from A newsletter for proactive planning... In this edition... Key person insurance – When can you claim a deduction? Telling HMRC that you have no corporation tax to pay Relief for post-cessation expenses Beware of diverting dividends to minor children to fund education Tax and influencers Tax Diary- October October 2023 Issue www.compassaccountants.co.uk
PAGE 2 Key person insurance – When can you claim a deduction?
PAGE 3 Telling HMRC you have no corporation tax to pay If you have a company that is dormant and you have filed your company tax return showing that no tax is due, you may think that there is nothing further you need to do as regards the lack of corporation tax due. After all, you have filed a return which shows that you have nothing to pay. However, that may not be the end of the story. You may receive a letter from HMRC reminding you when the corporation tax for the period is due. The letter will also inform you that if you do not owe any corporation tax, you should tell HMRC as soon as possible. Arguably, you have already done this by filing your return and corporation tax computation. The letter advises that if you do not tell HMRC that no corporation tax is due, you will continue to receive reminders about paying. To tell HMRC that no corporation tax is due, and put a stop to payment reminder letters, you need to visit the Gov.uk website at www.gov.uk/pay-corporation-tax and select ‘tell HMRC no amount is due’. It is then simply a case of clicking on the ‘nil to pay form’ and entering your 17-digit corporation tax reference, which can be found on the letter. This will be your 10-digit unique taxpayer reference for your company, plus additional digits and letters which indicate the period in question, for example, 1234005678A00101A. It is important that this is entered correctly. When is a company dormant? Your company may be dormant if it is not trading and has no other income, for example, from investments. It may also be dormant if it is a new company which has yet to start trading. If you think your company is dormant, you can tell HMRC online (see www.gov.uk/tell-hmrc-your-company-is-dormant-for-corporation-tax). If you cannot use the online form, you can also tell HMRC by post or by phone. If you have had a notice to deliver a company tax return, you will need to do this. This will show HMRC that your company is dormant. Once you have told HMRC that your company is dormant, you will not need to file further company tax returns unless you receive a notice to file. HMRC may also write to you to tell you that they have decided to treat your company as dormant and that you don’t have to pay corporation tax or file company tax returns. However, you must continue to file confirmation statements and accounts with Companies House. If your company qualifies as ‘small’, you can file dormant company accounts. A company is regarded as dormant by Companies House if there are no significant financial transactions in the year. Filing fees paid to Companies House, penalties for late filing of accounts or money paid for shares when the company was incorporated do not count as significant transactions.
PAGE 4 Relief for post-cessation expenses The end of a business will not necessarily mean that no further expenses are incurred. Where expenses are incurred after the business has ceased, tax relief may be available. Allowable post-cessation expenses An expense will be an allowable post-cessation expense if: ·the business has ceased; and ·the expense would have been deductible in calculating the trading profits had it been incurred prior to cessation. This means that the ‘wholly and exclusively’ test must be met and, unless the cash basis is used and the expense is a capital expense for which a deduction is allowed under the cash basis, revenue in nature. If the expense only partially relates to the business, a deduction is available for the business portion if that can be determined. If apportionment is not possible, no deduction is forthcoming. Relief is not available for expenses that relate to the cessation itself. Examples of post-cessation expenses include the cost of remedying defective work and associated legal and professional costs and the cost of collecting debts relating to the trade. Method of relief There are four ways in which a post-cessation expense can be relieved: ·as a deduction from post-cessation receipts; ·as a loss set against total income; ·as a loss deducted from chargeable gains; or ·against future post-cessation receipts. Relief is given in the above order. Method 1 – deduction from post-cessation receipts Where there are post-cessation receipts in the same period from the same trade, relief for allowable post-cessation expenses must be given as a deduction from those receipts before considering other methods of relief. Method 2 – against total income Where there are no post-cessation receipts in the same period, if the post-cessation expenses are incurred by someone subject to income tax (i.e., by an unincorporated business rather than by a company), CONTINUED ON PAGE 5
PAGE 5 the post-cessation expenses can be set against the total income of the same tax year. Method 3 – against capital gains To the extent that the post-cessation expenses exceed the individual’s total income, they can be set against any chargeable gains of the same tax year. Method 4 – against future post-cessation receipts If it is not possible to relieve the post-cessation receipts under methods 1 to 3, they can be carried forward and set against any future post-cessation receipts from the same trade. Post-cessation expenses incurred by persons subject to income tax cannot be set against bad or doubtful debts paid after cessation or against a trading receipt that relates to post-cessation expenditure. Post-cessation receipts Receipts received after the business ceased are taxable if they would have been taxable had they been received when the business was trading. An election can be made to carry back receipts received within six years of cessation to the date of cessation. Where such an election is made, the receipts are treated as if they were received on the date of cessation.
PAGE 6 Beware of diverting dividends to minor children to fund education Owners of personal and family companies frequently pay themselves a small salary and extract further profits as dividends. To utilise the unused personal and dividend allowances of other family members, an alphabet share structure (whereby each shareholder has their own class of shares, e.g. A ordinary shares, B ordinary shares, etc.) provides the flexibility to tailor dividend payments to the circumstances of the shareholder. Minor children also benefit from a personal allowance (set at £12,570 for 2023/24) and a dividend allowance (set at £1,000 for 2023/24). On the face of it, it can be beneficial to pay dividends to minor children to utilise their allowances. However, where shares are gifted by a parent to a child, the associated dividends are treated for tax purposes as dividend income of the parent rather than the child where they exceed £100 a year. HMRC have recently become aware of a dividend diversion scheme which is marketed as a tax planning option to fund education fees. HMRC are of the view that the arrangements do not work. The scheme The scheme in question seeks to avoid tax by allowing the director shareholders to divert dividend income from themselves to their minor children. In a bid to avoid being caught by the settlements legislation, the arrangement works as follows. 1. A company issues a new class of shares which usually entitles the owner of the shares to certain dividends and voting rights. 2. A person other than the company owner, such as a grandparent of the minor child or a sibling of the company owner, purchases the new shares for an amount significantly below their market value. 3. That person gifts the shares to a trust or declares a trust over the shares for the benefit of the company owner’s children. 4. The purchaser of the new shares or the company owner votes for a substantial dividend payment in respect of the new class of shares. 5. The dividend is paid to the trustees of the trust. 6. As beneficiaries of the trust, the company owner’s children are entitled to the dividend. HMRC are of the view that the arrangements are caught by the settlements legislation and do not work. The effect of the arrangements is to divert dividend income from the company owner to his/her minor children and as such the income will be taxed as that of the company owner rather than as that of the minor child. Similar arrangements may also fall foul of the settlements legislation.
PAGE 7 Tax and influencers Earlier this year, HMRC sent ‘nudge’ letters to social influencers who they suspect may not have declared the tax that they owe. They have also cracked down on gifts provided to influencers in return for promoting brands. Social media influencers and content creators, including those running blogs, may receive payments in cash. This may be in the form of sponsorship. They may also receive gifts in return for promoting a band. Many are unaware that this counts as income on which they must pay tax. Normal trading rules apply The first point to note is that there are no special tax rules for online traders, influencers and content creators – normal tax rules apply. Consequently, where they have trading income in excess of the £1,000 trading allowance they must declare it to HMRC. Anyone who is not already registered for Self Assessment must do so. This can be done online on the Gov.uk website. Income tax will be payable on profits to the extent that they are not sheltered by the personal allowance. As with other traders, influencers and content creators can opt to deduct the £1,000 trading allowance to arrive at their taxable profit where this is beneficial rather than actual costs. This will be the case where costs are less than £1,000. Class 2 and Class 4 National Insurance are also payable once profits exceed £12,570. Gifts Many influencers receive gifts from brands. This may take various forms. The brand may simply send a gift to an influencer with a high number of followers as a goodwill gesture in the hope that they will promote it. This is in the nature of a business gift in that it is voluntary without any expectation of anything in return. A brand may also gift a product to an influencer in return for the influencer promoting that brand or advertising that item. The influencer may be expected to provide a minimum number of posts including affiliated links to the brand’s site. HMRC do not consider gifts of this nature to be simple business gifts as something is expected in return. Rather, the ‘gift’ constitutes non-monetary consideration for the promotion of the brand’s business or for advertising a specific product. This is the case even if there is no formal contract between the brand and the influencer; HMRC consider there to be an implied contract representing a barter transaction. Influencers and content creators who receive gifts in this way must pay tax on those gifts. The gift is valued at the amount for which the influencer could sell it rather than its retail value.
PAGE 8 TAX DIARY OCTOBER 2023 1 October 2023 – Due date for Corporation Tax due for the year ended 31 December 2022. 19 October 2023 – PAYE and NIC deductions due for month ended 5 October 2023. (If you pay your tax electronically the due date is 22 October 2023.) 19 October 2023 – Filing deadline for the CIS300 monthly return for the month ended 5 October 2023. 19 October 2023 – CIS tax deducted for the month ended 5 October 2023 is payable by today. 31 October 2023 – Latest date you can file a paper version of your 2022-23 self-assessment tax return. For further information on any of the stories in this month’s newsletter, or for any other matter that Compass Accountants can assist you with, please contact us on 01329 844145 or contact@compassaccountants.co.uk To subscribe to the newsletter, so that each edition is delivered to your inbox, go to www.compassaccountants.co.uk and add your contact details. Compass Accountants, Venture House, The Tanneries, East Street, Titchfield Hampshire. PO14 4AR
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