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for the same project will be able to claim the large company
R&D tax credit. Therefore they will qualify for relief on 130%
of their R&D expenditure. An SME may also be entitled to
the large company R&D tax credit for certain work that has
been subcontracted to it.
Bringing family members into the
business
As long as it can be justified commercially, you can employ
family members in your business. They can be remunerated
with a salary, and possibly also with benefits such as a company
car or medical insurance. You can also make payments into a
registered pension scheme.
Family members may also be taken into partnership, thereby
gaining more flexibility in profit allocation. Taking your
non-minor children into partnership and gradually reducing your
own involvement as their contribution increases can be a very
tax-efficient way of passing on the family business. Of course,
you should be aware that this could put your whole family
wealth at risk, if the business were to fail.
It is worth noting that HMRC may challenge excessive
remuneration packages or profit shares for family members, so
seek our advice first. In most cases, if you operate your business
through a trading limited company, under current tax law you
can pass shares on to other family members and thus gradually
transfer the business with no immediate tax liability.
However, a tax saving for the donor usually impacts on
the donee, and you need to steer clear of the ‘settlements
legislation’, so again, contact us for advice before taking
any action.
Unincorporated businesses
Business profits are charged to income tax and Class 4 national
insurance contributions (NICs) on the current year basis.
This means that the profits ‘taxed’ for each tax year (ending
5 April) are those earned in the accounting period ending in the
tax year.
For example, in the case of a sole trader who draws up his
accounts to 31 July each year, his profits for the year ended
31 July 2016 will normally be taxed in 2016/17.
There are special rules for the early and final years of a business,
and for partnership joiners and leavers.
Numerous ‘fines’ are being administered for those who fail
to comply with the rules and regulations set by government
departments. We have already mentioned income tax but other
possible ‘traps’ to avoid are:
• late VAT registration and late filing penalties
• late payment penalties and interest
• penalties for errors in returns
• penalties for late PAYE returns
• penalties for failing to operate a PAYE or sub-contractors
scheme
• penalties for failing to comply with pensions
auto-enrolment regulations.
In order to help you to steer clear of these pitfalls, we must
receive all of the details for your accounts and Tax Returns
in good time, and be kept informed of any changes in your
business, financial and personal circumstances.
Determining employment status
There is no statutory definition of ‘employment’ or
‘self-employment’, so determining whether someone is
employed or self-employed is not straightforward.
Instead, HMRC applies a series of ‘tests’ in order to ascertain
whether someone is classified correctly. As large amounts of
both tax and NICs can be at stake, HMRC often takes quite an
aggressive line with regard to this issue, and errors can be costly,
so seeking advice that is tailored to your situation is essential.
Please contact us for assistance in this matter.
Under the ‘IR35’ rules, companies and partnerships providing
the personal services of the ‘owners’ of the business must
consider each and every contract they enter into for the
provision of personal services. The test is whether or not the
contract is one which, had it been between the owner or partner
and the customer, would have required the customer to treat
the owner or partner as an employee and therefore be subject
to PAYE.
The contract ‘passes’ if the owner/partner would have been
classified as self-employed; it fails if the owner/partner would
have been classified as an employee. If the contract ‘fails’,
the business is required to account for PAYE and NICs on the
‘deemed’ employment income from the contract at the end of
the tax year. This is done using specific rules. We can advise you
about these, so please contact us for further information.
Whose risk?
If the question is whether an individual is an employee or
self-employed, the risk lies with the ‘engager’ or payer – with
a potential liability for the PAYE which should have been paid
over without right of recourse to the ‘employee’. If the question
is whether or not IR35 applies, the question (and any liability
due) is for the individual and his/her company (the payee). The
position for individuals working through their own company in
the public sector is to change from April 2017. The intention is
that the public sector employer, agency, or third party that pays
the worker’s intermediary will have to decide if the IR35 rules
apply to a contract, and if so, account for and pay the relevant
tax and NICs.
Debtors and unbilled work
As explained above, small businesses may opt into the cash
basis and calculate their profits on the basis of the cash passing