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• for larger companies, the effective rate of relief is 26% (that
is tax relief on 130% of the expenditure)
• an alternative 11% ‘Above the Line’ (ATL) credit exists for
large company R&D expenditure. The credit is fully payable,
net of tax, to companies with no corporation tax liability. The
ATL credit scheme is optional until it becomes mandatory on
1 April 2016
• SMEs barred from claiming SME R&D tax credit by virtue
of receiving some other form of state aid (usually a grant)
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.
Employing family members
Providing that the package is commercially justifiable, 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. However, be
aware that bringing family members into your business may put
family wealth at risk if, for example, the business were to fail.
Meanwhile, a van might be a tax‑efficient alternative to a
company car. The maximum annual tax bill on the use of a
company van with unlimited private use is only £1,417.50 or
£1,684.80 including employer provided fuel. These amounts
have been calculated using the top rate of income tax of 45%
so for a basic rate taxpayer the costs are less than half of these
amounts.
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.
Case Study
Nilesh, a sole trader, draws up his accounts to 31 July each
year. His profits for the year ended 31 July 2015 will normally
be taxed in 2015/16.
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.
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.
The question of employment status
As there is no statutory definition of ‘employment’ or
‘self‑employment’, determining whether someone is employed
or self‑employed is not as straightforward as it might first
appear.
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