway?

The awkwardly named “Gift Hold-Over Relief” (GHOR) allows you to give away business assets – including certain shares – or sell them for less than they are worth, and not pay (or pay reduced) capital gains tax (CGT).

The person receiving the gift will potentially pay CGT when and if they sell the asset at some future date. Any taxable gain will then be the ultimate sale proceeds less the original cost.

The conditions for claiming relief depend on whether you’re giving away business assets or shares.

If you’re giving away business assets you must:

  • be a sole trader or business partner, or have at least 5% of voting rights in a company (known as your ‘personal company’),
  • use the assets in your business or personal company.

You can usually get partial relief if you used the assets only partly for your business.

If you’re giving away shares

The shares must be in a company that’s either:

  • not listed on any recognised stock exchange,
  • your personal company.

The company’s main activities must be in trading, for example providing goods or services, rather than non-trading activities like investment.

Claiming GHOR will usually mean that you can avoid paying any CGT on the gift

However, if you sell an asset for less than its true market value and if the value of the gift is more than you paid for it, CGT may be due. The example illustrating this point on the gov.uk website says:

Imagine that you sell a shop worth £81,000 to your brother for £40,000.

The shop cost you £23,000.

You would need to include the £17,000 gain (£40,000 minus £23,000) when you are working out your total taxable gain.

To claim this relief, you will need to make a joint claim with the person receiving the gift. We can help you complete the formalities and also consider other CGT reliefs that may be available to you.

Do you own a holiday let property?

There are a number of tax incentives that you can take advantage of if you own and let a Furnished Holiday Lets property (FHL). They include:

  • you can claim Capital Gains Tax reliefs for traders (Business Asset Rollover Relief, Entrepreneurs’ Relief, relief for gifts of business assets and relief for loans to traders),
  • you are entitled to claim capital allowance deductions for items such as furniture, equipment and fixtures, and
  • any profits earned from holiday lets count as earnings for pension purposes.

You will need to account for your holiday lets properties separately from any other rental properties and you will need to comply with the various FHL rules. They include:

There are also strict rules on occupancy. To secure the FHL tax benefits you will need to let your FHL for a certain, minimum number of days each year. The occupancy rules, set on a tax year basis, are:

  • Your property must be available for letting as furnished holiday accommodation letting for at least 210 days in the year.
  • You must let the property commercially as furnished holiday accommodation to the public for at least 105 days in the year.

Do not count any days when you let the property to friends or relatives at zero or reduced rates as this is not a commercial let.

Do not count longer-term lets of more than 31 days, unless the 31 days is exceeded because something unforeseen happens. For example, if the holidaymaker either: falls ill or has an accident and cannot leave on time or has to extend their holiday due to a delayed flight.

If you do not let your property for at least 105 days, you have two options (known as elections) that can help you reach the occupancy threshold.

As you can see, there are a few hoops to climb through to achieve FHL status, but the tax rewards for doing so are significant.

Holiday entitlements

As we are approaching the annual holiday season it would seem to be a suitable time to set out employees’ rights to receive holiday pay.

Almost all workers are legally entitled to 5.6 weeks’ paid holiday per year (known as statutory leave entitlement or annual leave). An employer can include bank holidays as part of statutory annual leave.

Most workers who work a 5-day week must receive at least 28 days paid annual leave per year. This is the equivalent of 5.6 weeks of holiday.

Part-time workers are entitled to less paid holiday than full-time workers. They are entitled to at least 5.6 weeks of paid holiday but this amounts to fewer than 28 days because they work fewer hours per week.

Statutory paid holiday entitlement is limited to 28 days, and so staff working 6 days a week are still only entitled to 28 days’ paid holiday.

Bank holidays or public holidays do not have to be given as paid leave. An employer can choose to include bank holidays as part of a worker’s statutory annual leave. An employer can also choose to offer more leave than the legal minimum. They don’t have to apply all the rules that apply to statutory leave to the extra leave. For example, a worker might need to be employed for a certain amount of time before they become entitled to the additional entitlement.

Paid annual leave is a legal right that an employer must provide. If a worker thinks their right to leave and pay are not being met there are a number of ways to resolve the dispute.

Tax free perk before annual leave

It is possible to make small tax-free payments to employees, including directors, and this might be an appropriate time to make a small tax-free bonus in advance of the annual holidays.

Employers and employees don’t have to pay tax on such a benefit if all of the following apply:

  • it cost you £50 or less to provide,
  • it isn’t cash or a cash voucher,
  • it isn’t a reward for their work or performance,
  • it isn’t in the terms of their contract.

HMRC describes these payments as a ‘trivial benefit’.

You can’t receive trivial benefits worth more than £300 in a tax year if you are the director of a ‘close’ company. A close company is a limited company that’s run by 5 or fewer shareholders.

Planning note

The only exception to the above is if the trivial benefits are made available as part of a formal salary sacrifice arrangement.

Employing students in the summer break

If you employ students to manage your staff needs over the summer break period, you will need to add them to your payroll and apply PAYE and NIC rules.

Students should be advised that they will pay tax and NIC if:

  • they earn more than £1,042 a month on average, and
  • pay NIC if they earn more than £166 a week.

Students can also apply for a possible tax refund if they work for part of a tax year.

Students who normally live and study in the UK but work abroad during the holidays will need to pay:

  • UK tax on anything they earn above their Personal Allowance, currently £12,500, and
  • National Insurance if they work for a UK employer.

If you work for a foreign employer you don’t need to pay National Insurance in the UK, but you might have to pay contributions in the country you’re working in.

Tax Diary June/July 2019

1 June 2019 – Due date for Corporation Tax due for the year ended 31 August 2018.

19 June 2019 – PAYE and NIC deductions due for month ended 5 June 2019. (If you pay your tax electronically the due date is 22 June 2019)

19 June 2019 – Filing deadline for the CIS300 monthly return for the month ended 5 June 2019.

19 June 2019 – CIS tax deducted for the month ended 5 June 2019 is payable by today.

1 July 2019 – Due date for Corporation Tax due for the year ended 30 September 2018.

6 July 2019 – Complete and submit forms P11D return of benefits and expenses and P11D(b) return of Class 1A NICs.

19 July 2019 – Pay Class 1A NICs (by the 22 July 2019 if paid electronically).

19 July 2019 – PAYE and NIC deductions due for month ended 5 July 2019. (If you pay your tax electronically the due date is 22 July 2019)

19 July 2019 – Filing deadline for the CIS300 monthly return for the month ended 5 July 2019.

19 July 2019 – CIS tax deducted for the month ended 5 July 2019 is payable by today.

Have you heard of the Prompt Payment Code?

The Prompt Payment Code (Code) is not a fanciful device to access cash from bank machines or a way to secure automatic “prompt” payment from your customers.

The Code was actually set up by the Chartered Institute of Credit Management (CICM) on behalf of government in order to promote a culture of prompt payment. Signatories to the Code agree to pay 95% of invoices within 60 days and work towards 30 days as normal practice, plus commit to other standards of good practice such as not retrospectively changing payment terms. The Code also requires signatories to give clear guidance to suppliers on payment procedures, ensure a system for dealing with complaints and disputes is communicated to suppliers and to avoid any practices that adversely affect the supply chain.

As payment practices have knock-on impacts through the supply chain, the Code also requests that lead suppliers in a supply chain encourage adoption of the Code throughout their own supply chains.

Apparently, as at the end of April 2019, nearly 2,300 organisations had signed up to comply with the PPC.

As most of us in business will wryly observe, there are 5.4m businesses in the UK, and so to have a real impact on cashflow the Code will need to be much more widely adopted.

Out take on credit control is to set up and enforce a rigorous cash collections system based on credit terms clearly set out in your terms and conditions of sale. You can’t expect your customers to pay up on-time if you haven’t indicated by which date an invoice needs to be settled.

If you are suffering from significant delays in payment from customers, you should take a hard look at your present credit control processes. If your monthly sales are £50,000 and your average credit allowed is 90 days, you are leaving upwards of £150,000 in your customers bank accounts when it should be in yours.

We can help. Redrafting your terms and conditions of sale is a good starting point, as is the introduction of strict enforcement of credit terms. Those who shout loudest are likely to get paid first.

What exactly is insolvency?

The dictionary definition of insolvency is less than illuminating, it is:

The state of being insolvent…

Listed synonyms provide more detail:

bankruptcy · liquidation · failure · collapse · ruin · financial ruin · ruination · pennilessness · penury · impecuniousness · beggary · administration · receivership · folding · pauperdom

What these explanations do not provide is a definition of the state of insolvency. A simple definition could be the insolvency occurs when we are unable to meet our obligation to settle debts by the required due date.

In a business sense, a firm can be said to be insolvent its assets are less than its liabilities, but even this definition does not quite hit the spot.

Imagine that you use all your available cash reserves to purchase stock. To place this in a current context, you might consider this as a strategy to avoid supply line issues in the event of a no-deal Brexit.

You have no issue with doing this as you are owed a significant sum by your major customer that will restore your cash flow before bills and salaries are due at the end of the month.

But what happens if your customer is suffering cash flow issues and is unable to pay?

On paper, your business will be solvent. As long as your delayed payment from your customer does not become more serious, in time your cash flow will be restored, but how will you pay your bills at the end of the month?

Without private funds that you can introduce to see you through this impasse or the support of your bank, how will your staff and other creditors respond if you have to go cap in hand and explain there will be a delay in paying them?

Cash, liquidity, really is king, and lack of cash can actually place your business in the same position as an insolvent firm.

If you are concerned that you may be skating close to a cash flow crisis or a deeper insolvency, please call so that we can help you figure out your available options. For certain, pretending that all will work out well in the end may not be the best strategy to apply.

Complaining to HMRC

Although many of the tax office processes are automated, dealt with by computerised systems, the rest is managed by human beings each subject to the same range of foibles as the rest of us. And we all know how reliable computerised systems have proven to be.

If you are certain, or have misgivings, about the accuracy of HMRC’s assertions regarding your tax affairs, these need to be challenged.

Initially, use the relevant HMRC helpline to discuss your particular concern. If this proves to be ineffective, you will need to ask HMRC to deal with your grievance under their official complaints handling system.

The chronology of the complaints process is:

  1. You will need to inform HMRC, online or by submitting your complaint by post.
  2. HMRC will consider your request and respond.
  3. If you still feel that you case was handled incorrectly you can request a second review by HMRC.
  4. If you are dissatisfied with this second review you will need to present your case to the Adjudicator’s Office.
  5. If you disagree with the Adjudicator’s Office, you will need to refer the matter to your Member of Parliament who will approach the Parliamentary and Health Service Ombudsman on your behalf.

Interestingly, if you are successful and resolve the issue in your favour, HMRC are obliged to cover your costs in exposing HMRC’s mistakes or challenging their delays in dealing with matters.

Costs you can claim include postage, phone charges and professional fees; which brings us to the final part of our post on this subject.

If you are convinced that you are correct, and HMRC have made a mistake, you could seek professional help in resolving the issue and it may be possible to recover any professional support charges from HMRC. If you would like to consider this option, we can help. Call us initially to discuss your grievance and we can take it from there.

The real tax cost of benefits in kind

There is a sting in the tail for companies that provide their directors or employees with taxable benefits as part of their remuneration package.

Obviously, the directors or employees that receive the benefits will pay additional income tax if the benefits provided are chargeable to tax: for example, the use of a company car.

The cost of the benefits is generally a deduction for the employer, and this would reduce the employer’s corporation tax bill, but it also triggers an additional, employers’ Class 1A National Insurance liability.

The amount payable is 13.8% of total taxable benefits provided.

Although this extra National Insurance payment is itself a deductible item for corporation tax purposes, this is still a net loss of cashflow for the company and needs to be considered when planning remuneration packages for directors and employees.

As we have posted previously on this site, one way that a company can trim this additional NIC charge is to negotiate a repayment of a taxable benefit from affected employees.

Why consider this?

Why would an employee consider repaying all or part of the cash equivalent of their benefit in kind? Doesn’t this diminish the value of their perks?

Certainly, this is not a strategy that you would use for all benefits provided, but there are some where there are real win-win outcomes for the employer and the employee.

A prime example is fuel provided to employees or directors for the private use of their company car. You would need to crunch the numbers, but it may well pay the employee to pay back the cash cost of private petrol provided – thus avoiding the car fuel benefit charge and reducing their income tax payments by more than the refund of fuel costs – and at a stroke, reducing the employer’s Class 1A NIC charges.

6 July 2019 deadline for 2018-19

The deadline for employees to make refunds of these types of cost to employers is before 6 April 2019 for the tax year 2018-19.

If you are unsure if this would work for your company, please call, we can help you calculate if there would be an overall benefit from adopting this idea.