from A newsletter for proactive planning... In this edition... Five tax-efficient ways to extract profits Is it worth registering for VAT voluntarily? Tax-free health benefits Five ways to save inheritance tax Cycle to work tax-free 10 Questions with ... Gareth Introducing ... Futuremap October 2022 Issue www.compassaccountants.co.uk
PAGE 2 Five tax-efficient ways to extract profits If you operate your business as a personal or family company where the sole employee is also a director), is one company, you will need to extract some or all of the profits equal to the primary threshold for 2022/23 of £11,908. If if you wish to use them personally. When it comes to tax, not all profit extraction methods are equal. While personal circumstances will dictate the most efficient way for you to extract profits, the following five extraction methods should be considered as part of a tax-efficient profit extraction strategy. Method 1: salary Paying a small salary can be tax-efficient where the recipient has not used their personal allowance elsewhere. Paying a salary that is at least equal to the lower earnings limit for National Insurance purposes (£6,396 for 2022/23), will ensure that the tax year is a qualifying year for state pension purposes; this can be useful where the recipient does not already have the 35 qualifying years needed for a full state pension. For 2022/23, the optimal salary will depend on whether the National Insurance Employment Allowance is available to shelter any employer’s National Insurance on the salary. Assuming the personal allowance remains available in full, the optimal salary where the Employment Allowance is not available (as is the case in a personal the Employment Allowance is available (or one the higher secondary Class 1 National Insurance thresholds applies), the optimal salary is one equal to the personal allowance, set at £12,570 for 2022/23. Method 2: dividends Dividends are paid from post-tax profits, and the profits from which they are paid have already suffered corporation tax. As all taxpayers benefit from a dividend allowance (set at £2,000 for 2022/23), where this remains available, paying a dividend up to this amount allows profits to be extracted free of any further tax. Once the optimal salary has been paid and the dividend allowance has been used, if further profits are needed outside the company, it is generally preferable to take dividends rather than additional salary as the dividend tax rates are lower and there is no National Insurance to pay on dividends. Remember, dividends must be paid in proportion to shareholdings. However, using an alphabet share structure preserves flexibility. Remember, dividends can only be paid if you have sufficient retained profits from which to pay them. CONT ON PG 3
PAGE 3 Method 3: rent Many personal or family companies are based at home. The company can rent a room from the director and pay rent for the privilege. This can be tax efficient, as the company will benefit from a deduction for the rent paid when calculating its profits for corporation tax purposes. While the rent is taxable in the hands of the director, if the director does not have other rental income, he or she may be able to benefit from the property income allowance to receive £1,000 of rent tax-free. Paying rent has the added advantage that there is no National Insurance to pay. Method 4: pension contributions The company can also make pension contributions on behalf of the director (and/or his or her family). The company will usually be able to deduct the pension contributions in full when calculating its profits. Providing the contributions do not exceed the available annual allowance or take total tax relieved contributions above the level of the lifetime allowance, there will be no tax charges on the recipient. Method 5: benefits-in-kind It can be particularly tax-efficient to provide directors and family employees with exempt benefits in kind, such as a mobile phone or workplace parking, as the recipient will enjoy the benefit tax-free, while the company can deduct the cost in calculating its taxable profit. Where an exemption applies, there is no Class 1A National Insurance for the company, and most benefits in kind are free of employee National Insurance. Benefits-in-kind can still be tax efficient even if a tax charge applies; for example, it may be beneficial for the employee to have an electric company car rather than be given more salary from which to fund the car. Providing a benefit rather than additional salary will also save employee’s National Insurance as most benefits-in-kind are liable to Class 1A (employer-only) rather than Class 1.
PAGE 4 You must register for VAT if your VAT taxable turnover for the last 12 months exceeded the VAT registration threshold of £85,000, or if you expect your turnover in the next 30 days to exceed this amount. However, while you are not obliged to register for VAT if your turnover is below this level, you can choose to do so voluntarily. Is this beneficial? Need to charge VAT If you are VAT registered, you will need to charge VAT on taxable supplies that you make. Unless you make zero-rated supplies (for example, zero-rated foods), this will make your products more expensive to the purchaser. If predominantly you supply to VAT-registered businesses, this may not be an issue as they will be able to recover the VAT charged. However, if you supply to individuals, charging VAT may make you less competitive against businesses that are not VAT-registered. If you supply standard-rated goods, you will need to add on 20%. Ability to recover input VAT One of the main advantages of registering for VAT voluntarily is that you will be able to recover the VAT associated with making taxable supplies (including those that are zero-rated). However, if you make exempt supplies, you cannot recover the associated input tax. Businesses that make zero-rated supplies only or mainly should consider registering for VAT voluntarily if their turnover is below the VAT registration threshold as they will be able to recover any associated input tax, but the imposition of VAT at the zero rate will not make their supplies more expensive. Compliance obligations Registering for VAT comes with an associated compliance burden. All VAT-registered traders are now within Making Tax Digital (MTD) for VAT. Consequently, they must maintain digital records and file VAT returns using software that is compatible with MTD for VAT. This will involve both time and costs, which may outweigh any VAT recovered. Do the sums To assess whether it is worthwhile registering for VAT voluntarily, there is no substitute for doing the sums to see whether what you could potentially recover is worthwhile.
PAGE 5 Tax Free Health Benefits If you are an employer, it is beneficial for both you and your employees if your workforce is healthy. Consequently, you may want to offer benefits to help employees spot any issues early and get back to full health. While the provision of private medical insurance (other than for employees working overseas) is a taxable benefit, the tax system contains a number of health-related exemptions. Health screening and medical check-ups Employees can be provided with one health-screening and one medical check-up each tax year without triggering a tax charge under the benefit-in-kind legislation. For these purposes, a health screening assessment is an assessment to identify an employer who may be at a particular risk of ill-health, whereas a medical check-up is a physical examination of the employee by a health professional for the sole purpose of determining the employee’s state of health. The provision of additional health screenings and/or medical check-ups in the same tax year are taxable and must be notified to HMRC on the employee’s P11D. Recommended medical treatment While there is no general tax exemption for employerfunded medical treatment, there is a dedicated exemption for medical treatment that meets the definition of ‘recommended medical treatment’ which is provided or paid for by the employer. This is treatment recommended by a health professional as part of occupational health services provided to the employee to help the employee retain employment or is provided to assist the employee in returning to work after a period of absence due to injury or ill health (such as physiotherapy to help the employee return to work after a back injury). The exemption is capped at £500 per tax year. Where the cost of the treatment is more than this, the employee is taxed on the excess over £500. Overseas medical treatment and insurance A tax liability arises in respect of the provision of medical treatment, other than recommended medical treatment, provided to UK-based employees. However, there is no tax liability where an employer provides medical treatment outside the UK and the need for the treatment arose while the employee was overseas for the purpose of performing the duties of the employment. The exemption extends to the provision of insurance against the cost of providing such treatment. Eye tests and glasses Where an employer is required by regulations made under the Health and Safety at Work Act 1974 to provide an employee with an eye test, no tax liability arises in respect of that test. If the test shows glasses and contact lenses are needed, the provision of these are also taxfree. However, the exemption is conditional on the access to tests and the provision of corrective appliances to those who need them is available to all employees to whom such tests must be provided.
PAGE 6 Transferring assets between spouses Inheritance tax is often described as a voluntary tax. While most of us do not know in advance when we are going to die, there are steps that you can take to reduce the amount of inheritance tax on your estate. Here are five suggestions. 1.Leave everything to your spouse or civil partner The inter-spouse exemption means that there is no inheritance tax to pay on anything that you leave to your spouse or civil partner. On their death, their estate can claim the unused portion of your nil rate band and your residence nil rate band, meaning that these are not wasted. The allowances allow a married couple or civil partners to, between them, leave £1 million free of inheritance tax. Alternatively, you can leave assets to the value of your nil rate band, and a main residence or share in a main residence to your children or direct descendants, and anything in excess of this to your spouse or civil partner. This too will ensure that there is no inheritance tax to pay on your estate. 2.Give away cash and assets early Gifts made more than seven years before your death fall out of charge for inheritance tax purposes. Also, taper relief means that the rate of tax payable on assets gifted made more than three years before your death is reduced on a sliding scale. Lifetime gifts are known as potentially exempt transfers and remain exempt if you survive for at least seven years after making the gift. However, if you do die within seven years, lifetime gifts come into charge. This may give rise to an unintended problem in that the nil rate band is applied chronologically, meaning that it may shelter a lifetime gift which would, if taxable, benefit from generous taper relief, rather than a death bequest which is chargeable at 40%. The earlier gifts are made, the greater the likelihood that they will fall out of charge. 3.Make gifts out of income An inheritance tax exemption means that it is possible to make lifetime gifts which are not treated as potentially exempt transfers by making them out of your income. To benefit from the exemption, the gift must be made as part of the normal expenditure from the income of the donor and, after making the gift, the donor must be able to maintain their standard of living. This exemption could be used, for example, to pay for your grandchildren’s school fees or your child’s rent or to set up a regular standing order to help meet your children’s living costs. 4.Use the annual and gifts exemptions There are a number of specific inheritance tax exemptions that allow you to make small gifts that fall outside the scope of inheritance tax. These exemptions can be used in addition to the gifts from income exemption outlined above. Further, they apply if the gifts are made from capital. The annual exemption allows you to give away £3,000 of gifts each year. You can use the allowance to make a single gift to one person, or several gifts totalling not more than £3,000. If you do not use all of the exemption for a tax year, you can carry the unused portion forward to the following tax year. However, if it is not used by the end of that tax year, it is lost. The small gifts allowance allows you to make as many gifts as possible of up to £250 per person each tax year. However, the recipient cannot benefit from more than one allowance (so you cannot give £3,250 to one person using the annual allowance and the small gift allowance). You do not need to count birthday and Christmas gifts, which are exempt. You can also make tax free gifts on the occasion of a wedding or civil partnership. The exempt amount depends on your relationship to the recipient – £5,000 for a child, £2,500 for a grandchild or great-grandchild and £1,000 for any other person. 5.Make a charitable bequest Your estate can benefit from a reduced rate of inheritance tax of 36% if you leave at least 10% of your estate to charity. Gifts to charities are themselves exempt from inheritance tax.
PAGE 7 Cycle to work tax-free As the cost-of-living crisis deepens, many employees are looking to save money. One option is to cut the cost of the commute by cycling to work. There can be tax benefits for this too. Exemption for employer-provided cycles Employees can enjoy the use of employer-provided cycles and cyclists’ safety equipment without having to pay tax on the associated benefit as long as the following conditions are met: 1. There is no transfer of property in the cycle or equipment – it remains the property of the employer. 2. The employer uses the cycle and/or equipment mainly for qualifying journeys. These are journeys between home and work and business journeys. 3. The cycles and/or equipment are made available to the employees who want to make use of them. It is not necessary for each employee to have their own dedicated bike; the employer can operate a pool system where employees who want to borrow a bike can do so from a pool. Salary sacrifice A Cycle to Work scheme combines a salary sacrifice arrangement with hire agreement. There are a number of commercial providers offering such schemes, which are popular. Under the scheme, the employee enters into a salary sacrifice scheme and gives up part of his or her salary in return for the provision of a cycle. The employee enters into a hire agreement, under which they hire the cycle from either the employer or a third party. The hire is paid for by the sacrificed salary. As long as the above conditions are met, the provision of the cycle is exempt from tax. It is important to stress here that ownership of the cycle must not at this point pass to the employee. As employer provided cycles are protected from the operation of the alternative valuation rules, the exemption is not lost by using a salary sacrifice scheme. The arrangement allows the employee to save tax on the salary given up, and both the employer and employee to save Class 1 National Insurance. Cycle to work schemes typically run for three years. At the end of the period, the employee has three options: 1. Extend the hire agreement. 2. Return the cycle and equipment. 3. Buy the cycle and equipment. There are no tax consequences if the employee chooses option 1 or 2. If the employee decides to buy the bike, as long the amount paid is at least equal to the market value of the bike at the time of the transfer, there is no tax to pay. However, if the amount paid is less than the market value, the shortfall is a taxable benefit. HMRC recognise that it can be difficult to establish the market value of a second-hand bike. Consequently, a simplified approach can be used under which no tax charge will arise as long as the employee pays at least the percentage of the original value for the age and original cost of the bike as shown in the table below: CONTINUED ON PAGE 8
PAGE 8 Age of cycle 1 year 18 months 2 years 3 years 4 years 5 years 6 years and over Acceptable disposal value (% of original price) Original price less than £500 Original price £500 or more 18% 16% 13% 8% 3% Negligible Negligible 25% 21% 17% 12 7% 2% Negligible So, for example, if an employee pays at least £24 for a cycle costing £300 (8% of £300) at the end of a 3-year hire period there will be no tax to pay on the transfer. 10 Questions with ... Gareth! Gareth Kendall has joined the Compass Accountants team as an Accountant- Here we ask him the Compass 10 Questions .. 1.What is the first thing you would buy if you won the lottery? Clear off the credit cards/cars and mortgage and then have an amazing holiday – may even take the family. 2.How did you get into accounting? A friend of mine made it seem more glamorous than I now know it is, but it is too late to change jobs again at my age. ;-) 3.What is your favourite film? Fear and Loathing in Las Vegas 4.What was your first ever job? Dealer (Croupier) in a Casino in Southsea. 5.If you could invite anyone (dead or alive) to your 8.What is your favourite place in the world that you have been? dinner party who would you invite? St Maarten in the Caribbean. Stephen Hawking. 6.What do you like most about working for Compass Accountants? Definitely the amazing team members!! 9.What did you want to be when you were growing up? A soldier. I am the first generation in 5 not to join. 7.Which super power would you most like to have and why? Telekinesis – I would be like a Jedi and that would be awesome. 10.Tell us one strange or unique fact about yourself! I can reach that hard-to-reach spot on your back and in between the shoulder blades.
PAGE9 Introducing ... Futuremap Futuremap helps SMEs assess their business in light of their goals, plan for success, secure the means to get them there and whilst on the journey, articulate their business with purpose. Whilst based in West Sussex, futuremap’s client-base is nationwide. Here, partner, David Arthur tells us exactly how futuremap does it. David, tell us a little more about what futuremap does? “Basically, we help business owners navigate their way to their goals. Most of the time, this begins with a free business review to establish where a business currently is. We then map out a pragmatic strategy to get them from where they are to where they want to be. “After the review, we may determine a business needs funding or equity investment to facilitate their journey. If they do, we offer a full service in finding it. “The review may also demonstrate a need to help the business articulate exactly who they are to their wider world; be that their workforce, suppliers, stakeholders or customers. This isn’t just about ‘who’ they are, but also their ‘why’. What the central purpose of the business is. What makes it tick. “In a nutshell, we’re called futuremap because our services combine to help business owners map out their future and realise their goals.” Can you give an example of how these services work together for a client? “Sure. One of our services is investorscout. Here, we look at your business and assess your viability for investment. We then test your proposal in the market and gather a shortlist of investors that are interested in receiving a full plan and pitch. This takes the form of a high-level ‘teaser’ document; a brief summary of the business, their requirements and reasons for investment. Unlike other providers, there is no large upfront fee required. In fact, the initial viability assessment is free of charge. “This assessment sometimes reveals the need to conduct a wider business review. We call this your futuremap. Here, we assess your cashflow, your customer-base, your supply chain and how well the combination of these is getting you towards your business goals. This often identifies potential pitfalls and makes recommendations in how you can get your business to where you want it. Again, this initial review is a free, no obligation service. "We also offer a service called purposepitch, which helps you to formulate the building blocks of your pitch, taking you a significant step closer to really engaging potential partners, existing staff, colleagues, suppliers or customers on your journey. As an entry point, this takes the form of a free online application, after which, if the customer requires a more detailed scripting service, we provide our paid purposescript solution. CONTINUED ON PAGE 10
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