Welcome to our Autumn 2002 Newsletter
|
|
|
Please contact us about any of the matters raised in this newsletter
Remember - we're here to help!
|
Clean Cars are Tax Efficient!
|
 |
Historically, a car purchased by a business has been eligible for a tax deduction by way of capital allowances. However, these have been restricted to 25% per annum and in the case of cars costing £12,000 and over to an annual maximum of £3,000. In order to encourage investment in ‘cleaner’ cars, new rules have been introduced which allow a 100% up front tax deduction, provided certain conditions are satisfied. We summarise the conditions below and give an indication of some of the cars that qualify.
Conditions to be satisfied
- the car must be new and first registered on or after 17 April 2002
- the car must have CO2 emissions of not more that 120gm/km or be electrically propelled.
|
| Some of the cars qualifying for the new 100% allowances…… |
Audi A2 1.4 TDI
Ford Fiesta 1.4 TDCi CL (14” tyre)
Renault New Clio 1.5 dci (65 bhp)
Volkswagen Lupo 1.4 (75 bhp)
Micro Compact Car Smart City Coupe
|
CO2
119
114
115
119
113 |
| Warning! Be careful that your precise desired specification has CO2 emissions not exceeding 120gm/km. For example an automatic as opposed to a manual can add significantly to the emissions. |
|
A final word
Remember that if the car is for the proprietor of an unincorporated business the allowances will be restricted to take account of the proportion of private use.
Note that 100% allowances are also currently available for the following:
- expenditure on certain energy saving plant and machinery (eg boilers and refrigeration equipment)
- for small businesses, expenditure on computers, software and internet-enabled mobile phones (until 31 March 2003).
Please talk to us if you need any further information or wish to discuss any of the points raised in this article.
|
|
Personal Pensions: Revenue Change of Heart
|
The Revenue has recently announced a change of heart which may benefit high earners paying personal pension contributions.
Since April 2001, it has been possible to pay personal pension contributions on the strength of your earnings in a ‘basis year’ which can be up to five years earlier. So for payments in 2002/03 this could be any year from 1997/98 onwards.
The Revenue’s previous view was that if earnings were high enough for the earnings cap to apply, then the cap of the basis year would limit contributions for the following five years. The view now is that the limit will be the cap of the year of payment. So, for example, someone with earnings of £110,000 in 1998/99 which they nominated as the basis year for 2002/03 can pay contributions based on the current cap of £97,200 rather than the much lower cap of £87,600 that applied in 1998/99. This change will particularly help those with fluctuating earnings by allowing them to benefit from annual increases in the earnings cap.
|
How Much is my Business Worth?
How would you go about valuing a business?
|
The key methods of business valuation are listed below.
- Multiple of earnings or ‘capitalised’ earnings
- Value of assets
- Discounted cash flow basis
- Accepted industry benchmark valuations.
The usual starting point for business valuations is to look at future maintainable/sustainable earnings. The past is normally used as a starting point. Many factors will be relevant in arriving at an appropriate figure or figures. Clearly the task is made more difficult if the business is volatile.
The amount that a purchaser is then willing to pay for the business will depend on the required rate of return. This in turn will depend upon the rates available elsewhere and the level of risk inherent in the investment.
Example
The future maintainable earnings of a business have been estimated as £100,000 a year. A prospective purchaser has a required rate of return of 12.5%. On this basis, the business would be valued at £100,000/12.5% = £800,000.
The value is therefore based on a ‘multiple of earnings’ of 8. This is often referred to as the ‘price/earnings ratio’ or ‘p/e ratio’. |
The future earnings and acceptable p/e ratio are likely to lie within a range of values so that one would normally have a range of values for a business.
An assets based valuation can then be used to act as a check. This method of valuation involves calculating the total current value of the company’s assets less its liabilities. Although the basis is once again subjective it ignores the risks inherent with future earnings.
In this article we have only been able to give you a brief overview of the complex area of business valuations. We would be delighted to talk to you if this is an area of interest for you or if you have any questions or issues arising from the article. Remember we are only a phone call away.
|
 |
All limited companies in Great Britain and Northern Ireland have a legal obligation to provide Companies House* with an up to date annual return and, in most cases, annual accounts. In addition to fulfilling these requirements, there are a number of changes that companies should keep Companies House informed of throughout the year. We provide a reminder of some of the more common changes and their respective Companies House forms below.
*Registry in Northern Ireland (NI)
|
| Form |
Name |
Comments |
363
371S(NI) |
Annual return |
- All companies must deliver an annual return to Companies House at least once every year and within 28 days of the date that the return is made up to.
- Companies House will send a pre-printed ‘shuttle’ form to your registered office for completion.
- A filing fee of £15 (£20 in Northern Ireland) must be sent with the annual return.
|
225
233 (NI) |
Change of accounting reference date |
- For use where you need to change your year-end.
- A company may not change a period for which the accounts are already overdue.
- The period may not be extended beyond 18 months**
- In most circumstances** a company may only extend its accounting period once every five years, although it may be possible to extend the period so that it agrees with that of a parent or a subsidiary.
|
287
295 (NI) |
Change in situation or address of registered office
|
- Any change in the situation of the registered office does not take effect until the Registrar has registered this notice.
|
288a
296 (NI) |
Appointment of director or secretary
|
- For use when a new director or secretary is appointed.
|
288b
296 (NI) |
Terminating appointment as director or secretary
|
- For use when a director or secretary resigns.
|
288c
296 (NI) |
Change of particulars for director or secretary
|
- For use when, for example, a director or secretary’s name or usual residential address changes.
|
Forms 287/295 and 288/296 should be sent to Companies House within 14 days of the change.
**There are a limited number of exceptions.
|
|
Wrongful Trading - Directors are you at Risk?
|
|
Is your company facing a financial crisis? Is it struggling to remain solvent? If your company were to fall into insolvent liquidation could you prove that you took all possible steps to minimise the loss to the company’s creditors from the moment insolvency became inevitable? If not, the courts could require a personal contribution from you in order to meet the company’s debts. You could also face being disqualified from acting as a director for up to 15 years and incur significant costs (which could run into thousands of pounds) in defending the claims.
The key to avoiding any action being taken is to face up to potential solvency problems at an early stage. An important weapon in the defence of wrongful trading, and indeed as a means to keep your company afloat, is a sound business plan that shows an awareness of your trading position.
By producing a formal plan, including budgets and forecasts and then by closely monitoring results, you will give your company a good chance of trading out of its problems.
If you feel that you or your business are at risk from solvency problems you must act early and take professional advice.
If you do not have a business plan or would like help in developing one, please get in touch. We can then discuss what course of action will be best for you and your business.
|
|
|
Back in 1998, when the capital gains tax regime was reformed and taper relief introduced, the Government made it clear that the regime would not apply to gains realised by companies. Individuals can now benefit from a 75% reduction in the taxable gain on a business asset once it has been owned for two years. This gives a maximum tax rate of 10% on such gains. Corporate gains are not eligible for taper relief and, indeed, have very little in the way of reliefs available to them. They continue to get ‘indexation allowance’, a relief for inflation based on the cost of the asset, but this is of little benefit where the asset has a low cost. The simple example shown demonstrates the differences.
Gains on business assets can be deferred using ‘rollover relief’ provisions so long as the proceeds of sale are used to acquire replacement assets for use in the business. However, not all assets are eligible for relief and it has never applied to shares in a subsidiary company.
Two years ago, the government attempted to improve the position by allowing corporation tax relief at 20% on acquisitions of minority shareholdings in qualifying trading companies - ‘Corporate Venturing Relief’. The relief has proved unpopular and complex to operate so few companies have benefited.
For many years, some other countries have exempted from tax the capital gains made by companies on the disposal of certain shareholdings in other companies. The UK is seen to have fallen behind and the lack of protection against tax on such gains has been harmful for the UK when competing with other countries. As a result, for disposals from 1 April 2002, there is an exemption for gains and losses realised when one company disposes of a ‘substantial shareholding’ in another company. Substantial is defined as 10% or more and both companies must be trading companies. Furthermore, the shares must have been held for at least 12 months.
Although the new rules are targeted mainly at large groups of companies they may also potentially apply to groups of family companies or owner-managed companies. The downside of the new rules is, of course, that no relief is available where shares are disposed of at a loss. Also it is clear that the rules are limited to gains and losses made by companies and have no relevance to individuals’ shareholdings.
Please talk to us if you wish to discuss any of the points raised in this article in more detail. |
| Sale proceeds |
Business Asset
|
Owned personally
£ |
Owned by company
£ |
| 50,000 |
50,000 |
Cost (1999)
|
(1,000) |
(1,000) |
| 49,000 |
49,000 |
Indexation (say 10%)
|
(100) |
| Taper relief (75%) |
(36,750) |
| Gain |
£12,250 |
£48,900 |
Taxed at 40%(1) /19%(2)
|
£4,900 |
£9,291 |
(1) Higher rate taxpayer
(2) Small companies rate of corporation tax |
|
|
|
|
|
|
The new Second State Pension (S2P) replaced the State Earnings Related Pension Scheme (SERPS) in April this year. Virtually all employees earning at least £3,900 a year will be affected. Although middle and high earners will eventually be worse off under S2P, it will enhance the state pensions of employees who earn between £3,900 and £10,800 a year. Employees in this pay range will generally be treated as if their earnings were equal to the S2P lower earnings threshold of £10,800.
Rewarding your spouse tax-efficiently
The introduction of S2P therefore increases the benefits of business owners paying a modest salary to their spouses. For example, where the salary paid does not exceed the personal allowance (£4,615 for 2002/03) it will not be liable to national insurance contributions (NICs) and may well also be tax-free. Notwithstanding the modest salary, such employees are able to have a personal pension. Since April 2001 an employer can contribute £3,600 (gross) per annum to an employee’s stakeholder or personal pension irrespective of the employee’s (modest) earnings. The payment is free of both tax and NICs and so is often more efficient than paying the employee additional salary out of which they fund their own pension contributions. The salary package for the spouse including any pension contributions needs to be commercially justified. Otherwise there is a danger that the payments will not be tax-deductible in the business.
It may be that the spouse already receives dividends from the company but remember that these do not accrue state pension benefits and if the spouse has little or no other income then dividends are generally less tax-efficient than salary.
The self-employed
A government think-tank has proposed that the self-employed should contribute to S2P. Currently the self-employed pay less national insurance than employees but only qualify for the basic state pension on retirement. However, any such change is likely to take several years to implement.
|
|
Incorporation - Yes or No?
|
 |
One of the hot topics of the moment is the issue of incorporation - should you be running your business as a company or as an unincorporated sole trade or partnership?
Many issues are relevant when considering this complex area. The potential tax savings available (see our example) will depend on a number of factors both tax and non-tax and we would need to discuss these with you.
Attention has focused on the question of incorporation as a result of a number of changes made to the tax system in recent years. These are summarised below.
Corporation tax rates
With effect from 1 April 2002, the corporation tax starting rate was reduced from 10% to 0% on annual profits up to £10,000. This, together with a reduction in the small companies rate from 20% to 19%, further widens the gap between corporation tax rates for many (smaller) companies and the 40% rate applicable to sole traders and partners whose profits push them into the higher rate income tax bracket.
Extraction of profits
Once profits have been earned (and taxed) in the company, the issue arises as to how best to extract them. Often there is a tax advantage in director/shareholders of such companies taking a dividend rather than salary or bonus. Increases in national insurance contributions (NICs) for employers, employees and the self-employed have added to the incentive to avoid these charges. Further increases are planned from April 2003. All NICs can be avoided by incorporating, taking a small salary up to the threshold at which NICs become payable and then taking the balance of post-tax profits as dividends.
Clearly, the national minimum wage requirements should be considered, but company directors fall outside the provisions provided there is no formal employment contract.
Personal (including stakeholder) pensions
The new rules for personal pensions mean that it is necessary only to take a salary one year in six. Pension payments in each of the six years can be based on the salary paid in the one year.
Using a company to save tax has a few disadvantages, in particular the extra administrative requirements and costs. These should not be underestimated and we would be happy to talk to you about your own individual circumstances.
As a final thought, there may be many good reasons currently for considering use of a company as part of a tax planning strategy but the tax tail should not be allowed to wag the commercial dog!
|
|
Example
John is a self-employed painter and decorator. During the year to 31 March 2003 he expects to make a profit of around £25,000.
The figures below compare his tax position if he remains self-employed with the position if he forms a company, takes a salary equal to his personal allowance (£4,615) and the balance of profit as a dividend.
|
Self-employed
|
£
|
£
|
Income tax (2002/03)
|
|
|
|
4,615
|
@ nil |
|
1,920
|
@ 10% |
|
18,465
|
@ 22% |
|
£25,000
|
|
|
-
192
4,062
|
4,254
|
National insurance
|
| Class 2 52 x £2 |
104
|
| Class 4 (£25,000 - £4,615)x7% |
1,427
|
| £5,785 |
Company
|
£
|
£
|
Salary
£4,615 : no tax or NI |
-
|
Company profits
(£25,000 - £4,615) = £20,385 |
| Corporation tax (y/e 31.3.03) |
|
|
|
10,000
|
@ nil |
|
10,385
|
@ 23.75% |
|
£20,385
|
|
|
-
2,466
|
2,466 |
Post tax profits
(£20,385 - £2,466) = £17,919
Pay out as dividend : no tax
|
-
|
| £2,466 |
|
Tax saving: £3,319
Note that these calculations assume John has no other income and pays no pension premiums. Also, the precise tax effects of ceasing business in an unincorporated form have been ignored, as have the costs of forming and running a company.
|
|
|
Disclaimer - for information of users
This newsletter is published for the information of clients. It provides only an overview of the regulations in force at the date of publication, and no action should be taken without consulting the detailed legislation or seeking professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material contained in this newsletter can be accepted by the authors or the firm.
|
