Neg claim

Making a negligible value claim

Where assets that have become worthless, it may be possible to make a negligible value claim, allowing a loss to be realised which can be set against chargeable gains to reduce the capital gains tax liability. A negligible value claim can be made either on the self-assessment tax return or in writing to HMRC.

Shares of negligible value

Where the claim is for company shares and securities and the company is in liquidation, the following information must be given to HMRC:

  • a statement of affairs for the company and any subsidiaries;
  • a letter from the liquidator or receiver showing whether any return will be made to the shareholders;
  • details of how this decision was reached (for example, a balance sheet where liabilities are significantly greater than assets); and
  • evidence that no recovery or rescue is likely (for example, a statement that the company has ceased trading).

If a negligible value claim is being made for a company that is not in liquidation or receivership, comprehensive evidence to support the claim that the shares are of negligible value should be provided.

Where the shares are unquoted, HMRC will generally accept that the shares are of negligible value where all the following conditions are met at the date of the claim:

  • the company is registered in the UK; 
  • the company is not registered as a PLC;
  • there is capital loss arising from the deemed disposal of shares following the negligible value claim;
  • the company was in liquidation and insolvent or had ceased trading and had no assets.

HMRC publish a list of quoted shares and securities that they accept as being of negligible value. 

Example

Anna purchased 1,000 shares in an unquoted company for £10 each. On 1 May 2021 the company goes into liquidation. Anna successfully makes a negligible value claim, realising a loss of £10,000 which she can set against capital gains in the same or later tax years.

Please get in touch here, if you have any questions.

co directors nic

National insurance for company directors

Special rules apply to company directors when it comes to calculating their Class 1 National Insurance liabilities. 

Why the rules

Directors, particularly of personal and family companies, can control how and when they are paid and, in the absence of special rules, would be able to reduce their Class 1 National Insurance liability by manipulating the earnings period rules. The rules circumvent this.

Annual earnings period

Company directors have an annual earnings period for National Insurance regardless of their actual pay frequency. This means that if they do not opt to apply the alternative arrangements, their National Insurance liability is calculated cumulatively by reference to the annual thresholds. 

For 2021/22 these are as follows:

 Annual threshold
Lower earnings limit£6,240
Primary threshold£9,568
Upper earnings limit£50,270

Example

A director is paid £8,000 a month. In month 1, he pays no National Insurance as his earnings are below the annual primary threshold of £9,568.

In month 2, his earnings for the year to date are £16,000. By applying the annual thresholds, his total liability on his earnings to date of £16,000 is £771.84 (12% (£16,000 – £9,568)). As he paid no National Insurance in month, his liability for month 2 is £771.84.

For months 3 to 6 inclusive, his earnings for the year to date fall between £9,568 and £50,270. Consequently, he pays employee’s National Insurance at 12% on his earnings for the month of £8,000, equal to £960 each month.

In month 7, his earnings for the year to date are £56,000 (7 months @ £8,000 a month), on which total contribution of £4,998.84 (12% (£50,270- £9,568)) + 2% (£56,000 – £50,270)) are due. He has already paid £4,611.84 (£771.84 + (4 x £960)), leaving £387 due for the month.

As his earnings for the year have now exceeded the upper earnings limit, he will pay National Insurance at the rate of 2% of all future payments – a liability of £160 per month.

Applying the annual earnings period rules means that the contribution liability falls unevenly throughout the year. The liability for the year is £5,798.60 ((12% (£50,270 – £9,568) + ((2% (£96,000 – £50,270))).

Alternative arrangements

As seen in the example above, calculating the liability by reference to the annual thresholds on a cumulative basis each time the director is paid means that their pay is uneven throughout the year. To overcome this, the director can opt for their National Insurance to be calculated throughout the year on their earnings for each earnings period using the relevant thresholds for the earnings period, as for employees who are not directors, with an annual recalculation on an annual basis at the end of the year.

If this basis is adopted, the director in the above example would pay National Insurance of £483.26 (12% (£4,189 – £797)) + (2% (£8,000 – £4,189))) each month for months 1 to 11, with a final payment of £482.74 in month 12.

Over the course of the year, the annual liability (£5,798.60) is the same which-ever method is used, but collected differently.

Directors can choose the method that suits them best.

Please get in touch here, if you have any questions.

Covid-19 related ben

Amend your PSA for Covid-19 related benefits

A PAYE Settlement Agreement (PSA) enables an employer to meet the tax on certain benefits and expenses on the employee’s behalf. This can be useful to preserve the goodwill nature of a benefit. 

Not all benefits are suitable for inclusion within a PSA. To qualify a benefit must fall into one of the following categories:

  • the benefit is minor; 
  • the benefit is provided irregularly; or
  • the benefit is provided in circumstances where it is impractical to apply PAYE or to apportion the value of a shared benefit.

A PSA can be used, for example, to meet the tax liability on the provision of an annual party that falls outside the associated tax exemption. Benefits that are exempt from tax do not need to be included.

The tax and National Insurance payable on items included within a PSA for 2020/21 must be paid by 22 October 2021 where payment is made electronically, and by 19 October 2021 otherwise.

An enduring agreement

Once as PSA has been set up, it remains in place until cancelled or amended by the employer or by HMRC. Existing PSAs should be reviewed each year to ensure that they remain valid.

Amending the PSA 

If a PSA needs to be altered, this must be done by 6 July following the end of the tax year to which it relates. 

The Covid-19 pandemic changed the way in which employees worked and may have changed the mix of benefits that were provided. Where a PSA needs to be amended in light to take account of Coronavirus-related benefits provided in the 2020/21 tax year, this must be done by 6 July 2021. 

Normally, HMRC would issue a new P626 (the PSA) when a PSA is amended. However, where amendments to the PSA relate solely to Covid-19 changes, rather than issuing a new P626, they will instead issue an appendix to the existing PSA. 

Covid-19 exemptions

To remove the tax charge that would otherwise arise, a number of limited-time exemptions have been introduced in respect of Coronavirus-related benefits. These include an exemption for the provision of Coronavirus antigen tests, and also any reimbursement of the cost of the test where this is initially met by the employee.

Where employees have worked at home during the Covid-19 pandemic and have bought equipment to enable them to do so, any reimbursement by the employer is also tax-free, as long as the provision would fall within the exemption for accommodation, services and supplies if provided directly by the employer.

Coronavirus-related benefits that fall within the time-limited exemptions do not need to be included within a PSA. However, consideration may be given to adding any non-exempt benefits made available to employees during the pandemic to the PSA (for example, antibody tests), as long as they meet the qualifying conditions for inclusion.

A new PSA

If a PSA is not already in place, should an employer wish to set one up to deal with taxable benefits provided as a result of the Covid-19 pandemic, if the PSA is to have effect for 2020/21, it must be agreed with HMRC by 6 July 2021.

Please get in touch here, if you have any questions.

extracting profits

Extracting profits from a property company

Running a property business through a limited company rather than as an unincorporated business may be an attractive proposition; at 19% the rate of corporation tax is lower than the basic rate of income tax and interest and financing costs are fully deductible in computing taxable profits. However, the tax bill on the company is not the end of the story – if profits are required outside the company, they will need to be extracted, and this may come at a further tax cost.

Take a salary

If your personal allowance has not been utilised elsewhere, it can be tax efficient to take a small salary. As long as the salary is at least equal to the lower earnings limit (set at £6,240 for 2021/22), paying a salary will ensure that the year is a qualifying year for state pension and contributory benefits purposes. 

The optimal salary will depend on whether the employment allowance is available to shelter employer’s National Insurance contributions. Where the allowance is not available, as will be the case if the company has one only one employee who is also a director, the optimal salary is equal to the primary threshold of £9,568. If the employment allowance is available, it is tax efficient to pay a higher salary equal to the personal allowance of £12,570.

Declare dividends

Once a salary at the optimal level has been paid, it is more tax efficient to take further profits as dividends, than to pay a higher salary. The dividends will be tax-free to the extent that they are covered by any unused personal allowance and the dividend allowance, which is set at £2,000 for 2021/22. Once the allowances have been used up, dividends are taxed at 7.5%, 32.5% and 38.1% where they fall, respectively, in the basic rate, higher rate and additional rate bands.

There are some rules which govern the payment of dividends. They can only be paid out of retained profits (on which corporation tax has already been paid) and must be paid in accordance with shareholdings (although the use of an alphabet share structure allows for flexibility). 

Other options

Other options for extracting profits from the property company include the provision of benefits in kind, which can be tax efficient where the benefit is exempt from tax and National Insurance, the payment of rent if the business is run from home and making pension contributions on the director’s behalf.

Please get in touch here, if you have any questions.

pre-letting exps

Obtain relief for pre-letting expenses

When starting a new property rental period there will usually be a preparatory phase during which expenses will be incurred. To what extent is relief available for expenses incurred before the property is let?

Start of the property rental business

A property rental business usually starts when the letting first commences. Once the letting has commenced, relief is available for expenses in accordance with the usual rules to the extent that the expense is incurred wholly and exclusively for the purposes of the business and is revenue in nature. Relief for capital expenditure is given in accordance with the relevant rules depending on whether the accounts are prepared under the cash basis or the accruals basis.

The start date is important as it provides the dividing line between pre-commencement expenditure and that incurred in the running of the business.

Relief for pre-commencement expenditure

A landlord may be able to claim relief for expenses incurred for the purposes of a property rental business before the start of that business. Relief is only available if:

  1. The expenditure is incurred within a period of seven years before the date on which the property rental business started.
  2. The expenditure is not otherwise allowable for tax purposes.
  3. The expenditure would have been allowed as a deduction if it had been incurred after the rental business started.

Thus, to be deductible, the expenditure must be revenue in nature and incurred wholly and exclusively for the purposes of the property rental business.

Where relief is available, the qualifying pre-commencement expenditure is treated as if it was incurred on the day on which the property rental business commenced and is deductible in computing the profits for the first accounting period.

Example

Jaz purchases an investment property in January 2021 which he plans to let out. In preparing to let the property, he incurs administration expenses of £1,200 and undertakes repairs costing £3,000. The property is first let on 28 June 2021. Jaz claims relief for the pre-commencement expenses of £4,200, which are treated as if they had been incurred on 28 June 2021 – the date on which the property rental business commenced.

Please get in touch here, if you have any questions.

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Extracting funds with no retained profit

If you operate through a limited company, for example as a personal or family company, you will need to extract funds from your company in order to use them to meet your personal bills. There are various ways of doing this. However, a popular and tax efficient strategy is to take a small salary which is at least equal to the lower earnings limit (set at £6,240 or 2021/22) to ensure that the year is a qualifying year for state pension and contributory benefits purposes, and to extract further profits as dividends. 

However, this strategy requires the company to have sufficient retained profits from which to pay a dividend. If the company has been adversely affected by the Covid-19 pandemic, it may have used up any reserves that it had. As dividends must be paid from retained profits, if there are none, it is not possible to pay a dividend.

Are there other options for extracting funds to meet living expenses?

  1. Pay additional salary or bonus

Unlike a dividend, a salary or bonus can be paid even if doing so creates a loss – it does not have to be paid from profits. However, this will not be tax efficient once the salary exceeds the optimal level due to the National Insurance hit and the higher income tax rates applicable to salary payments.

  • Take a director’s loan

If it is expected that the company will return to profitability, taking a director’s loan can be an attractive option. Depending when in the accounting period a loan is taken, a director can benefit from a loan of up to £10,000 for up to 21 months free of tax and National Insurance. If the company has returned to profitability within nine months of the year end, a dividend can be declared to clear the loan in time to prevent a section 455 tax charge from arising. If the account is overdrawn at the corporation tax due date nine months and one day after the year end, a section 455 tax charge of 32.5% of the outstanding amount must be paid by the company (although this will be repaid after the corporation tax due date for the accounting period in which the loan balance is cleared).

  • Put personal bills through the director’s loan account

Another option is for the company to pay the bills on the director’s behalf and to charge them to the director’s loan account. Again, if the company has sufficient profits to clear the outstanding balance within nine months of the year end, a dividend can be declared to prevent a section 455 tax charge from arising. A benefit in kind tax charge (and a Class 1A National Insurance liability on the company) will also arise if the outstanding balance is more than £10,000 at any point in the tax year.

  • Provide benefits in kind

Use can be made of various tax exemptions, such as those for trivial benefits and mobile phones, to provide certain benefits in kind in a tax-free fashion.

  • Pay rent

If the company is run from the director’s home, the company can pay rent to the director for the office space. This should be at a commercial rate, and the director will pay tax on the rental income. However, there is no National Insurance to worry about and the rent can be deducted in computing the company’s profits, even if this creates a loss.

As a bonus, if the extraction policy creates a loss, it may be possible to carry the loss back to generate a much-needed tax repayment.

Please get in touch here, if you have any questions.

dividend waivers

Dividend waivers

Dividends are paid at the same rate for each category of share according to the number of shares held. However, such inflexibility could mean the distribution of profits not being made in the most tax efficient manner or produce difficulties for a shareholder who does not want or need the payment — a dividend waiver may offer the solution.

Tax inefficiency

Examples of tax inefficiency can arise where one of the shareholders is a higher rate taxpayer and the others are either basic rate taxpayers or non-taxpayers or if by taking the dividend the shareholder is affected by the higher income charge on Child Benefit. A shareholder may also prefer not to take a dividend if Child Tax Credit is being claimed as inclusion in the calculation may take his or her total income over the CTC limit. Shareholders of smaller companies in particular may choose to waive their rights to dividends in order to retain money in the business. 

In a dividend waiver the shareholder voluntarily waives (gives up) entitlement to their share of the dividend which then allows the distributable profits to be divided between the remaining shareholders in the proportion to their holdings.The other shareholders still receive their proportion of distributable profits in the proportion of each of their respective holdings but the shareholder who has waived his dividend receives nothing — his or her share of the profit remaining in the company’s bank account.

The waiver can refer to a single dividend or a series of dividends declared during a specified period of time. An interim dividend must be waived before being paid, and a final dividend waived before being approved as a waiver afterwards could be construed as being a ‘settlement’. The settlements rules are anti-avoidance provisions and apply where the settlor (i.e. the person gifting an asset) retains an interest in the asset given away and the settlor or the settlor’s spouse benefits from the gifted asset, an element of ‘bounty’ (i.e. no consideration) being needed for the provisions to apply. The transfer could also be deemed to be a transfer of value for inheritance tax purposes and even ‘value-shifting’ for capital gains tax purposes.

HMRC challenge

Dividend waivers that have been challenged by HMRC in the past have invariably been as the result of payments made in situations where the waivers have meant the increase in dividends for a company owner’s spouse (or children or the trustees of a children’s settlement). In practice, however, HMRC are only likely to make the ‘settlement’ point where the waiver is considered to create a tax advantage. 

HMRC’s interest is more likely to be aroused if the level of retained profits in the company is insufficient to allow the same rate of dividend to be paid on all issued share capital or where there is evidence which suggests that the same rate could not have been paid on all the issued shares in the absence of the waiver. To alleviate the possibility of HMRC interest it is suggested that the deed should state that the waiver has been made to allow the company to retain funds for a specific purpose, thus emphasising that there is some commercial reason for the waiver. 

Use them sparingly

Dividend waivers should be used sparingly – don’t waive every year. HMRC will look more closely at arrangements which are repeated, the practical effect of which reduces the overall tax payable. In addition, waivers should not last for more than twelve months as use of a long-term waiver could reduce the value of that shareholding, and potentially increase the value of those shareholdings that are able to enjoy higher dividends as a result. If it is envisaged that waivers will be required on a more regular basis, then consideration should be made to the creation of Alphabet shares. A waiver must be a formal deed and must be signed, dated, witnessed and sent to the company. The drafting of a deed is a reserved activity, which only a member of The Law Society or the Bar can conduct.

Please get in touch here, if you have any questions.