Corporate Focus - February 2010
Fighting 50% tax
With the new 50% tax rate just months away, now is the time to
start reviewing your affairs to ensure that, where possible, you
can avoid the increase. Whilst there are no magic solutions, there
are a number of ways in which tax can be saved by advance
planning.
Accelerate what you can
Paying tax before you need to is not something that would
usually spring to mind. However, with the huge rate increase from 6
April 2010 taxpayers should look at whether accelerating income is
worthwhile.
- At risk of stating the obvious, cash accounts can be closed
early to ensure that interest is paid in the current tax year.
- Bonuses and dividend payments can be accelerated if this is
commercially viable. This is simple for the owner manager who has
complete flexibility and, if needs be, funds can be loaned back to
the company for cash flow.
- For employees and executives it is not so simple – there is
little point accelerating a performance based cash bonus if in
doing so you destroy the rationale for having the bonus in the
first place. That said, companies can look at accelerating bonuses
combined with a claw back should the executive fail to hit
targets.
- Holders of unapproved options should consider whether these
should be exercised before the end of the tax year, but only where
they have the funds available to pay the tax.
Spread what you can
Taxpayers should think about whether income generating assets
can be spread across other entities or family members to reduce the
overall tax burden.
- So high earning individuals might decide to transfer income
producing assets to a spouse who either doesn’t earn or has a low
income. Clearly the transfer will need to have “no strings
attached” so other considerations may apply.
- Shareholders could decide to spread shares around the family,
for example, to spouses and adult children. Where those people work
in the business the added advantage is that they may then qualify
for entrepreneur’s relief from capital gains tax (“CGT”) (giving
tax at 10% on the first £1 million of gain) after a year has
elapsed. As with all things this needs to be reviewed very
carefully to assess the full tax and practical implications – for
example, gifts can give rise to CGT unless certain reliefs are
available.
- Partners operating an unincorporated business should consider
introducing a corporate partner so that some of the drawings can be
retained and invested by the lower tax paying corporate. This,
again, needs to be thought through quite carefully as obviously the
corporate pays tax on capital gains at a higher level but certainly
for cash savings a corporate may have certain advantages.
Defer income until things improve?
I would certainly not bank on trying to defer income until the
tax rates are reduced – with huge public deficit to fund the next
government of whatever party would seem very unlikely to be in a
position to assist the wealthiest few per cent of the population.
That said individuals with designs on emigrating at a future date
may benefit from deferring their tax bills. If that is the case,
schemes like those that seek to park cash in an Employment Benefit
Trust may be worth considering. However, HMRC has publicly declared
its dislike of these schemes so the likelihood of challenges and
future legislation would need to be factored into the decision
making process – this form of planning is not for the faint
hearted.
Foreign possibilities
Under the CGT rules there is a temporary non-residence charge
for people who make gains whilst outside the UK for less than 5
years. With income tax there is currently no equivalent. So,
business owners with the opportunity of working full time abroad
for at least a full tax year can make the most of their
non-resident status by stripping reserves out of the business at no
tax charge – there is no withholding tax in the UK on dividends
paid by UK companies to foreign residents. Providing that the
country that the individual moves to has a more benign tax regime
this can work extremely well. This may, of course, have somewhat
limited application - few business owners build up enough reserves
to make it worthwhile and even less are able to leave their
business for that length of time. But for those few that it could
work for the benefits are significant. The fact that stripping the
dividends out is in the individual’s mind when he goes abroad does
not matter as long as he goes for full time employment and keeps
out of the UK.
Foreign Domiciliaries
Individuals who are resident in the UK but domiciled elsewhere
had already been hit by sweeping changes to the tax regime that
came in to force last April.
However, benefits of non-domiciled status still remain and with
the 50% rate in prospect there is an added incentive to review ones
affairs to see if the most can be made of the remittance rules.
Companies that employ foreign executives should still consider
whether dual contracts are appropriate so that at least a
proportion of the remuneration can remain offshore and avoid UK
taxes.
Pay 18% rather than 50% - share based
payments
The new higher rate means that now, more than ever before, the
attractions of tax efficient share based awards cannot be ignored.
Saving NIC is the additional advantage for both the company and the
employee and in many circumstances corporation tax deductions can
be obtained.
The tax efficient Enterprise Management Incentive Scheme remains
the share scheme of choice for numerous companies and with the
gross assets test now at £30 million even sizeable businesses can
benefit. The EMI regime is extremely flexible so the operative
terms can be tailored to each individual employee if desired.
EMI will not, however, work in all cases. Where it doesn’t and
where the shares are too expensive for the manager to buy at the
outset, some companies fall back on unapproved options which
although highly inefficient from a tax perspective work very well
commercially. However, with a little more thought, a similar
commercial result can be achieved with a far better tax outcome.
For example, the manger in question could be awarded “growth
shares” at an early stage.
These “growth shares” carry no current value and only start to
participate in the capital value of the company once a certain
level of growth has been achieved, either in terms of profit levels
or exit value. As long as the growth levels are reasonably
ambitious it should be possible to be confident of a fairly nominal
value attaching to the shares at the outset so up front tax charges
should be avoided. On sale of the shares in the future the manager
should benefit from CGT at currently 18% in the same way as the
other shareholders. If unapproved options had been used instead he
would have potentially been faced with tax (including NIC) of up to
52%.
Now is the time to review whether there is anything that you can
do to reduce your exposure.
Lisa Stephenson is a consultant, specialising in tax, in
our corporate team.