Category: Taxation
How to Invest Business Profits
With many entrepreneurs accumulating cash in business accounts, the question of “how to invest business profits?” is a favored topic when planning.
Entrepreneurs work hard for their businesses and this short article explores how business funds can work hard- or most effectively, for entrepreneurs.
Let’s take the following scenario: your business is profitable and has accumulated cash. During the years of trading, you have typically drawn an annual salary and dividends of £45,000, a point at which you are paying the basic rates of tax. Now with a stockpile of cash in the business, there are two options through which to invest. Should you personally draw additional funds from the company to invest, or alternatively should you invest from within the corporate structure?
Assume in both cases there is a £50,000 cash surplus in the company. Assume also that this happens every year for the next 10 years.
Personal investment through your ISA
To take the money out of the company, you would pay dividend tax of 32.5% upfront. You (and perhaps your partner) could then invest your money tax-free, say in an ISA wrapper, in which your combined ISA allowances are currently £40,000.
Investment through your Company
Investing the money within the company would mean no upfront dividend tax of 32.5%. You would instead pay corporation tax on the investment income and gains annually, with the caveat that dividends received from stocks and shares are mostly exempt from corporation tax. This is a considerable advantage.
Let’s see how the two strategies fare:
As you can see, investing the money in a limited company yields approximately £180,000 more over a ten-year time horizon. The cost of paying the dividend tax upfront outweighs the benefit of tax-free personal investments. Why should you lose out?
Compounding evidence
You will notice immediately from the graph above that investing your company’s profits in the corporate vehicle, without paying dividend tax, allows the investment to accumulate, or compound, at a faster rate, even after paying corporation tax on investment income and gains.
Sure, if you do not draw the surplus funds from your company you may need to take a 32.5% dividend tax rate hit at a later date, but in the interim you will have generated greater income through compounding.
Caveats
Here we assume constant tax rates at the points of execution, income and realisation. It would be unwise to speculate on domestic policy, but current political trends and economic philosophy may see a conservative government try to enforce its stronghold on previously labour heartlands. Corporation and dividend tax rates could well rise before they fall.
You may find that transaction costs are slightly higher for corporate accounts, chipping away at annual returns. You will need to shop around harder for a broker. Equally personal brokerage accounts tend to be more insurable than corporate accounts.
Investing through a Limited Company
If the preference for investing through a Limited Company has been established, so should the mechanism through which to do so. Yes, you could simply open an investment account for the existing trading company, however there are several reasons why a designated investment company is superior:
- If the trading company runs into legal issues, the investment company will be protected.
- The trading company can be sold off as a standalone vehicle without the need for complex restructuring.
- An investment company will have minimal expenses and overheads, meaning it will be easier to administer for tax purposes (no VAT or payroll requirements).
- A trading company shouldn’t start investing in activities outside its core functions as it could end up becoming reclassified. This may carry tax implications, especially if Entrepreneurs’ Relief is sought.
Whilst the trading company is often the vehicle in which profits have been generated and accumulated, there are tax neutral ways of shifting funds to an investment company, such as lending the cash surplus. There is no obligation to pay back the loan and one can be the sole director of both companies.
A Holding Company
A holding company structure that owns operating companies and receives dividends is favourable. The holding company can own shares in the subsidiary trading companies and can provide centralised corporate control. Additionally, no taxes would be incurred when the trading company is sold.
Special Purpose Vehicle (SPV) for Property
If you want to invest in property it may be a better idea to set up an SPV. This is often a requirement from buy-to-let lenders. If you are looking to acquire a primary residential residence however, personal ownership is often the best way to go.
Don’t let the tax tail wag the investment dog
Your investment goals will seek a level of risk and return that you are comfortable with, regardless of the structure through which you pursue them. The tax wrapper is the “cherry on the top”, though worth a certain percentage of your annual returns. Contact Mouktaris & Co Chartered Accountants for an accountant who understands your investment strategy and can help you plan accordingly.
Non-resident Taxation of Income from UK Property
Finance Act 2019 has introduced two changes to the taxation of non-resident income from UK property:
- From 6 April 2019, disposals of direct or indirect interests in UK land are brought into the Territorial scope of charge; and
- From 6 April 2020, income from a UK property business is moved out of the charge to income tax and brought into the charge to corporation tax.
Background: the position until 5 April 2020
Non-UK resident companies have been subject to income tax in respect of property income arising in the UK. Tax has been chargeable at the basic rate of 20%. These companies are required to complete a Non-resident Company Income Tax Return (SA700).
Finance Act 2019
Coming into effect from 6 April 2020, income from a non-resident UK property business will now be subject to corporation tax rather than income tax. The corporation tax rate is currently charged at 19%: 1% point lower than the equivalent income tax rate. The details of profits to be charged with corporation tax will be included on a company tax return form CT600, as opposed to the SA700.
From an administrative point of view, the annual company tax return will include details of both UK property business income and any property disposals for the accounting period as a whole, on which corporation tax will be due. The filing deadline is 12 months after the end of the accounting period, though in practice, this will be filed 9 months after the end of the accounting period: the point at which any corporation tax is due.
Property losses and allowable deductions
Profits and losses will accordingly be drawn up under corporation tax principles according to the rules of CTA 2009 Part 4.
Loan relationships or derivative contracts that the non-resident company is party to for the purposes of its UK property business are also brought into the charge to corporation tax.
For companies that have net deductible interest and financing costs of over £2 million per annum, there will be a limit to the amount that the company can deduct: the Corporate Interest Restriction.
Transitional rules
UK property business income tax losses carried forward at the point of transition, 6 April 2020, will be grandfathered and therefore deductible under corporation tax rules against future income of the property business.
Capital allowance balances will transfer between the two regimes in such a way as to produce no balancing allowances or charges.
Notably, if a company’s only source of UK income after 6 April 2020 is expected to be income from the UK property business, no Income Tax payments on account for 2020/2021 and future tax years will be required. Similarly, if a credit balance remains in the company’s Income Tax account after all Income Tax liabilities for 2019/2020 and earlier years have been settled, the credit balance will be repaid to the company.
Annual Tax on Enveloped Dwellings (ATED)
ATED on residential properties owned through a corporate structure with a value of more than £500,000 continues to be unchanged following the Finance Act 2019. As ever, ATED can be relieved in full for residential property that is let to a third party on a commercial basis and isn’t, at any time, occupied (or available for occupation) by anyone connected with the owner. Other reliefs can be claimed as per sections 30 to 41 of the ATED technical guidance.
Capital Gains Tax (CGT) on UK property
Non-residents, both individuals and companies, are taxed on almost all gains made on disposals of UK residential properties. Since 6 April 2019, non-UK residents who make an indirect disposal of an interest in UK land will also be brought into the Territorial scope of charge, with the new s1A of TCGA 1992 Part 1. Indirect disposals can for example be disposals of shares in a non-UK entity that derives at least 75% of its value from UK land, provided that the person making the disposal has an investment of at least 25% in that company. The scope of taxation for non-residents has been extended from targeting UK residential property specifically, to now including commercial property and disposals of shares in so-called ‘property rich’ entities. Disposals will be reported in the annual company tax return.
Mouktaris & Co have experience in helping clients navigate the regulatory, accounting and tax matters of property businesses. Our team can review your corporate structure and advise on whether it may be beneficial to de-envelope or restructure in other ways, to take heed of an almost even UK vs non-UK playing field. This will include reviewing potential capital gains tax, stamp duty and inheritance tax liabilities as well as commercial considerations of raising finance and banking relationships in the UK and offshore.
Contact Mouktaris & Co Chartered Accountants to find out how we can help your property rental business.
Offshore Income: in the Firing Line of the Worldwide Disclosure Facility
As predicted, HM Revenue & Customs (HMRC) has started firing, quite unpredictably, Certificates of tax position concerning offshore income or gains. In the firing line are taxpayers who the revenue believes have not correctly disclosed their worldwide income to HMRC. The requirement for a UK resident to disclose and pay tax on all overseas income and gains is age-old, but was often overlooked: clouded by the murky waters that separated national tax positions. Now the gunpowder, or information source, are the Common Reporting Standards (CRS), a commitment by over 100 countries to exchange taxpayer information on a multilateral basis and increase international tax transparency.
Past, Present or Future?
Taxpayers are being encouraged to use HMRC’s Worldwide Disclosure Facility (WDF) to come clean and disclose their non-UK income and assets, including additional tax liabilities together with penalties and interest. This could include income arising from a source outside the UK, assets situated or held outside the UK or activities carried on wholly or mainly outside the UK. The challenge can surmount to a daunting prospect for wealthy individuals with global, inter-connected and complex tax affairs. The declaration will affect not only past, but also future tax liabilities.
As part of the disclosure, made via the online Digital Disclosure Service, the taxpayer also needs to self-assess his or her behaviour, ranging from “careless” to “deliberate and concealed”. This self-assessment is an integral part of disclosure that determines the penalties applied and whether further action is warranted. Understanding the spirit of the Requirement to Correct (RTC) legislation is therefore crucial, for mis-reporting could compound the already very penile penalty rate, equivalent to 200% of the tax liability which should have been disclosed to HMRC under the RTC but was not. Rather frightfully, HMRC reserves complete discretion to conduct a criminal investigation in relation to the disclosure, whether it appears to be complete or incomplete.
The inevitable question arises: how much does HMRC now know, or rather, not know.
Tax investigations can be stressful if you are going it alone and most often merit professional advice. Our team of advisors in North West London is here to help.
Contact Mouktaris & Co Chartered Accountants to ensure that you report correctly and avoid the potential repercussions, of getting it wrong.
The taxation of Cryptocurrency profits – How to report Bitcoin profits
Cryptocurrency investors navigating 100% price swings and exchanges with generous down-time have, this tax season, encountered another hurdle: the tax authorities. Whilst the question “should I report my bitcoin profits?” was clarified by the Inland Revenue some four years ago, the more sobering questions of “how to report bitcoin profits?” and “how much will I be taxed?” have made it to the front of the line.
Whilst bitcoin continues to stir controversy for its inherent value, how bitcoin is accounted for is a far less epistemological thought- rooted in the International Financial Reporting Standards which, unsurprisingly, have not budged.
Currency (why don’t you come on over)
Cryptocurrency is not issued or backed by any government (at least for now), and so cannot be classified as “cash”. Nor does cryptocurrency confer to the holder a contractual right to receive cash or another financial asset (excuse the formulaic definition of “financial instrument”). Of course bitcoin has no physical form, so it cannot be accounted for as “property, plant and equipment”. This narrows down its classification to either of two forms, depending on the circumstances of the investor.
Inventory
Inventories are held for sale in the ordinary course of business. If you are a private investor who actively trades in bitcoin, for example, but not restricted to, “mining” coins, HMRC will view your ownership of bitcoin to be “for sale in the ordinary course of your business”. Consequently your profits will be deemed to be “income” which, as you know, is taxed at 20%, 40% and 45% instead of 10% or 20% as with Capital Gains Tax (CGT). HMRC and the courts will apply any of nine “badges” in deciding whether an activity constitutes a trade so professional advice should be sought on the optimal setup for a trader, as well as the tax and reporting implications.
Intangible assets (IAS 38)
Cryptocurrencies also meet the definition of an intangible asset: one which can be sold, exchanged or transferred individually and which has no physical form. This treatment of bitcoin as an intangible is pioneering for three reasons:
- This intangible asset is traded with a profit motive. Remember, intangible assets, say patents or brand names, have traditionally been assets held for use in the production process.
- Because of its essence in having no physical form, bitcoin carries low detection risk, compounding the profit motive above.
- Scale, and the sheer volume of investors who have crowded into this trade, compounding one and two above.
Taxation of bitcoin as an intangible attracts CGT at the less penile rates of 10% and 20%, depending on your tax bracket. In this case, investors would do well to seek professional advice on the correct measurement basis of gains and, for example, working out the tax when you have held different parts of your bitcoin portfolio for different periods of time.
How will they know (if I really own it)?
One theme from this tax season has been the reportability of cryptocurrency-related profits (though surprisingly, not so much losses!?). Note the following: UK-based trading platforms must provide data to HMRC on their customers. This may seem a moot point for now because the vast majority of cryptocurrency trading in the UK takes place on overseas exchanges, which may explain the low incidence of tax investigations. In this era of cross-border information sharing however, cross-border information sharing of cryptocurrency activity, and traders, may not be far away. In the US, Coinbase, the country’s most popular exchange, has already handed over identity information of 14,000 of its most frequent traders to the Inland Revenue Service. It would be fair to assume that HMRC too will tackle this traceability issue heads-on: tax payers who do not properly report their gains of virtual currency transactions may find themselves with penalties and interest.
Investment in cryptocurrencies merits investment in professional advice, whether you have made profits, or losses. Contact Mouktaris & Co to ensure that you report correctly, structure optimally and avoid the pitfalls, and potential repercussions, of getting it wrong.
Autumn Budget 2017
Chancellor Philip Hammond presented the 2017 Autumn Budget against a backdrop of ongoing economic uncertainty. In no uncertain terms, this was a glum budget. The Office for Budget Responsibility revised down its outlook for productivity growth, business investment and GDP growth across the forecast period, though the chancellor challenged the nation to “prove them wrong”.
Off we go.
The Chancellor announced the immediate abolition of stamp duty land tax for first-time buyers on homes worth under £300,000, and a rise in the tax-free Personal Allowance to £11,850 from April 2018.
Also unveiled in the Autumn Budget was a change to business rates revaluations: these will now take place every three years, as opposed to every five years, beginning after the next revaluation, currently due in 2022. The Chancellor also addressed the issue of the so-called ‘staircase tax’.
Our Budget Report summarises the key announcements arising from the Chancellor’s speech. Additionally, throughout the Report you will find useful tips and ideas for tax and financial planning, as well as an informative 2018/19 Tax Calendar.
Don’t forget, we can help to ensure that your accounts are accurate and fully compliant, as well as suggest strategies to minimise your tax liability and maximise your profitability.
If you would like more detailed, one-to-one advice on any of the issues raised in the Chancellor’s Budget speech, including on the ensuing tax implications, please feel free to call on 020 8952 7717 to see how we can help.
What does the 2017 Spring Budget mean for you and your business?
Following the UK’s historic vote to leave the EU, and with Prime Minister Theresa May poised to trigger Article 50, Chancellor Philip Hammond presented the Spring Budget against a backdrop of economic uncertainty. Figures from the Office for Budget Responsibility revealed that UK economic growth is now expected to reach 2% this year, before falling to 1.6% in 2018.
The Chancellor announced a range of significant measures for businesses and individuals, including a support package for firms in England affected by the business rates revaluation and the announcement that unincorporated businesses and landlords with turnover below the VAT registration threshold will have until 2019 to prepare for quarterly reporting.
Also unveiled in the 2017 Spring Budget was a reduction in the tax-free dividend allowance, which will fall from £5,000 to £2,000 in April 2018.
Our Budget Report provides an overview of the key announcements arising from the Chancellor’s speech. However, it also looks beyond the more sensational measures and offers detail on the less-publicised changes that are most likely to have an impact upon your business and your personal finances.
Additionally, throughout the Report you will find handy tips and ideas for practical tax and financial planning, as well as an informative 2017/18 Tax Calendar.
Don’t forget, we can help to ensure that your accounts are accurate and fully compliant, as well as suggest strategies to minimise your tax liability and maximise your profitability.
If you would like more detailed, one-to-one advice on any of the issues raised in the Chancellor’s Budget speech, including on the ensuing tax implications, please feel free to call on 020 8952 7717 to see how we can help.
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