News and Publications

Autumn Statement 2022

Autumn Statement 2022

Taxing Times

In the latest decisive swoop of indecisiveness, Jeremy Hunt performed a 180 degree turn from the Mini Budget delivered less than two months ago by his predecessor. If the Mini Budget was dubbed “The Growth Plan”, can the Autumn Budget also be a plan for growth?

It was a step in the right direction: re-implementing fiscal discipline in an effort to re-galvanise trust in HM Treasury. Notwithstanding, it’s disappointing that fairer and more creative means of collecting taxes were not applied, rather than manipulating the tax bands in a move which fiscal-drags one and all. The 40% band no longer applies to the wealthiest. The capital gains tax rates on investment income are still only 50% of those paid on working income.

There were surely opportunities missed to rebalance the tax-system in a much-needed fairer way. Especially now in the face of a looming recession – or potentially depression, when the smallest tweaks in taxes and spending will have knock on effects on the amount of money that is spent on our high streets.

Taxes aside, there is risk of a continued disintegration of public services – this will come home to roost in two years if inflation continues its current trajectory amidst public spending cuts of £28bn.

Visit our Budget Highlights and tax data for a summary of the Autumn Statement 2022.

Contact Mouktaris & Co Chartered Accountants for expert advice or click here to subscribe to our Newsletter.

Earning over £100k: how to avoid the 60% Tax Trap

A pay rise or bonus that takes one’s annual income above £100,000 is cause for celebration. Tread though carefully these muddy waters, for additional income earnt up to £125,140 attracts the highest rate of marginal tax across all other taxpayers, including those richer than you. Read on for tax-saving tips on how to navigate the 60% Tax Trap…

One’s Personal Allowance goes down by £1 for every £2 earnt over £100,000, increasing the amount of income that is taxed at the higher rate of 40%. One loses their Personal Allowance in full when their income reaches £125,140. The graph below illustrates how tax payable accelerates as income increases in the Tax Trap Band. Note the steepest gradient for income earnt in this range.


Avoiding the 60% Tax Trap
The incentive effect, or disincentive effect rather, of working to receive income in the Tax Trap Band, is punitive. For every £1 earnt, 60 pence are paid to the exchequer. Fortunately, there are several ways of avoiding or mitigating the 60% Tax Trap Band:

  1. Increase the amount paid into your pension
    • You can receive tax relief on money saved into a private pension scheme, up to an annual allowance of £40,000. The allowance is reduced to a minimum of £4,000 if you earn high income or have flexibly accessed your pension.
  2. Ask for a non-cash bonus
    • If you are not in need of liquidity immediately, then rather than receiving a cash bonus, you can ask for a non-cash bonus provided at low or no tax if received through a salary sacrifice scheme. Consider a company car with low emissions, childcare or private medical insurance.
  3. Invest in start-up investment schemes 
    • There are three start-up schemes you can invest in which give you a percentage of your investment back as tax relief: Seed Enterprise Investment Scheme (SEIS) – 50%, Venture Capital Trust (VCT) – 30% and Enterprise Investment Scheme – 30%. Speak to your adviser about building a portfolio which balances your appetite for risk and reward.
  4. Donate to charity and claim Gift Aid Tax Relief

If you anticipate that your income will exceed £100,000, talk to your employer about strategies to manage your tax position. As ever, Contact Mouktaris & Co Chartered Accountants for expert advice or click here to subscribe to our Newsletter.

Platinum Jubilee Tax

One Entertains: Tax Allowances for the Platinum Jubilee (and other Entertainment)

With the dust still settling on the Mall following a triumphant celebration of Her Majesty The Queen’s Platinum Jubilee, one may begin to consider the tax deductibility of hosting Diana Ross, Ed Sheeran and the like – a figure reported to be around £28m.

As a general rule for tax, expenditure on entertainment or gifts incurred in the course of a trade or business is not allowed as a deduction against profits, whether incurred directly or paid to a third party such as an events organiser. HMRC are not however completely devoid of holiday spirit and provided conditions are met, certain types of entertainment are allowable. Hurrah.

Promotional Events
Events which publicise a business’ products or services are not deemed to be entertaining expenditure and so direct costs are allowable for tax if they meet the “wholly and exclusively” test. The cost of related food, drink or other hospitality is however disallowed. For example if a car manufacturer organises a golf day at which test drives are available, only the direct costs of the test drives and of any publicity material provided are allowed, together with any immaterial costs such as teas and coffees.

Gifts
Costs are allowable where gifts incorporate a conspicuous advertisement, do not exceed £50 in value (for all gifts made to the same recipient in a year) and are not food, drink, tobacco or tokens or vouchers exchangeable for goods. This could be merchandise branded with the business logo.

Staff Entertainment
Entertaining staff is allowable provided that it is not merely incidental to customer entertaining. Regardless of any deduction allowed against the profits of the business, a tax charge may arise on the employee personally. Employers may need to report the event costs to HM Revenue & Customs (HMRC) on each employee’s form P11D and pay class 1A National Insurance. Generous employers can though opt to pay the Income Tax and National Insurance Contributions on behalf of employees by entering into a PAYE Settlement Agreement (PSA).

To avoid this complicated scenario and to ensure that staff entertainment is allowable, an event would need to meet the following conditions:

  1. Opening the party to all staff (not only to directors/management)
  2. Limiting the cost per staff member to £150 per head (inclusive of VAT) per year. In practice, this would mean limiting the cost per general attendee to £150 per head. One would also need to consider any future events in which the limit may be breached, for if the cost per head were to exceed £150, then no tax-deductible expense could be claimed, with a tax charge arising on employees.

To avoid a tax charge, the event would need to meet the additional condition of taking place annually! If an event were to include entertainment for staff as well as customers, the apportionment of expenditure on staff would be fully allowable, whilst the apportionment of expenditure on clients would generally be disallowable (with the exception of any gifts).

Recovering VAT on Entertainment
As a general rule, a business cannot recover input VAT related to client entertainment. VAT incurred on staff entertainment is however recoverable provided the following conditions are met:
1. Entertainment is not only provided for directors/partners
2. Costs incurred are not related to entertaining non-employees. For events which entertain both employees and non-employees, an apportionment of employee-related expenses and VAT would again be made.

Contact Mouktaris & Co Chartered Accountants for expert advice or click here to subscribe to our Newsletter.

Trading with the EU post Brexit

Spring Budget 2022

A Targeted Budget
Amid soaring inflation of 6.2% and forecasts of the sharpest fall in living standards since records began (according to the UK’s fiscal watchdog), Rishi Sunak presented a Budget which he argued would support the UK economy, businesses and families in both the short and the medium term. In contrast to the profligate Budgets of very recent times, which were arguably necessary to address a pandemic that affected all areas of the economy from all angles, this was a targeted Budget with a laser beam pointed at the erosion of disposable incomes that is likely to pursue at least in the short term.

The key measures were as follows:

  • regarding personal taxes, an increase to the threshold at which an individual will begin to pay NI from 6 July 2022, aligning it with the personal allowance which is set at £12,570 per annum
  • regarding employment taxes, the Employment Allowance will be increased by £1,000 from 6 April 2022 to £5,000
  • regarding duties, an immediate reduction in duty on diesel and petrol, by 5 pence per litre, for 12 months
  • regarding VAT, a cut in the VAT levied on energy efficient upgrades, such as solar panels and energy efficient heating

Rishi Sunak saved the “crowd pleaser”, or “low-tax-Conservative-MPs-and-commentators pleaser” until the end – his virtual rabbit out of the hat, by promising to cut the basic rate of income tax to 19p in the pound in April 2024, conveniently a few weeks before many Tory MPs expect to face a general election. Rishi has kept what looks to be substantial powder for more election-fighting fireworks. Has he done enough for the poorest people in society? Having banked most of the fiscal good news he received – higher than expected growth and tax revenues this year – he could have gone further. He is building up a war chest for the autumn. Momentum politics.

Contact Mouktaris & Co Chartered Accountants for expert advice or click here to subscribe to our Newsletter.

CIS accountant NW London

Construction Industry Scheme (CIS) and the Domestic Reverse Charge

Under the Construction Industry Scheme (CIS), a contractor deducts money due to a subcontractor and instead pays it to HM Revenue and Customs (HMRC). This deduction counts as an advance payment towards the subcontractor’s tax. The amount deducted is a percentage of the labour services provided. The Domestic VAT Reverse Charge is in addition to but separate from CIS tax.

VAT – Domestic Reverse Charge
To ensure VAT is reported correctly by businesses in the construction sector, the domestic reverse charge has been added to the existing CIS since 1 March 2021. Prior to 1 March 2021 the supplier (subcontractor) would charge VAT to the customer (contractor), collect it and pay it to HMRC. The contractor would reclaim the VAT amount paid in their VAT return. From 1 March 2021, the subcontractor must not charge VAT but instead specify that the reverse charge applies. The subcontractor then accounts for the contractor’s output tax and reclaims the exact same amount as input tax on the VAT return. The subcontractor effectively accounts for the VAT directly to HMRC, as opposed to paying it over to the contractor.

The reverse charge must be used for most supplies of building and construction services. Normally if any of the services in a supply are subject to the reverse charge, all other services supplied will also be subject to it. The charge applies to standard VAT services for businesses who are registered for VAT in the UK and in the kinds of construction work listed here. Even if a customer enters into 2 separate labour and materials contracts with the same supplier for works within the scope of CIS and the works are to be provided at the same time on the same site, the reverse charge will apply to both contracts (subject to the 5% disregard) as they comprise a single supply for VAT purposes.

If you supply building and construction services as a sub-contractor
You must use the reverse charge from 1 March 2021, if you’re VAT registered in the UK, supply building and construction industry services and:

  • your customer is registered for VAT in the UK (check if your customer has a valid VAT number)
  • payment for the supply is reported within the CIS (use the CIS online service to check your customer’s registration)
  • the services you supply are standard or reduced rated
  • your customer has not given written confirmation that they are an end user or intermediary supplier (an end user is someone who does not make onward supplies of the CIS services supplied to them)

If the above applies, you will not charge VAT to your customer, and they will account for the VAT themselves. You should not charge VAT on the invoice but specify that the reverse charge rule applies. Page 8 of this guidance shows an invoice template.

If you buy building and construction services as a contractor
You must use the reverse charge from 1 March 2021 if you’re VAT registered in the UK, buy building and construction industry services and:

  • payment for the supply is reported within the CIS
  • the supply is standard or reduced rated (check if your supplier has a valid VAT number)
  • you’re not using the end user or intermediary exclusions

If the above applies, you must ensure that your supplier does not charge you VAT (and you do not pay VAT to your supplier), as you should instead account for VAT using the domestic reverse charge procedure.

Settling with HMRC
A contractor must register for the scheme. CIS deductions made will be added to PAYE liabilities.

A registered subcontractor will have 20% deducted from its payments, whereas an unregistered subcontractor will suffer a 30% deduction. A contractor and subcontractor must register as both. Each time tax is withheld from payment to a subcontractor, the subcontractor must be presented with a CIS Payment and Deduction Statement from the contractor. This is used to reclaim tax from HMRC.

A sole trader or partners subtract CIS deductions suffered against income tax and national insurance on the Self-Assessment Tax Return. A limited company subcontractor offsets CIS deductions suffered against PAYE payroll liability. Unrelieved CIS tax deductions at the end of the tax year can be refunded into a bank account or offset against other outstanding tax liabilities, in which case an online form needs to be submitted. A subcontractor who meets the revenue thresholds and has a record of timely tax payments can apply for gross payment status, meaning that they will be paid in full by contractors, without deductions.

Our tech-enabled CIS and payroll service will help:

  1. Advise on your optimal business structure
  2. Ensure that you remain compliant and avoid the many pitfalls
  3. Onboard you to a cloud invoicing facility, with customised invoice templates for each customer or supplier
  4. Email deduction statements directly to your subcontractors
  5. Pay your subcontractors directly using our highly secure cloud payroll + payment integration

Contact Mouktaris & Co Chartered Accountants for expert advice or click here to subscribe to our Newsletter.

Automate salary payments

Automate Salary Payments

You may be all-too-familiar with the process and time spent dealing with payroll and HR: emails, telephone calls, attachments, more emails to employees, setting up bank payments…the list goes on. Large businesses will have segregated duties, with an HR lead responsible for managing joiners and leavers and holiday requests, an Operations Manager for coordinating and communicating shifts, a Payroll Manager and a Financial Controller. For small-to-medium sized businesses, the responsibility often lies with the managing director. In this regard, there are some fantastic tools to make managing your team more pleasant and more efficient, including the new way to automate salary payments.

Paying salaries
The latest integration to the cloud payroll ecosystem automates the payment of staff salaries. Currently, we prepare a BACS payment file which many employers upload to their online banking facility for processing onwards payments. The latest payments platform goes a significant step further and allows us as your accountants to make payroll payments, linked to your payroll information, shortly after the payroll is approved, saving you precious time, removing manual processes, and eliminating costly errors. The seamless workflow is protected by two factor authentication and payments are processed through a highly secure and compliant network. This solution benefits all employers with a high headcount and who pay their staff via bank transfer.

Employer and Employee Portal
By integrating with our payroll software in the cloud, we can streamline the way you communicate payroll information to us, including hours worked, holiday days taken, bonuses or new starters. A browser- or app-based Employer Portal allows you to enter relevant information, store and organise documentation (including payroll reports which we prepare) and make final approvals. We can email your employees their payslips directly, or even grant them access to the Employee Portal, where they can retrieve payslips (including past payslips), submit holiday requests, enter starter data…etc. This functionality benefits businesses in all sectors, as it is centred around improving the information flow between the employer, the employees and the accountant.

Rota Management
If your business requires organising shift patterns for your staff, we can help you implement software which helps you schedule rotas, optimise wage spend, record attendance and approve timesheets for payroll. Your employees would receive pop-up notifications and would log their check-in and check-out times in the app. The app can then produce weekly reports showing hours worked and wages due. There are also built in features such as overtime pay and GPS, which would ensure that employees can only log in when actually present. We have found this software to be particularly helpfuly for hospitality businesses and beauty salons.

How much does it all cost?
The payment integration and cloud hosting is priced based on the number of active employees, and the efficiency saving will tend to outweigh the fee for a payroll with at least 4 employees.

Our Information Sheet sets out a full list of our integrated Payroll and Pensions services.

Whether you’re an existing client or don’t yet use our services, we would be pleased to help you. Contact Mouktaris & Co Chartered Accountants for expert advice or click here to subscribe to our Newsletter.

Spring 2021 Budget Chartered Accountants North West London

Spring Budget 2021

Facing an almost empty House of Commons yesterday lunch-time (television viewing numbers yet to be announced!), the Chancellor presented his long-awaited second full Budget.

The challenge the chancellor faced was double edged: begin to recoup the £407bn state bill for tackling the pandemic (comparable to the two world wars), without choking the economy just as the cogs might begin to turn.

The headline was the only apparent increase in tax rates, being the raise of the Corporation Tax rate from 19% to 25% for companies with profits over £250,000, with effect from 1 April 2023. The 19% rate is retained for trading and (most) property investment companies with profits up to £50,000 – but even for those companies, once profits exceed £50,000, a tapered rate will be introduced until profits reach the £250,000 limit. To avoid avoidance, profits between group companies under common control are proportionately reduced, akin to the mechanisms prior to Budget 2015.

The effect will mainly hit larger companies, but the change will also discourage the incorporation of profitable sole trades or partnerships. No reduction of the dividend tax rates to reflect the additional underlying Corporation Tax is afforded, meaning that the effective overall rate of tax on profits earned in a company and extracted by way of dividend could now be as high as 54.5% in some circumstances, though more commonly 49.4% (for a higher-rate taxpayer).

Other taxes were increased by stealth – that is to say, in an indirect manner. Allowances and tax bands have been increasing over the past several years to reflect inflation, however yesterday the Chancellor gleamed when he announced the removal of indexation and fixing of allowances, tax bands, or both for the next five years. This applies to the following, with the effect of dragging taxpayers to higher tax brackets as they get richer – more commonly known as “fiscal drag”:

  • Income Tax personal allowance
  • Income Tax Basic and Higher Rate bands
  • NIC upper earnings and upper profits limits
  • Pension Lifetime Allowance
  • Inheritance Tax Nil Rate Band
  • Capital Gains Tax annual exempt amount

Other rules did lend themselves to favouring trading businesses, be they companies or individuals:

  • The rules on setting trading losses against general income are loosened, with the carry-back period extended to three years (from the current one year). The legislation has not been published, but for companies, the relief applies to losses of accounting periods ending between 1 April 2020 and 31 March 2022. For individuals, the relief applies to losses of the tax years 2020/21 and 2021/22, with the £2m loss cap applying ‘per individual’ not ‘per business’ – this may be especially relevant to partnerships or LLPs.
  • Capital expenditure incurred by a company (note, only a company) is incentivised – companies can now claim “super deduction” capital allowances of 130% of expenditure on plant and machinery that would ordinarily be relieved at 18% per annum (and 50% on plant that would otherwise be relieved at 6% per annum). The relief applies to expenditure incurred from 1 April 2021 (but not if the expenditure was already contracted before 3 March 2021). Scrupulous small business owners will note that this saving represents only 30% on capital expenditure that is already being relieved at 100% under the Annual investment allowance, subject to the annual cap.

The wider economy

  • Mr Sunak maintained the exemption from stamp duty land tax (SDLT) on the first £500,000 of residential property value to 30 June 2021. This will be replaced by a £250,000 exemption until 30 September 2021. As a reminder, the 2% surcharge for non-resident purchasers of residential property in England or Northern Ireland applies from 1 April 2021, meaning that foreign buyers may end up paying an additional 5% SDLT if they also own another home anywhere in the world.
  • In a further strain to avoid pulling the rug from under the housing market, Mr Sunak also confirmed the introduction of a mortgage guarantee scheme with deposits of just 5%, slogan-ned ‘Turning “generation rent” into “generation buy”‘.
  • The coronavirus job retention scheme (CJRS) will be extended in full until 30 June 2021 and will be phased out by September 2021, with employers required to contribute from July 2021.
  • The self-employed income support scheme (SEISS) will be extended at its current level with a fourth grant covering the period February to April. A fifth grant will cover the period May to September, but this will be at a lower level for those who have seen less than a 30% drop in turnover. The Chancellor’s team may be beady-eyed with income and profits reported in Tax Returns, with the announced creation of an HMRC ‘taskforce’ to crack down on those defrauding support schemes introduced to combat the economic impact of Covid-19.
  • The business rates holiday for retail, hospitality and leisure businesses will be extended until June, with a 75% discount thereafter. Various restart grants will be made available to retail and hospitality, to be administered by local councils.
  • Lower VAT rate for hospitality firms is to be maintained at the 5% rate until September.
  • Eight new English freeports have been announced across the UK, with the aim of encouraging commerce and inwards investment using generous and wide-reaching tax breaks.

Whether you’re an existing client or don’t yet use our services, we would be pleased to help you. Contact Mouktaris & Co Chartered Accountants for expert advice or click here to subscribe to our Newsletter. Budget Highlights and tax data following Budget 2021 can be viewed on our website here.

Hair Salon Business Model: which style suits you?

Hair Salon Business Model: which style suits you?

As a hair salon or barber shop owner, you aim to run your business in a way that maximises revenue, reduces costs, and ensures a good working relationship with your staff and customers. It is important to choose the right model that suits your business needs from the outset. We discuss below three different models of business:

  1. Full operation, whilst operating:
    1. a PAYE scheme
    2. a self-employed model for hairdressers
  2. Chair rental
    1. charging a fixed weekly rent to barbers
    2. charging a percentage of the chair’s takings
    3. a combination of a and b
  3. Shop rental

Full Operation

Full operation is the most involved and therefore carries the capacity for highest profits. This model also incurs the highest administrative costs, both in terms of money and time, including:

  1. Paying over 20% VAT on your sales if turnover exceeds £85,000
  2. Maintaining a payroll service to your staff
  3. Carrying out senior management responsibilities

Self-employed basis
As senior manager, you could continue operating the business, whilst moving some of your staff to a self-employed basis. The benefit of transitioning could save money in the following ways:

  1. No legal obligation to pay for sickness, maternity or holiday
  2. You avoid paying Employer’s national insurance
  3. There is no need to worry about auto enrolment pensions or make contributions

Should you pursue this model, it would be worthwhile implementing a service contract with the freelancers, to ensure that both parties’ expectations are understood. Of course, the risk of a barber turning up late, taking a day off or poaching clients for their own business remains. You should take on full advice, including with respect to legislation around self-employment.

Internal Controls
If you are not present at the salons throughout the day, it would be worthwhile implementing Internal Controls. These should be considered especially if you will continue to operate the salons, or even if you plan to sub-let at a variable rate dependent on performance. Internal Controls for cash sales and collections include:

  • Reconciling till rolls to cash collections each day.
  • Reconciling cash collections with banking and sales records each day.
  • Restricting the receipt of cash and the recording of sales by making sure that only one person is in charge of the cash register.

Internal Controls to accurately track employee time should be considered if you are paying your staff per hour, either as employees or subcontractors. To help you accurately monitor and control employee timesheets, we have helped our clients implement an app-based time management software which you or your management could use to organise rotas.

Chair rental

There are three models to renting out chairs:

  1. Charging a fixed weekly rent to the freelancer
  2. Charging a percentage of the chair’s takings
  3. A combination of a and b

With option 1, if there is a high volume of customers for a particular chair you will lose out on sales as the freelancer will take all of the earnings. Option 2 avoids this problem, however if the freelancer doesn’t turn up for work then you lose out on rental income compared to the first model. A combination of the two methods is arguably the best way forward, however it would require monitoring of sales figures. The incentive agreement should be set at a level where the freelancers have the potential to make more money than they currently do.

You would need to charge VAT on rental income should your turnover exceed £85,000. A non-VAT registered freelancer would then suffer the VAT. Of course, the barber may also seek VAT registration, depending on his or her particular circumstances.

Compared to the full operation model with staff there will be no wages, national insurance and pensions costs however sales will be limited as per your agreement with the freelancers. Should you pursue this model, it would be worthwhile:

  • implementing a service contract with the freelancer. It would be important to draft strong payment terms to avoid the risk of arrears.
  • implementing an EPOS till system to give you full visibility of sales (important with incentive agreements).
  • considering whether you would allow freelancers to sell their own products, or take a commission from your sales.

An additional risk compared to an employee-based model is that freelance workers may come and go, thereby requiring more management time to maintain occupancy.

Shop rental

This option is the least involved. If you do not foresee a pick-up in footfall in your salon, you may consider subletting your salon and collecting the passive income. You should bear the following points in mind:

  • First check whether your lease allows you to effectively sub-let the premises.
  • Should turnover increase more than you anticipate, you will not be sharing in the upside.
  • Should you eventually sell the business, your eligibility to pay the Entrepreneurs’ Relief rate of CGT of 10% will be in jeopardy.

Summary

  • The full operation model has the greatest potential for maximising profitability but carries the highest level of administrative costs.
  • Internal controls regarding hours worked and wages paid are paramount, especially if you will continue to be directly involved in the full operation of the business.
  • If you decide to base your business model around working with freelancers, it is important that both parties’ duties are understood (owner and freelancers). A service contract between parties is key.
  • If the chair rental model is pursued you will need to charge VAT if rental income exceeded £85,000, which a freelancer could then suffer.
  • The chair rental model is the most cost-effective option, but you risk losing out on revenue if there is a high level of footfall.

Whether you’re an existing client or don’t yet use our services, we would be pleased to help you. Contact Mouktaris & Co Chartered Accountants for expert advice or click here to subscribe to our Newsletter.

Inter company loans

The Taxation of Inter-company Loans

Under the right circumstances, which can of course be shaped, intercompany loans are an effective means of funding further profit or not-for-profit motives. Consider Mr Trader, who is director and sole shareholder of Company T, a trading company. Company T has grown with accumulated profits in excess of £2m, matched by substantial cash balances. Mr Trader has decided to set up a not-for-profit organisation, ReMobly Ltd, aimed at rehabilitating injured athletes back into competitive sport. In addition to Mr Trader, two other directors will be appointed to the board of ReMobly Ltd and each of the three persons will own 33% of the ReMobly Ltd share capital.

ReMobly Ltd is seeking to raise capital to begin its operations and Mr Trader is considering the most apt means of lending money to the not-for-profit organisation. There are three issues which spring to mind…

Loans to participators
In view of the large cash balances that have accumulated in the company, Mr Trader considers lending money from Company T to ReMobly Ltd. CTA10/S455 applies to loans/advances made by a close company to its participator, or an associate of its participator. Broadly, where a close company makes any loan to an individual who is a participator (or an associate of a participator) in the close company, then the close company is due to pay tax under CTA10/S455. The not-for-profit is not classed as an associate of Mr Trader (so far as section 448 of Part 10 of the Corporation Tax Act 2010 is concerned), therefore the loan can be made by Company T without corporation tax implications under CTA10/S455.

It is also important to analyse CTA10/S459, which applies if there are arrangements made by a person whereby a close company makes a loan or advance that is not subject to tax under CTA10/S455, and another person makes a payment to a relevant person who is either a participator of the company or an associate of such a participator. In this case there is a proposed “loan or advance” from a close company. However, there is not then a payment by a person other than Company T to a relevant person who is a participator in Company T or is an associate of such a participator. Indeed ReMobly Ltd is not a relevant person who is an associate of Mr Trader, because a relevant person has to be an individual or a company acting in a fiduciary or representative capacity (CTA10/S455(6)). Therefore the loan can be made without corporation tax implications under CTA10/S459.

Loan write off
There is a possibility that the future activities of ReMobly Ltd will be inadequate to allow for the repayment of the loan made by Company T, under the terms of the loan agreement. If both parties are companies and both are found to be under the common control of another person, company or individual, at any time in the accounting period, then no bad debt relief will be available on the release of the loan, and no taxable credit will arise to the company whose indebtedness is forgiven. Company T and ReMobly Ltd are not under the common control of another person and are therefore not considered to be connected. The debit for the loan write off will be allowable for Company T (most likely as a non-trade loan relationship deficit). The corollary is that a taxable credit will arise to the not-for-profit.

Anti-avoidance
The main anti-avoidance rule will also need to be considered in FA 1996, Sch 9 para 13, the ‘unallowable purposes’ rule. This will deny relief for so much of a debit where the loan or part of the loan is attributable to an unallowable purpose. An unallowable purpose is any purpose which is not amongst the business or other commercial purposes of the company, Company T. If taken literally, this would seem to be cast fairly widely. In general however, if the loan relationship rules are seen to be fairly applied to both parties, HMRC seem content in leaving matters undisturbed.

Whether you’re an existing client or don’t yet use our services, we would be pleased to help you. Contact Mouktaris & Co Chartered Accountants for expert advice or click here to subscribe to our Newsletter.

EIS Tax Relief and Joint Investment

EIS Tax Relief for Joint Investment

The following scenario often arises with our client Mr Investor, who is considering investing in an early-stage business. Wonderful Ltd is an established FinTech company which has developed a track record of an established user base, consistent revenue figures and other key performance indicators. Wonderful Ltd is now seeking to raise Series A funding of £1.5 million in order to further optimize its user base and product offerings. Mr Investor has received an Investment Memorandum for the funding round and is considering allocating a small proportion of his investment portfolio. Mr Investor has asked his accountant to run through the Investment Memorandum with him and has identified five reasons why he wishes to invest. Being an early-stage business, Mr Investor acknowledges that the investment is inherently high-risk, but he really believes in the founder Mrs Wonderful, who attended the same university. The generous Enterprise Investment Scheme (EIS) tax breaks “cushion” the risk element of the investment (see below) but nonetheless, the minimum investment of £75,000 is punchy for Mr Investor.

Mr Investor has an idea. Can he pool together capital from two other friends in order to meet the £75,000 minimum investment? Will each investor still be eligible for the EIS tax relief for joint investment?

Joint Investment – A Problem Shared is a Problem Halved

In short, there is a way to pool funds in order to meet one investment clip of £75k. EIS relief is available for an individual who makes the subscription on his or her own behalf, with two notable exceptions:

  1. Individuals who use another person as a nominee to subscribe for the shares, or be registered as the holder of them, on their behalf, are treated as themselves being the subscriber.
  2. Individuals who invest jointly with others, with the result that the subscribers are in law acting as bare trustees (whether for themselves or for others), are themselves as individual beneficiaries treated as being the subscribers.

Mr Investor can therefore form a bare trust with his friends (as in point 2) in order to make a direct investment jointly. Where shares are issued to a bare trust on behalf of a number of beneficiaries, each beneficiary is treated as having subscribed, as an individual, for the total number of shares issued to the bare trustees divided by the number of beneficiaries. This creates an important limitation in that each of the three friends should invest an equal percentage in Wonderful Ltd.

Paperwork

Wonderful Ltd should provide each subscriber form EIS3 showing the total number of shares subscribed for on Page 1 of the form.  Form EIS3 Page 3 should show the amount on which each owner is entitled to claim the tax relief for the shares, that is the fractional amount of the total subscribed.

Tax Relief?

Whilst joint investment does not preclude EIS tax relief, Mr Investor and his associates must of course check that all the other EIS eligibility criteria are met for EIS tax relief to apply. Mouktaris & Co can provide a checklist of questions to ask in order to determine whether tax relief under EIS is available to an investor in shares. The target company may produce an Advance Assurance document to potential investors demonstrating that HMRC accepts the investment under the scheme, however Advance Assurance will not tell you if an investor would meet the conditions of the scheme.

EIS Investment Funds

A different route (via point 1 above) would be for Mr Investor to invest via an EIS investment fund, which is structured as a nominee vehicle which invests funds in EIS-qualifying companies on behalf of investors. This vehicle would provide Mr Investor with a more diversified risk exposure to early-stage businesses, as his £25,000 investment would be spread across a number of target companies identified by the fund manager. Wonderful Ltd may seek to market its strengths to the EIS investment fund manager so as to be included in the fund’s equity holdings. So in fact Mr Investor could in the future invest in Wonderful Ltd through an EIS investment fund without necessarily being reliant on his friends’ capital.

EIS for Investors: Advantages

  1. As a reminder, EIS investors receive the following benefits as a result of participating in the scheme:
  2. A 30% income tax break against the amount invested
  3. No capital gains tax (CGT) to be paid on any profit arising from the sale of the shares, as long as they are held for at least 3 years
  4. Payment of CGT can be “rolled over” if the money gained is invested through EIS. The investment must be made 1 year before or 3 years after the gain occurred
  5. No inheritance tax is payable provided shares are held for at least 2 years
  6. If the shares are sold at a loss, the loss can be offset against any income tax in that year or the previous year

Whether you’re an existing client or don’t yet use our services, we would be pleased to help you. Contact Mouktaris & Co Chartered Accountants for expert advice or click here to subscribe to our Newsletter.

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