Tax Doesn't Have To Be Taxing

by Richard Leach - Kuhrt Leach LLP

Every time I see the Government's advertisements on television about filing returns online featuring a famous personality, who should really have known better, I start to flick through the channels and its not surprising that even Eastenders repeats are more interesting. The catchphase of "Tax doesn't have to be taxing" gives completely the wrong impression – tax is taxing – and in lots of ways.

From a business perspective you will have various tax issues to deal with on a regular basis, be it monthly PAYE, quarterly VAT, half yearly income tax or annual corporation tax. All this takes away from both the time you have to devote to keeping your business going and of course the cash flow which we all need in business – especially in this climate.

We know a very successful businessman in Tring, a director of a quoted company, who is so incensed about the amount and variety of taxes his business has to pay that he wants to produce an adapted profit and loss account for his published accounts which identifies all the various taxes in one total to demonstrate what the Government really costs a successful business.

A Helpful Budget?

The last Budget was a difficult situation for the Government but it did little to encourage the entrepreneur with a new higher rate income tax and the proposal to effectively reintroduce a form of earnings cap for pension contribution relief.

It is an old saying but it still holds true that wealth creators should be encouraged not penalised. Businesspeople create profits which the Government tax and use to spend on our infrastructure, such as the NHS. The population cannot all work for various Government bodies, there has to be a vibrant private economy to generate the funds and the Government has to encourage that sector so that it stays in this country.

Tax Planning

The lack of support for businesses has seen the growth of the tax planning industry. The Government has actively sort to attack such activities by requiring any mitigation schemes to be registered and individuals to declare their use on their tax returns. There is an anecdote that is now 'folk law' in the accountancy sector about a recent senior Government Minister who phoned the senior partner of a well respected international accountancy firm demanding that they stop marketing aggressive tax mitigation plans or else the firm would be blocked from getting any further Government contracts.

There are also stories of HMR&C trying to deter the use of tax planning strategies by corresponding directly with the individual rather than their official advisors and delaying any refunds.

There are a number of approaches that you as a business can explore and use according to your particular circumstances.

Pension Schemes

On the whole, HMR&C doesn't generally look at pension scheme contributions other than to confirm that the contributions have actually been made. For 2009-2010 you could in theory make a contribution of £245,000 per person. However, it was announced that HMR&C would look at any large contributions in this tax year as in the Budget it is being proposed to limit the tax relief to basic rate for those people earning more than £180,000 and to impose a sliding scale reduction from £150,000 from 2010.

The probable solution to this is to make the contributions employer related, i.e. it is not the individual who makes them but their employer via a salary or bonus sacrifice regime. This is attractive because as it is not the individual who makes the contribution, the contribution will be allowable for Corporation Tax and also save on both employee and employer National Insurance.

If you are self-employed and operate through a limited company the mechanism will still work for you as well as your employees.

The main criticism with reducing tax by the pension route is the money is then tied up within a scheme where you can't use it for the benefit of the business. This is particularly true of the majority of 'off the shelf ' plans provided by the main insurance companies. However, there are schemes known as Small Self Administered Schemes (SSAS) whereby as long as certain HMR&C criteria are met you can access at least 50% of your pension scheme to benefit your business.

Salary Verses Dividends

As a shareholder and director you have the opportunity to plan your income as a combination of salary and dividends. Many small businesses operate on the basis that the owner draws an amount each month to meet his or her living expenses and then accounts for it at the end of the year with the help of their accountant as to how much to allocate to salary and how much to dividends.

The problem generally occurs when there are insufficient profits to turn into a dividend and clear the director's current account. This can mean that a 25% tax charge has to be paid on the outstanding amount, reducing the cash the company has to use.

There are schemes a director can use to resolve the situation and these work effectively in situations where the amount in question is around £100,000.

Employee Benefit Trusts

Employee Benefit trusts (EBTs) have been widely used for a number of years and similarly investigated by HMR&C. Whilst HMR&C will look at such schemes for up to four years, careful construction of the scheme could in most cases result in up to 50% of your Corporation Tax profits being allowed as a contribution. There are various conditions that need to be met to ensure the maximum chance of the scheme being successful and EBTs' are best used for companies with at least 6 to 8 employees with at least £100,000 taxable profits.

It should be stressed that such schemes do take a long time to get HMR&C clearance and they are definitely a vehicle that should be dealt with by a professional advisor.

Contractors – IR35 Issues?

There are various schemes for mitigating the tax payable by contractors and these are very cost-effective for those businesses under IR35 who are earning more than £50,000 per year.

The techniques used in these schemes can also be effective for when a husband and wife work together and the business profits can be allocated equally, even though HMR&C would prefer to see an unequal shares so that one partner suffers higher rate tax.

Stamp Duty

Stamp Duty is one of the least popular taxes and is regularly in the press for calls to reduce it or raise the thresholds. It is also one of the areas where the tax planning industry has had the most success in getting schemes approved by HMR&C and in relatively short timescales of 3 to 4 months.

When these techniques were first employed the entry level was for properties in excess of £1,000,000 which really excluded the majority of individuals and businesses. Most providers now will set an entry level of £500,000 but one provider has now dropped this to £250,000 making it very attractive to a lot of people. The total cost of such a scheme tends to result in a saving of half of the Stamp Duty payable.

Good or Bad Thing To Do?

Overall I think that tax planning is good and should be part of any business'' decision making process. It's easy to understand why taxes are needed and businesses should make a contribution. Tax legislation does allow a business to pay less tax which in turn creates more wealth and cash to be spent on the business and therefore in the economy as a whole.

by Richard Leach
Accountant (Kuhrt Leach)
01442 822 880 | rleach@kuhrtleach.com