Pension contributions – Are they still worth it?

Although there has been a tremendous amount of bad press with regard to pension schemes in recent months we remain convinced that contributing to a registered pension scheme still makes sound financial sense, particularly if you can leverage your pension assets to build a really substantial pension…..

The shock attack on tax relief for pension contributions in recent years and the recent bad press about pension charges has made many people question whether such pensions are still a worthwhile investment. This view is compounded by the poor returns from investment funds of late.

Recent attacks on aggressive tax avoidance

There have been wide spread reporting in the press with regard to the “morally repugnant” routes of tax avoidance, pensions however are a legitimate and authorised means of reducing your tax bill and the contributions are deducted from your highest rates of tax.

Furthermore the generous carry forward allowances allow for creative tax planning both for individuals and employees.

The three year carry forward rule

If you save more than £50,000 in your pension you still might not have any annual allowance charge to pay. You can carry forward any annual allowance that you have not used from the previous three tax years to the current tax year. The amount of the unused annual allowance can then be added to this year’s annual allowance. This gives you a higher amount of available annual allowance.

You must have been a member of a registered pension scheme to have an unused annual allowance to carry forward from an earlier year.

If your pension saving for the tax year is less than your available annual allowance there will be no annual allowance tax charge.

If your pension saving is more than your available annual allowance you will have to pay the annual allowance charge – but only on the amount over your available annual allowance. You will not need to contact HM Revenue & Customs (HMRC) to tell us that you have unused annual allowance that you want to use to set off against an annual allowance charge for a later year. This doesn’t need to be included on your Self Assessment tax return.

There is a strict order in which you use up your annual allowance. You use the annual allowance in the current tax year first. You then use your unused annual allowance from earlier years, using the earliest tax year first.

If you have been a member of a registered pension scheme but, in one particular year, have not made pension savings for that year then you can carry forward an annual allowance of £50,000 from that year. If however, you have not been saving in a registered pension scheme then you will not have unused annual allowance to carry forward from that year.

However with all of the examples provided, as in reality, you can only obtain tax savings against your actual earnings in any one financial year. So it would be pointless to roll forward your allowances for any amounts above your earnings limit.

Example

Brian has total pension savings of £65,000 for the 2012-13 tax year.

In the previous three tax years his pension savings were:
2011-12 – £35,000
2010-11 – £30,000
2009-10 – £25,000

If the annual allowance for each of those years was £50,000 Brian has unused annual allowance of £25,000, £20,000 and £15,000 from those three tax years:
2011-12 – £15,000
2010-11 – £20,000
2009-10 – £25,000
2010-11 – £60,000

This means Brian has £60,000 unused annual allowance to carry forward.

Together with the £50,000 annual allowance for the 2011-12 tax year. Brian’s can have pension saving of £110,000 without the annual allowance charge being due.

Brian’s pension saving for the 2011-12 tax year is less than his available annual allowance. He will not have to pay the annual allowance charge.

 Work ’til you drop

Any financial planner worth his salt will consider the client’s entire lifestyle before advising on any long-term investment decision, not just the client’s immediate cash position and expected date of retirement. The client will be asked to provide details of all his assets, income and liabilities, together with a view of his personal and business objectives. For example: the client may see himself working in his own business ‘until he drops’. All this data can be fed into a sophisticated model that can forecast the client’s financial needs well into the future, up to age 100 if necessary. This financial modelling will also highlight where cash shortfalls are likely to occur.

The financial planner will suggest a number of ‘what-if’ scenarios to meet these shortfalls, some of which may involve pension contributions. The total solution will include a review of the client’s current savings vehicles to reduce any unnecessary charges, and increase performance if possible.

For example, there is normally a good case for ensuring that ISA contributions are paid up to the annual allowance. Remember that the ISA contribution limits have increased to £11,280 from 6 April 2012.

If there is a shortfall

The individual may not be able to afford the increased level of monthly pension contributions that are needed to meet the predicted cash shortfall. If the individual has a number of years before retirement it may be possible to increase the value of the overall pension by intervening at an early stage. As a first step it is often helpful to streamline any existing pension arrangements, perhaps by amalgamating funds with a single provider.

Where the individual is a business owner, a flexible self-invested pension scheme can be established under the SIPP or SASS rules. Funds from a variety of existing pension schemes may be able to be transferred in to the SIPP or SASS, which may provide for savings on overall charges and hopefully the total consolidated funds will be managed far more efficiently.

Loans to employer

There is the possibility of a pension fund such as a SASS arrangement to make a loan to the employer – up to 50% of the value of the fund to the sponsoring employer company, if all of the following conditions apply:

  • the loan is fully secured on an acceptable unencumbered asset;
  • the period of the loan does not exceed five years;
  • interest and capital is repaid evenly at one-year or shorter intervals; and
  • the interest rate must be commercial (as a guide the interest rates should at least be 1% above the average base lending rates of the main high-street banks).

The scheme trustees cannot lend directly to the scheme members or to any entity connected with the member that is not the sponsoring employer.

Funding a property purchase

A SIPP or SASS pension fund can purchase a commercial property to be used by the business, or as a pure investment. The trustees can borrow 50% of the fund’s value to purchase a property, and they can combine with up to four other co-owners to purchase a larger property. Such a property could be sub-let to provide an additional income stream for the pension fund.

If you are familiar with my planning then you will be aware of how beneficial such an arrangement can be if carried out in conjunction with astute planning, it combines two strategies I favour for wealth creation, namely leverage and OPM (other people’s money). So having established a base pension one can create a larger fund and then other people ( the tenants of the property will make payments that reduce the debt created by the loan over time – leaving you with a much bigger pension fund).

When is retirement?

These days many people continue to work to some extent during their retirement, perhaps on a voluntary basis to keep physically and mentally active. This merger of work-life and retirement is reflected in the pension rules, as individuals are permitted to start to withdraw monies from their pension from age 55*, or a later age specified in the pension scheme rules, whether they have ceased working or not.

What does drawing pension benefits mean?

When an individual starts to access his pension benefits he can opt to receive a cash-free lump sum of up to 25% of his pension fund assets, but can defer the payment of a regular pension until he needs that income. This tax-free pension commencement lump sum can place a significant sum in the member’s hands immediately reaching age 55. However he may decide to delay taking pension drawdown regular payments until he has effectively retired from work as otherwise he will be taxed both on his earnings and pension receipts.

Common pension mistakes

No investment should be made without considering the charges to be levied, the growth prospects and, crucially, the affordability. Pension contributions are no different, but these aspects are often overlooked. When setting up a regular pension contribution, beware of the following:

  • The pension provider may deduct high initial commissions.
  • We do not advise business owners to make monthly contributions. It is far better for a business owner to time his payments just prior to his financial or trading year-end and may be easier for the business to manage.
  • Review the range and growth performance of the funds the pension provider offers.

Conclusion

In spite of some bad press recently, pension contributions are still a very tax-efficient way of providing a future income stream. The investments within the fund are not taxed and tax relief is received on contributions, at varying rates depending on who makes the contributions.

However for business owners particularly pensions can be a boon as they can be designed to be a dynamic planning tool both for the business and for wealth creation.

So yes, pension contributions are still worth it — as long as you take the right advice.

This article provides a general review and its purpose is to inform, not to recommend any specific investment or course of action, you should always seek professional advice.

The value of investments and pensions is not guaranteed and on maturity or encashment, you may not get back the full amount of money invested.

EXAMPLE

Bruce is aged 65 and a director of Strictly Ltd, which makes a pension contribution of £100,000 on 1 March 2010 into its occupational scheme on Bruce’s behalf.

Strictly Ltd pays corporation tax at a marginal rate of 26%, so the net cost of the pension contribution after corporation tax relief is £74,000 (£100,000 — 26% x £100,000). Bruce is old enough to start drawing his pension immediately, so withdraws a tax-free lump sum of £25,000.

Bruce can also start to take a regular pension of £4,800 a year. Since he is still working and paying tax at 40%, his net pension income is £2,880 (60% x £4,800). However wisely Bruce decides to delay taking regular pension withdrawals until he formally retires from the company as the tax deductions from regular pension payments may then be lower.

Ray Best can help you protect your financial future. To find out more, simply click here!

It’s easy to get distracted in business, so how can you avoid distractions AND get your business to run on auto pilot?

One thing all business owners have in common, large or small, is the need to produce a business plan, so why is it that they don’t?

Without a plan, it’s easy to get distracted and fail to meet your business turnover targets, thereby losing thousands of pounds of revenue every month, these monthly shortfalls compound over the year with disastrous consequences for your business.

So I am going to let you know how you can avoid these unnecessary financial shortfalls by harnessing a very powerful computer system. What is more I will tell you how to tap into the hidden power of this computer system to subliminally run your business on auto-pilot.

The information that I provide about the system you can use will not cost you anything but has the potential to make you thousands of pounds of additional revenue every month and tens thousands every year.

I know someone who is a living testament to the success of the system as just over twelve years ago he lost everything due to entering into a business relationship with a person who was less than honest. He took two years off work fighting a court case and almost had a nervous breakdown, he deserved one as he had worked very hard to achieve it!

Then one day he sat down and wrote the system out on the back of a large white envelope. He then forgot about it for a few days and then picked it up again. For some reason he re-wrote the system again but for some uncanny reason he was now entering markedly different figures from before. He stuffed them under his pillow and literally slept on those figures, and when he awoke he discovered he had more energy than previously.

So things started turning around, instead of a constant flow of bad news, opportunities presented themselves, he started earning again – although a lot more than before all of his troubles. It was all due to the system he’d stumbled upon.

Before I tell you about the system, let me explain how easy it is for business owners to get distracted, part of the problem is the extent of the influences surrounding business owners. Influences that are often well meaning but impact on both the time and decision.

The other is procrastination, without a plan or a system it is easy to be doing things that are not core to your skills or core to the business achieving its goals.

Wouldn’t it be nice to be able to avoid such distractions and procrastination – if only life were so simple – but it is!

I want to help you develop your plan for your business but by that I do not mean a conventional highly detailed business plan. The sort that most entrepreneurs would rather have their teeth pulled than get involved with. The sort of plan that has no connection with your private life or aspirations, the sort that tends to make you brain dead in one hour!

I am not saying that the system is instant, push-button stuff.  The first two or three times you run the system it’s quite hard and it does take time and energy. However once you have adapted to system as part of your business life, then it becomes easier and you will find the experience liberating. Because it does not follow the normal conventions for “business planning” and is different it may prove easy to ignore for some people, that’s a shame because it could do wonders for their business and personal lives.

Why you should avoid conventional business planning and tune into the power of the system.

Business planning should be focused entirely on the business, shouldn’t it? You get so far with a conventional business plan and then you call your accountant in to assist you, and then your business adviser. All of this takes time, your time. In addition you are engaging with other parties who are not necessarily entrepreneurial and do not have your interest in improving your lot. It might prove better to hand them a brief and then delegate all of that deflating soul destroying detail to them, so how do you provide a basis for them to wrap the detail around?

The problem with most conventional business planning is that there is a disconnect between your personal goals and aspirations and the corporate entity that is your business.

Having eschewed detail so far, to engage with the system and make it work, we now need to embrace detail and write down specific information with regard to your long term dreams and aspirations. Plus write down the consequences for you of not reaching your long term goals.

If you are in any doubt with regard to the power of “proper” goal setting then you have not been doing it properly. Goal setting is key to success, as Brian Tracey would say “all else is commentary”.

Then you need to work out your annual goals or targets by working out annual increments that will eventually mean that you will realise your long term goals. At the very least your plan should include an annual repayment of 8% of your debts plus an annual accumulation or increase of 8% in assets.

Remember that your plans should not only include financial or material goals but also social and spiritual goals.

If you have not engaged in in-depth goal setting on a proper basis before then you may be surprised at the time you have to set aside for this. At least one day initially but then you may find that the following week you are constantly re-writing this part of the system.

This process is an essential part of the system, you will recall that I mentioned linking to a very powerful computer system – I was referring of course to the brain – we only use about 10% of the capacity of the brain – but the process I am describing will help you to tune in to part of the brain to a higher degree.

You will be wondering why we are making so much emphasis on your personal goal planning, that is because you need to get this to a level that is both meaningful and consequential before you attempt to formulate any plans for the business.

Once we have completed this stage, we now need to understand how to link this initial stage of the system to formulating a SIMPLE but dynamic business plan that will enable you to run your business on auto-pilot. Plus a lot more techniques that you can apply to make the system work at maximum effectiveness.

 I will be showing you how over my following blogs……

Ray Best can help you protect your financial future. To find out more, simply click here!

Directors’ powers and financial liabilities

Being a director has its rewards and its responsibilities.

Whether you are appointed to the board of the company you work for or from establishing a new business yourself, taking on the role of director gives you a sense of achievement.

However the role of director should not be accepted lightly. The introduction of the Companies Act 2006 has brought about a number of changes and pitfalls for directors which you must be aware of.

1. You have a duty to act within the company’s powers – A director must always act in a way allowed by the company’s articles of association and its decisions.

2. You have a duty to promote the success of the company – A director must act in the way that will promote the success of the company for the benefit of the shareholders. When doing this, a director must consider the following:

  • the long term consequences of any decision
  • the interests of the company’s employees
  • the need to foster the company’s business relationships with suppliers, customers and others
  • the impact of the company’s operations on the community and the environment
  • the desirability of the company maintaining a reputation for high standards of business conduct
  • the need to act fairly between the members (shareholders) of the company

This means that making the most money for shareholders (profits) should not be the only concern of a director; he must also consider the wider effects of how the money is generated. The advice of Cousins Business Law solicitors is that the above checklist should be gone through whenever making board decisions. This ensures all the directors can leave an audit trail to show they have considered the impact of every decision upon the business.

3. The duty to exercise independent judgment – This may arise, for example, if a bank or major funder wants you to act in a particular way. This duty can, however, be modified by agreement or by changing the company’s articles of association.

4. The duty to exercise reasonable care, skill and diligence – A director will be judged according to what would be reasonable in his role, as well as any particular skills or knowledge he has. For example, a financial director would be held more culpable for financial errors than a general director. But all directors must perform to a minimum reasonable standard. For example, a sales director will not be excused with saying that he left the finances to the financial director to deal with and he had no idea about the company’s finances. It is his duty to find out.

5. The duty to avoid conflicts of interest – A director must avoid any situation where he has or could possibly have a conflict of his own interests with those of the company. He cannot exploit any property, information or opportunity that comes his way because of company activity. For example, if in the course of running a company a director discovered a business opportunity he cannot exploit it himself or by setting up another company, even if the first company did not take advantage of it. There are a few exceptions to this, the most important being that the board of directors can authorise a director to exploit a particular opportunity even if there is a conflict.

6. The duty not to accept benefits from third parties – This prevents taking bribes but may also include benefits from being a director, shareholder, employee or advisor to a competing company.

7. The duty to declare interests in a proposed transaction or arrangement with the company – A director, or shadow director, must declare the nature and extent of any interest he has in a proposed transaction or arrangement to the board of directors, whether he is directly or indirectly interested in it. A director is deemed to always be aware of matters which he ought, reasonably, to be aware of.

This will arise particularly when a director is a shareholder, director, employee or advisor to another organisation or person with whom the company is about to enter into a transaction or arrangement.

The director must make the declaration in writing before the company enters into the transaction. He is to give what is called a “general notice”, which is where he says he has an interest in another organisation or person and is therefore to be taken as being interested in any transaction or arrangement that that organisation or person might make.

8. The duty to declare interests in existing transactions or arrangements – A director should declare an interest before the company enters into a transaction. This duty is primarily aimed at new directors, who should declare their interests when they are appointed. Clearly, if you have not already declared an interest when appointed, you should do so now.

Common law fiduciary duties remain unaffected by the new Act and there is some overlap between them and the duties in the Act, e.g. to act in the company’s best interests, to use company property for legitimate company interests only, to act in accordance with the company’s constitution, to avoid conflicts of interest and to avoid making a secret profit.

Insolvency duties remain unaffected too, such as the duties to the company’s creditors when a company becomes technically insolvent and the duty to put a company into liquidation if an insolvent liquidation cannot reasonably be avoided.

The Sanctions

If you breach these duties, a court can hold you personally liable to pay back to the company any losses that it suffered or any profits that you made.

When Breaches May Come to Light

Generally, breaches of a director’s duties come to light in the following circumstances:

  • when directors fall out with each other or the shareholders
  • when a director leaves
  • when the company is wound up or put into liquidation or administration
  • when the company is sold

Certainly, if you have any concerns and one of these circumstances is about to happen, you should take legal advice to minimise the risk of you having to pay lots of money back to the company.

However, often it’s difficult to predict when something might happen. So the time to consider these duties and to ensure you are compliant is now!

Summary

The role of the company director has, until recently, been defined by case law. The Companies Act 2006 confirms previous case law and requires company directors to act in a way most likely to promote the success of the business.

You must exercise a degree of skill and care. You must:

  • show the skill expected of a person with your knowledge and experience
  • act as a reasonable person would do looking after their own business

You must act in good faith in the interests of the company as a whole. This includes:

  • treating all shareholders equally
  • avoiding conflicts of interest
  • declaring any conflicts of interest
  • not making personal profits at the company’s expense
  • not accepting benefits from third parties

You must obey the law:

  • company law requires you to produce proper accounts and send various documents to Companies House
  • other laws include areas such as health and safety, employment law and tax
  • you may be responsible for the actions of company employees

If in doubt, take professional advice. Acting improperly can lead to fines, disqualification from being a director, personal liability for the company’s debts or a criminal conviction.

However you may be not be aware of how easy it is to fall foul of the law:-

An engineer at Rhone Poulenc Rorer Ltd stepped onto a roof “guarded” by a sign which stated that crawling boards had to be used since the roof was fragile. He ignored the sign and stepped on the roof and fell to his death.

You would have thought that a warning sign was sufficient, apparently not. His widow sued and succeeded in her action against the company.

The court stated that the onus was on the company to protect all workers on its premises and that both practical and physical preventative measures were needed.

There were additional steps that the company could have taken to provide themselves with a valuable defence*.

In another legal case of Pharmed Medicare Private Ltd v Univar, two employees described as “managers” of the firm placed a small number of orders on behalf of the company. Later they placed a much larger order. When there was a dispute over payment for the larger order the other party successfully claimed that the employees had authority since all previous transactions had been ratified by payment by the purchasing company.

I must admit that the ramifications of this particular case shocked me, so I have now taken preventative measures to put in place controls so that our own companies have both expenditure control and bribery prevention strategies in place*.

What about Director’s Liability Insurance?

We understand that insurance companies find selling Director’s Liability Insurance very profitable as they hardly ever pay out, largely due to the small print on their policies. Therefore investing your hard earned cash in such a policy is no guarantee of protection.

How can you best prevent a problem occurring?

To bring yourself up to date, you might consider attending a one day seminar, such as the one offered by Benchmark Training, I recently attended this course myself and found it extremely practical and helpful in bringing me up-to-date with current and anticipated requirements and remedies.* The course was full of practical solutions, along with legal theory and helpful handouts. I must say that the comprehensive and user-friendly handouts containing ‘ready to use’ checklists, procedures and policies (including safety and vehicle folders) were worth their weight in gold. Attendees gained these valuable resources for free.

Final Comment

We recommend ALL directors take steps to update themselves on the recent legislation and their liabilities. The Benchmark Training seminar is a great way of finding out about the latest requirements for directors and to ensure you are compliant with the Companies Act 2006.

If interested in further details please e-mail us for course details and enrollment form.

Ray Best can help you protect your financial future. To find out more, simply click here!

Ring a Ding-Dong – Telephone scams ring wrong numbers for business owners and private organisations?

Channel 4 reported some months ago that international fraudsters are targeting UK businesses with a highly lucrative telephone hacking scam.

This criminal enterprise, run by overseas hackers, uses widely available sophisticated software to infiltrate an organisation’s phone exchange. The software enables them to identify the pass code for any telephone exchange. Often the hackers do not even need to use sophisticated software as many businesses have failed to change the default pass code provided by the supplier of their telephone exchange, these pass codes are familiar to these crooks.

Another tactic used is to simply locate an out of use phone extension and get access to the phone’s voicemail. Most phone systems allow users to dial into their voicemail and then to make work calls while out of the office. Once they’ve hacked into the voicemail, the criminals program the phone to dial an international premium rate number (IPRN). Of course, they own this number and every time it’s dialled the money goes straight into their pocket. With calls costing anywhere up to £10, this can generate substantial amounts of cash.

Target is mainly large organisations

Public bodies such as councils have a large telephone exchange and consequently a large number of phone lines. An example of this was Hambleton District Council in North Yorkshire, who ran up a £30,000 bill from hundreds of unauthorised calls to countries like Ethiopia, Bosnia and Pakistan. Despite the criminality the council was obliged to pay the bill and this means of course that they are short of funds for other services.

Our view is that all business organisations should (as part of their risk assessment of the business) regularly change the pass code into their telephone exchange on a regular basis, or at the very least change the pass code from the default. They may also wish to re-negotiate their contract so that premium rate numbers are excluded by the service provider.

 Another telephone scam targets smaller companies

Every week, businesses are contacted by companies offering advertising space for sale in publications. Most of these companies are genuine, and provide a valuable service. However, there are some rogue companies that use dubious methods to make a significant profit. They do this by duping legitimate businesses into placing advertisements in publications that turn out to be either non-existent or not as described.

Typically, such companies target business owners offering to sell advertising space in publications such as diaries and wall-planners. Often, these companies pose as registered charities or claim that a percentage of the publication’s revenue will be donated to charity – usually a children’s or cancer charity. Many businesses agree to place an advertisement, in the mistaken belief that most of the proceeds will be donated, when in reality any donation is minimal.

The circulation of the publication may prove significantly less than claimed in the sales pitch. So while a publication may be produced, there may be little commercial benefit to the business.

Another tactic involves researching publications in which a business may have advertised before. The scammer will then contact the business posing as the publication’s advertising agency. If during the course of the telephone call the business indicates an interest in placing an ad, they are transferred to another telephone operator. At this stage, the telephone conversation is recorded and the rogue company claims this as ‘evidence’ of an agreement to enter into contract, pressuring businesses into payment.

These rogue advertising businesses may even send you an invoice for advertising services supposedly provided months earlier. Many businesses pay these invoices, in the mistaken belief that they have simply forgotten that they placed the advertisement. In cases where they don’t pay, businesses will have endless phone calls and letters until they relent and make payment.

Many businesses have admitted paying such invoices, simply to end the unwanted calls and letter demands. However, such a move is counter-productive as it marks them as an easy target to these parasites and ripe for a repeat performance.

Our view

It is important for any business to have financial controls in place. We have covered in a previous blog the need for a purchase order book for recording all purchases and for identifying which employee may place orders and up to what level (see also our forthcoming blog on director’s responsibilities). This provides valuable control and prevents misunderstanding or potential loss of money when a rogue invoice arrives.

Ray Best can help you protect your financial future. To find out more, simply click here!

Tax Avoidance with an ethical twist!

A UK Income Tax Saving Scheme that could revitalise the amount of PAYE you pay to HMRC and also revitalise some building projects…

There is an under used tax relief scheme with HMRC blessing that can provide high rate tax payers with a boost and provide jobs in hard pressed areas.

The Business Property Renovation Allowance (BPRA) allows up to 100 percent tax relief on the costs of converting disused buildings for use as commercial premises.

But, as always, there are restrictions:

  • The relief does not apply to the cost of acquisition or extension. Only renovation.
  • A “qualifying” building must be in a disadvantaged area (currently parts of North and Central England, Scotland and Wales – and all of Northern Ireland)
  • The building must have been disused for at least a year
  • It must have last been used for a trade, profession or vocation or as offices

The BPRA scheme was due to end last year, but was extended for a further five years in 2011’s Budget. But take up so far has been surprisingly low. At the time of the Budget, Treasury figures showed that in 2009-10 only 300 companies and unincorporated businesses claimed the allowance, amounting to around £90m total.

The opportunity is significant. Were the government to actively promote the BPRA scheme, and were it to remove some of the current restrictions, then this could really give areas of high unemployment the boost they desperately need.

Background

Business Premises Renovation Allowance (BPRA) was introduced by the Finance Act 2005. It is intended to be an incentive to bring derelict or unused properties back into use, with an initial allowance of 100 percent for expenditure on converting or renovating unused business premises in disadvantaged areas. Its start date was 11 April 2007, so expenditure must be incurred on or after 11 April 2007 to qualify for BPRA.

Conditions of qualifying for the BPRA

1. Buildings must be in disadvantaged areas specified as development areas by the Assisted Areas Order 2007(SI 2007/107) or in Northern Ireland. They must also have been unused for a year immediately before work begins. The last use must not have been as a dwelling.

2. A person must incur qualifying expenditure in order to claim BPRA, which is capital expenditure on converting, renovating or repairing a qualifying building into qualifying business premises. It does not cover expenditure on acquiring land, extending a building or developing land next to a qualifying building.

3. Qualifying business premises are premises used, or available for letting for use, for a relevant trade, profession or vocation or as offices. There are exceptions, however, as these types of premises don’t qualify:

  • Used or available for use as a dwelling
  • The relevant interest in which is held by a person carrying on a relevant trade
  • Used wholly or partly for the purposes of a relevant trade

A relevant trade is a trade in the following sectors:

  • Fisheries and aquaculture e.g. fish farming
  • Shipbuilding
  • The coal industry
  • The steel industry
  • Synthetic fibers
  • The primary production of certain agricultural products
  • The manufacture or marketing of products which imitate or substitute for milk and milk products

Allowances and charges

The initial allowance is equal to 100 percent of the qualifying expenditure. If this is not claimed, or not claimed in full, the person that incurred the qualifying expenditure (and holds the relevant interest in the qualifying building) may claim writing down allowances (WDAs). WDAs are given at an annual rate of 25 percent on the straight line basis to the person holding the relevant interest until all the qualifying expenditure has been allowed.

The relevant interest in the building is that to which the person incurring the qualifying expenditure was entitled to when the qualifying expenditure was incurred.

There is a balancing adjustment if there is a balancing event within 7 years of the first use of the building after conversion or renovation. A balancing adjustment is a balancing charge or a balancing allowance. The main balancing events are the sale of the relevant interest and the grant of a long lease for a premium out of the relevant interest.

How allowances are given and charges made

If the person entitled to BPRA has a trade, profession or vocation, the allowance is treated as an expense and a balancing charge is treated as income of that trade, profession or vocation.

If the person entitled to BPRA has a property business, that is if the person is the landlord, the allowance is treated as an expense and a balancing charge is treated as income of that property business.

Our View

We always take the moral high ground and use authorised (legal) tax avoidance for saving tax. This appears to fit the bill nicely: not only are you helping yourself by reducing your tax bill, but you are boosting the economy by providing the finance for building work.

Tax has hit the national headlines recently for all the wrong reasons; particularly the K2 scandal and the Eclipse Film partnership (see our previous blogs). The first thing we consider when we get details of a new scheme is whether it is safe to recommend to clients? The last thing we want is to promote schemes that become vilified in the national press.

The BPRA is safe to recommend because it is an ethical tax break sponsored by the government  and intended to entice businesses to move to derelict buildings in economically depressed areas.

Are there a variety of schemes? If so, is any one better than another?

It really depends on the structure of the scheme and how it is organized. Typically, a scheme will collect a number of investors to form a syndicate which will then buy and renovate a property qualifying for BPRA. Often they will also arrange borrowing to boost the funds invested. For example, if you put in £25,000, it may gear up £75,000 when your investment is combined with the loan and later used to renovate the property.

The scheme will get tax relief on 100 percent of the money it spends on renovation. If, for example, your share was £75,000, you’ll get relief on it at your highest tax rate; that could be 50 percent, producing a tax refund of £37,500.  However, depending on the timing of the scheme, you may have to wait some time for your tax relief.

Some schemes warn that your money must be invested for at least seven years after the property has been renovated or, if you attempt to withdraw funds early, some of your tax refund will be clawed back. So in reality you may have to wait eight years, although your investment will have already been recouped with the generous tax reliefs. In reality, therefore, you are waiting for money that ordinarily would have been paid to HMRC.

The property is rented out and the income it generates will be used to meet the syndicate loan repayments and usual property and administration overheads. Ultimately, the scheme sells the property and, assuming it’s increased in value, you should get your original investment back plus a small profit.

Unlike film funding and similar tax-saving schemes, this is not a loop hole or a manipulation of the tax rules. We’re confident you won’t have any trouble from the taxman provided the scheme is setup properly. That does not mean you can afford to be complacent. As always with tax planning, the devil is in the detail. So take professional advice with regard to your choice of scheme and remember not to put all of your eggs in one basket but instead spread your investments around different ones.

Ray Best can help you protect your financial future. To find out more, simply click here!

Pensions – Timing is everything

My previous blog prompted a number of comments from business owners who are interested in using their pension funds more creatively and creating wealth independent of their business.

I trust that this blog will answer these queries.

When does the property pass to the pension scheme?

In example 2 of that article, Toybox Ltd transferred a commercial property to a registered pension fund as an in-specie contribution on behalf of the directors.

There is some confusion over the date on which such an in-specie transfer to a SIPP is considered to have taken place. Where the transfer is made close to the end of the input period for the SIPP (usually 5 April), or close to the end of the company’s accounting period, a misunderstanding over the contribution date could mean that the transaction falls into the wrong period. This could lead to tax relief being delayed or denied for the contribution.

An in-specie contribution to a registered pension scheme is a complex process and is best handled by someone who has experience of dealing with this process. Do not rely upon the advice given by professional trustees, they may have a level of documentation that suits their processes but may not properly protect the client.

In addition it is generally known that pension fund trustees can confirm in advance whether a generic class of assets would be suitable to be transferred into the pension scheme, but they cannot give a promise to accept a specific asset before the monetary debt in the first step has been fixed. So ensure you take specialist advice.

If the value of the assets accepted does not match the monetary debt, any under-payment must be made up by the member or employer who has promised to make the contribution.

Example 1

Harrow Ltd promises to make a contribution of £500,000, to be satisfied by a commercial premises valued at £495,500, and £4,500 in cash.

The date of payment of the in-specie contribution, the contribution date, is the date the asset has been irrevocably disposed of by the member or employer who makes the contribution. For a transfer of stocks or shares this will be the trade date, ie, the date the stock transfer form is signed. For property transactions this will be the date of exchange of an unconditional contract. The completion date for the transfer of property is irrelevant; as is the date the pension fund trustees annotate the transfer of the asset in the records of that fund.

A significant delay in the conveyance of a property to the pension scheme trustees can cause a number of problems. The asset’s market value, as determined by TCGA 1992, s. 272, may have changed, and the original valuation may be out of date. It is the asset’s value on the contribution date that is deducted from the existing debt. Where the value has fallen, the contributor must make up the shortfall.

In example 1, the property originally estimated to be worth £495,500 may have dropped in value to £405,000. In this case Harrow Ltd is obliged to find £95,000 in cash to fulfil their commitment to pay the contribution of £500,000.

Any increase in value over the amount promised as a contribution should be returned by the pension trustees either in cash, or if the assets are devisable, as a reverse in-specie by transferring shares. The contributor may then decide to pay the excess amount to the pension fund as an additional contribution, but this must strictly be an entirely separate transaction from the transfer of the property.

The pension fund trustees can only claim tax relief on the contribution from the contribution date. This is also the date on which the capital gain or loss will be calculated for the contributor. The date of acceptance of the promise to pay the contribution is not a valid date for the tax regulations.

SDLT on a property transfer becomes due when a land transaction contract is substantially performed, and this will normally be on the completion date when the acquirer takes possession of the property. However, if the acquirer takes possession before the completion date, that is the relevant date for SDLT. This removes the old stamp duty avoidance trick of ‘resting on contract’.

Restrictions on losses

In example 1 of my previous article I suggested that Barry could transfer his portfolio of quoted shares into his SIPP as an in-specie contribution. As the total value of the portfolio was less than the original cost, Barry made a capital loss on this transaction.

A reader queried whether Barry, as a beneficiary of the SIPP, would be connected to the trustees of the SIPP, within the definition of TCGA 1992, s. 286(3)(a): ‘A person, in his capacity as a trustee of a settlement, is connected with —

a) any individual who in relation to the settlement is a settler..’.

‘Settlement’ for this purpose has the same meaning as in ITTOIA 2005, s. 620.

The implication of a transaction between connected persons is that the loss created becomes what HMRC call a clogged loss. The use of clogged losses is restricted by TCGA 1992, s. 18(3), such that they can only be used against profits arising from transactions between the same connected persons in the same tax year, or from transactions between the same persons in a later year, while they are still connected.

Although a SIPP and other registered pension funds have trustees, HMRC do not consider registered pension funds to be settlements for the purposes of income tax (ie, for ITTOIA, s. 620). This is because, since a contribution to a pension fund does not involve an element of ‘bounty’, the person who makes the contribution is not a settlor in relation to the fund (see HMRC CG Manual, para CG14596).

As Barry is not a settlor in relation to the SIPP trustees, the transaction between those two parties is not a connected party transaction, and HMRC state that the availability of the losses is not restricted by TCGA 1992, s. 18(3). The connected party rules do not apply even if the person who transfers the asset is the only or main employee who will benefit from the pension fund — although HMRC caution that the transaction between the individual and pension fund trustees must be regarded as taking place at market value for capital gains purposes.

Contributions under attack

In these troubled times almost any company could be at risk of insolvency. Company owner/directors will be concerned for their businesses, but equally concerned that the money they have salted away in their SIPPs or SSASs is safe from the company’s creditors.

Normally, funds legally contributed by the employing company to a registered pension scheme cannot be clawed back to be used to satisfy the debts of that company, as the pension fund is a separate legal entity. However, the pension scheme may be forced to return the contribution to the company where all of the following conditions apply:

  • the company was insolvent at the time the contribution was made, or making the contribution render the company insolvent; and
  • the decision to make the contribution was influenced by a desire to advantage the employee/director as against the creditors of the company.

If these conditions apply, the act of making the contribution is referred to as a ‘voidable preference’ under the Insolvency Act 1986, s. 239-240. The company’s liquidator / administrator may challenge avoidable preference by making an application to the court within two years of the date of the transaction. If the court agrees that the transaction is a preference, it will order that it should be voided by the pension scheme returning the funds to the company.

If the company was not insolvent at the time the pension contribution was made, and making the contribution did not make the company insolvent, the contribution cannot be treated as a preference and the court cannot order the pension scheme to refund the money. If the directors incorrectly believed that the company was not insolvent at the time the contribution was made, when it was in fact insolvent, the transaction can still be a voidable preference.

There is one other circumstance where the contribution could be successfully challenged by the company’s creditors — if they can prove to the court that the contribution ‘was made for the purposes of putting the assets beyond the reach of a person who is making, or may at sometime make, a claim against the company’ (Insolvency Act 1986, s. 423). This circumstance requires the court to be satisfied the contribution was primarily a fraud on the company’s creditors. All the company has to show is that the contribution was not a means to defraud the creditors. It may be difficult to prove this either way, but the creditors are not bound by a time limit when making an application to the court to set aside the contribution on grounds of fraud.

Conclusion

Many SIPP providers do not accept in-specie contributions because they believe the transfer process is risky and complicated, but if you consult a specialist then the process can run quite smoothly.

Ray Best can help you protect your financial future. To find our more, simply click here!

Creative Pension Planning – How can one mitigate investment losses and boost retirement using creative planning

We’re living in extraordinary times: the value of investments in all four main asset groups – equities, bonds, property and cash – have all dropped simultaneously. This was not supposed to happen. It has, so economists need to re-evaluate their rule books. Meanwhile, back in the real world, we need to provide strategies to cope with the devastating loss of value of pension funds.

If you are close to retirement, you may be concerned as a loss of value of your pension fund will mean that you may have to suffer a loss of income, (unless you are in the fortunate financial position of either boosting your pension contributions, or delay the date for taking any benefits from your pension).

However if you are young, you may want to sit on your investments and wait for the upturn.

It’s not just investments in pension funds that have fallen, so have investments held in general investment accounts and ISAs.

I wonder though, if you do have personal investments that have taken a hit AND you need to boost your overall level of pension funds, if there is anything you can do to mitigate your loss?

Example 1

Barry, aged 56, is a higher-rate taxpayer with earnings of £250,000. His portfolio of quoted shares stands at £150,000, which is way below the base cost of the shares of £210,000. Barry decides to cut his losses and sell his entire portfolio, reinvesting the proceeds of £150,000 in his self-invested pension plan (SIPP). Since Barry is already over the retirement age for this pension scheme (55), he can take a 25% cash draw-down from the fund as soon as the Trustees have received the tax rebate from HMRC.

As Barry has not made any pension contributions for many years, he is allowed to roll up any unused contributions to a maximum of £50,000 gross, and can carry forward for three years only, i.e. three unused years plus current year.

The £150,000 will be treated as a net pension contribution. HMRC will add £37,500 to this and so the total gross contribution will be £187,500.

Barry gains in a number of ways from this transaction:-

By taking action now, before any uplift of values in his investment portfolio (when the market recovers), he is potentially saving on future Capital Gains Tax that may have been levied on his investment portfolio.

As well as the £37,500 tax relief gain on the net amount contributed to his pension fund, he will be able to claim a similar amount of relief against his earnings, so his Personal Tax Liability will be reduced by a further £37,500.

Alternative method

Barry sold his Share Portfolio and invested the cash proceeds in his SIPP; but the same effect can be obtained if Barry transfers his quoted shares into the SIPP as an in-specie contribution, (although not all SIPP providers will allow in-specie contributions). The SIPP provider must agree to receive the Shares in satisfaction of a promised contribution from the individual, and may require an independent valuation of the Shares where there is no obvious Market Value. The advantage of transferring the Shares themselves to the Pension Fund, is that Barry effectively retains control of those investments, but any future increase in the value of those shares, is protected from Capital Gains Tax.

Small company director

Barry is fortunate to have a high level of relevant earnings, but many small company share-holder/directors extract most of their income from their company’s dividends which do not qualify as Relevant Earnings. The level of pension contributions they can make personally in any tax year is thus limited by the level of their Gross earnings, once the minimum threshold of £3,600 is exceeded.

This problem can be circumvented by the employing company making the pension contributions on the Director’s behalf. [The link between pension contributions made by a company and earnings was broken in 2006].

Example 2

Adrian draws a regular salary of £25,000 plus dividends of £40,000 (gross) from his company Fine City Ltd, which has a 31 December year end. Adrian’s investments have suffered in the downturn, so he decides to cash-in his Corporate Bonds generating proceeds of £140,000.

Adrian’s relevant earnings for the year are just £25,000, which gives him scope to contribute £20,000 (net) to his SIPP. This contribution has the potential to reduce his taxable earnings for this year to within the basic rate band. He therefore has paid Net Tax so the SIPP will reclaim the tax relief of £3,750, and add this to his contribution. Adrian lends the balance of the proceeds of £50,000 to his company, which will be treated as a positive balance on his Directors’ Loan Account.

Fine City Ltd uses the cash from Adrian to make an employer’s pension contribution of £60,000 both before and after company year end. As long as Fine City Ltd has regular taxable profits of at least £60,000 each trading year, it will receive Corporation Tax relief for the pension contributions.

If HMRC query the payment, the company will need to show that Adrian’s total remuneration package for each year is not excessive in relation to the work he undertakes for the company, as described in the HMRC Business Income Manual at para. BIM 46035.

When Fine City Ltd has sufficient cash to repay Adrian’s loan account he can withdraw the balance of £120,000 from his Director’s Loan Account tax free.

The no-cash solution

Many companies do not have large cash reserves, but they may hold other assets, such as commercial property, that could be transferred into the pension fund as an in-specie contribution. Take care, as registered pension funds may face penalties if they hold residential property or tangible movable property as part of their investments, if so, making a transfer in-specie may not be an option.

Example 3

Mary Loo and Andy Pandy are the Directors and Shareholders of Toybox Ltd, which owns a commercial property worth £400,000. The company has agreed to pay contributions to a registered pension fund totalling £400,000 on behalf of Mary and Andy.

This contribution promise is satisfied by the transfer of the commercial property at its Market Value. This example illustrates again, the possibility of making large pension contributions (taking advantage of the roll-up of missed contributions over previous years).

The total value of the transaction is deemed to satisfy the promise to make two contributions of £200,000 each for Mary and Andy, which is within the rules (providing no pension payments have been made for several years).

As long as the Directors’ total remuneration packages, including the value of the pension contributions, are reasonable compared with the value of work those Directors do for the company, the employer can offset the payments against their Corporation Tax liability.

Please note that, once the commercial property has been paid into the pension scheme, the business would have to then complete a Lease Agreement with the SIPP Trustees for their Tenancy within the property. Rental payments at a ‘fair market rate’ would thereafter be paid into the pension scheme by the Company.

According to HMRC, http://www.hmrc.gov.uk/ct/forms-rates/claims/losses.htm#2 a trading loss can be carried back subject to certain conditions.

Toybox Ltd arranges for an independent valuation of the property to be carried out, and the transfer of the property is completed. The pension fund must pay Stamp Duty Land Tax on completion of the contract. The pension fund takes ownership of the property within the pension input period, for which sufficient Annual Allowance is available.

The Capital Gain or Loss, that Toybox Ltd made on the disposal of the commercial property is calculated based on the exchange date for the unconditional contract for the property transfer, not on the completion date.

Companies can still deduct from the gain, an indexation allowance based on the acquisition cost of the property, or on the market value at 31 March 1982 if the property was acquired before that date and a re-basing election has been made. The indexation allowance cannot turn a gain into a loss. The result in that case is a ‘Nil gain’.

Where the value of the property is so depressed that it produces a Capital Loss, that loss may only be set against Capital Gains arising in the same accounting period or carried forward to set against gains in subsequent accounting periods. A Capital Loss a trading company makes, cannot be carried back or surrendered to other Group companies. A Capital Gain a company makes is subject to Corporation Tax at the same rate as the Trading Profits for the period.

Other assets to be considered

Since 6 April 2006 there is only one set of rules governing the permitted investments for all registered pension schemes, although there are some restrictions for SIPP and SSAS schemes (see below). In brief, the following types of investment may be transferred as in-specie contributions into a pension fund:

  • commercial property in the UK or located overseas;
  • hotels, guest houses and nursing homes;
  • riding stables and golf courses; forestry, woodland and agricultural land;
  • non-income producing land;
  • shares in unrelated companies, including:
    – VCT shares
    – EIS shares
    – shares acquired from Employee Share Schemes
    – shares in Real Estate Investment Trusts (REITS).

Shares held as investments do not have to be quoted shares, but unquoted shares must be valued on a ‘fair market value’ basis before transfer. An SSAS can hold up to 5% of its fund value in shares of the sponsoring employer or an associated company, or up to 20% of the fund where the shares relate to more than one sponsoring employer. However, beware of the trap that may be set by a SIPP holding up to 100% of its fund in the shares of the scheme members’ employer, but not where that company has established a trust to run the SIPP – that would make the pension scheme an occupational scheme.

Conclusion

The examples demonstrate the possibilities for mitigating losses on investments, a note of caution is required before you embark on such an exercise. Always take professional advice and if this is an idea that may suit your circumstances consult a Pension Planning expert for comprehensive Financial Planning advice before you proceed.

Ray Best can help you protect your financial future. To find out more, simply click here!

Is Comedian Jimmy Carr having a laugh with tax avoidance scheme K2?

HMRC has confirmed that the K2 scheme is under investigation and has vowed to “challenge it in every way available to them,” stating that the “Government does not intend anyone, no matter who they are, to get away with paying less than they should.”  The tax scheme is understood to protect £168m a year from the taxman in Jersey, with Jimmy Carr its largest beneficiary.

According to a special investigation by the Times newspaper, thousands of high earners in Britain use such schemes to carefully do their accounting “under the radar.”

It claims an accountant disclosed that Mr Carr had sheltered £3.3m a year through the company. Lawyers for the comedian have confirmed he is a member of K2, but categorically denied any wrongdoing. Instead, they said the scheme had been disclosed to the relevant authorities in line with the law.

The Government has already announced a crackdown on individual tax avoidance, which is estimated to account for £4.5bn of the £7bn lost in tax each year.  HMRC does not intend anyone, no matter who they are, to get away with paying less than they should

A game of cat and mouse

Chancellor George Osborne has claimed he was left “shocked” after finding the extent to which multi-millionaires were exploiting tax loopholes and vowed to take “action.”

But shortly after he announced this year’s Budget, the Times alleges the K2 scheme assured its members “most of the powerful tax-saving opportunities survived unscathed.”

It has now published the details of an undercover investigation, in which an accountant promised to cut the tax bill on a £280,000 salary from £127,000 to just £3,500.

Roy Lyness, from Peak Performance Accountants which run the K2 scheme, told a seminar of businessmen: “It’s a game of cat and mouse. The Revenue closes one scheme; we find another way round it.

“It’s like a sat nav. I’m driving to Manchester, get a message saying there’s a smash at Stoke, and press the button to re-route. That’s all we do with tax avoidance.” He added the company did not broadcast the scheme because doing so would be like a “red rag to a bull.”

As much as £168m from taxman has been ringfenced.

The regime, called K2, is provided by accounting firm Peak Performance Accountants and allows its 1,100 of its clients to pay as little as 1% income tax.

It works by transferring salaries into a Jersey-based trust, which lends investors back the money. As the loan can technically be recalled, it is not subject to income tax.

The K2 arrangement is one of a range of schemes continuing to operate, despite the government’s vow to crack down on the “morally repugnant” practice. It is estimated by the Inland Revenue that tax avoidance by individuals alone costs the economy £4.5bn out of £7bn lost in tax every year.

Indeed, the lawyers for stand-up comedian and TV presenter Jimmy Carr – best known for his roles hosting 10 O’Clock Live, 8 Out of 10 Cats and regular guest appearances on QI and Have I Got News For You – have confirmed he is one of the scheme’s beneficiaries. They denied any wrongdoing and said that the scheme had been disclosed to the relevant bodies.

According to the Times’s investigation, he safeguarded as much as £3.3m from the taxman through the arrangement.

How Does a Remuneration Trust Work?

A company owner, director, LLP partner, partner in a business partnership, sole trader or someone with income that is not processed through the PAYE system can use a remuneration trust.

The basics are: Income or company profits are contributed to a remuneration trust. Because the contribution is being paid into a trust there is usually no tax payable on the contribution.

Complex?

Behind the scenes the construction of a remuneration trust is often extremely technical and complex, but paperwork when applying is often quite straightforward.

A remuneration trust is designed to deliver more versatile financial options for companies, partnerships and sole traders when reaching tax management decisions. It extends the incentive resources available via legal wealth-saving techniques and reduced liabilities.

The current economic environment, as well as the difficulties it creates for business and financial management, has led to more organizations and individuals seeking sensible approaches to offer remuneration incentives to their suppliers and service providers.

Whilst conventional salary payment models, such as bonuses and dividends, are helpful, a remuneration trust could also be used as a possible incentive that could offer more significant financial freedom, and improve the funds available.

A remuneration trust may be used as a device to enable profit from a UK limited company to be deducted as an expense. The trust then enhances the accessible wealth by minimizing liabilities and making the funds available to trust beneficiaries via a more profitable channel.

General guidance on remuneration trusts

The content presented here is of a general nature. Utilizing a remuneration trust is actually a complicated area, demanding specialized knowledge.

Consequently, our recommendation is that professional guidance is sought for every unique set of circumstances of your business and employees.

We will not accept any legal responsibility for any action taken resulting from the information contained in this article, and this isn’t supposed to be a comprehensive legal declaration in respect of the common use of remuneration trusts. A remuneration trust may not be suitable for your particular circumstances and we always advise that you take advice. It is now possible (due to changes in legislation) to provide remuneration strategies that are not contentious.

Quite clearly, the K2 scheme that has saved people such a considerable amount of tax is no laughing matter. But it really depends whether you are the beneficiary of such a scheme or a taxpayer who has not received effective tax planning advice!

Who knows HMRC may have the last laugh on Jimmy Carr!

Ray Best can help you protect your financial future. To find out more, simply click here!

Bankboozled – Government hits the panic button!

The government has announced two schemes to provide finance for businesses; the monies are to be provided directly to the banks who must lend this onto business owners in the form of cheap loans or finance.

The government states that up to £140BN will be funnelled to businesses in this way, but insiders believe there is effectively no limit to the amounts that may be provided, with widespread anxiety within the Bank of England and the Government that the euro zone crisis will worsen and take the UK further into recession.

A cautious welcome

The coordinated action by the Bank of England and Treasury will see billions offered to banks on the condition that they pass it on to businesses and households in the form of cheaper loans and mortgages.

The scheme, which is due to start in the next few weeks, has received a cautious welcome, with bank shares rising on the news.

However, there are warnings that the scheme will not address the core problem of companies’ reluctance to borrow, particularly with business owners’ awareness of the ramifications of the euro zone debt storm that could deepen this weekend following elections in Greece.

Graeme Leach, chief economist at the Institute of Directors, said: “The funding for lending scheme helps the supply of money and the demand for it, by lowering the cost of borrowing.

But the core problem remains: Companies alarmed by the euro crisis will not be eager to borrow, regardless of the cost.”

No guarantee banks will lend

Economists have also cautioned that banks may simply not want to lend more, even with the carrot of cheaper funding.

Vicky Redwood of Capital Economics said, “High bank funding costs are just one challenge facing the UK economy. Indeed, these moves on their own will do little to reduce the effect of the euro zone crisis on UK exports or reduce the uncertainty facing UK companies.”

In his annual Mansion House speech, Bank Governor Sir Mervyn King also activated facilities for an emergency scheme that offers six-month liquidity to banks in tranches of at least £5 billion a month.

The two measures are estimated to be worth around £100 billion in funding to banks.

Banks signal they are ready and willing to release funds

The banking industry has been hit by higher funding costs as the euro zone troubles have escalated, and they have been hoarding money for fear of another worrying phase in the crisis. However, there are hopes that the new schemes will allow these stored funds to be released.

The British Bankers’ Association (BBA) said it was ‘ready and willing’ to get behind the moves.

BBA chief executive Angela Knight said the industry welcomed the news that the Bank and Government were “ready to stand with the financial sector in making more money available to fuel the recovery”.

Experts also hailed signs that the Bank stood ready to further expand its quantitative easing programme, which currently stands at £325 billion.

Alan Clarke, economist at Scotiabank, said the announcements “come at a crucial time” ahead of the Greek elections, which are being seen as a referendum on the country’s future in the euro.

“The Bank has hinted that it has contingency plans in the event of disaster, but has now started to flex its muscles and show that it means business,” he added.

However, he cautioned incentives for banks to loan needed to be well thought out: “Past schemes have been conditional on banks increasing their loan books, but we have hardly seen a dramatic rebound in lending. We need to hope that the incentive structure is better designed in this scheme.”

Battling the worst crisis since the Great Depression

The moves follow mounting pleas for action from the Bank and Treasury to do more to help banks and steer the UK economy through the euro zone crisis. The origin of the current financial malaise is the 2007–2012 global financial crisis, considered by many economists to be the worst financial crisis since the Great Depression. It resulted in the collapse of large financial institutions, the bailout of banks by national governments, and downturns in stock markets around the world. In many areas, the housing market also suffered, resulting in evictions, foreclosures and prolonged unemployment. The crisis also played a significant role in the failure of key businesses, declines in consumer wealth estimated in trillions of US dollars, and a downturn in economic activity, leading to the 2008–2012 global recession and contributing to the European sovereign-debt crisis.

Will it be enough?

So what will this £140bn kiss of life do for Britain? Have the Chancellor and Bank of England acted in ‘panic’ in a bid to hand small firms and house-buyers cheap loans and there any likelihood that this gamble kick-start the economy?

Let’s look at the facts:

  • Banks will be loaned money on condition that they pass it on in the form of cheaper loans and mortgages
  • This staggering sum represents 1/5 of all Government spending
  • Scheme aimed at limiting impact of ‘euro zone debt storm’ which is blamed for raising the cost of lending
  • Government will soon announce another initiative to underwrite tens of billions of pounds of spending on housing and infrastructure

This £140billion lifeline to small businesses, homeowners and the banks is a high stakes gamble to jolt the economy back into life. Both the part time Chancellor George Osborne and Bank of England Governor Sir Mervyn King have clearly been asleep at the wheel, the question is – have they woken up in time to prevent a crash?

Government sources indicated that two separate schemes will pump around £140billion over the next 12 months into Britain’s big five banks and their smaller rivals.

A stated previously this huge sum is equal to a fifth of all Government spending, and more than the current education and defence budgets combined. And it doesn’t stop there because sources privately admit there is no limit to how much money will be given to the banks, meaning the total bill could be far higher with one senior Lib Dem saying the move was like ‘hitting the panic button’.

A move born out of anxiety rather than level headed judgement?

The extraordinary move comes amid rising Government anxiety that the euro zone crisis could plunge Britain back into a deep recession that could take years to recover from.

In his annual Mansion House speech in the City last night Mr Osborne warned the euro zone crisis had made the economic outlook ‘as difficult perhaps as any our country or our continent has faced outside of war’.

But he insisted Britain was ‘not powerless in the face of the euro zone debt storm’.

Unveiling plans for two new bank lending schemes with Sir Mervyn, he said, ‘Together we can deploy new firepower to defend our economy from the crisis on our doorstep. Funding for lending to inspirational families wanting to own their home, business that wants to expand, plus liquidity for our high street banks.

The Government – with the help of the Bank of England – will not stand on the sidelines and do nothing as the storm gathers. “We are rolling up our sleeves and doing everything possible to protect British families and firms.”

Can the banks be trusted?

In essence the government is placing implicit faith in the banks to do the right thing for business owners. This is ignoring the banks’ failure to abide by Project Merlin, the previous government initiative. Yet bankers and the banking system have repeatedly failed both the economy and business: despite the previous millions pumped into the banks from the government, lending to businesses is down but staff remuneration by the banks has increased significantly.

It does not make common sense for the government to place such faith in the banks – the very institutions that have brought our economy to its knees. Nor does it seem wise to channel such a large amount of money to these institutions.

We wonder also whether it is prudent for business owners to take on more financing (and risk) when the global financial world is imploding around us.

What does make sense, however, is creating the right conditions for businesses to grow. This may mean taking radical steps with regards to legislation and the way that taxation is structured. The present levels of corporation tax mean that many companies have left our shores and set up headquarters elsewhere, so the UK is losing out on collecting the corporation tax from those companies, so why not reduce corporation tax rate to a flat rate of 10%. That will surely be more of more benefit to hard pressed UK business owners than extending their financing and their liabilities. Isn’t debt what got us all into the present mess? So why are we planning to increase the indebtedness of business owners now!

The current legislation on employment makes employers think twice before taking on new staff for fear of either paying out twice for maternity leave (as they not only have to pay for the staff member who has taken time off but also for staff replacement). In addition they have to consider the potential financial consequences and potential time spent attending an industrial tribunal.

One thing’s for certain, there is a bumpy ride ahead.

If you are a business owner and are considering increasing your financial liabilities to take advantage of this new initiative, we would advise that it may be better to re-plan your business and personal financial arrangements to ensure that increasing your liabilities do not place your family at risk.

Ray Best can help you protect your financial future. To find out more, simply click here!

Joan Collins speaks out over income tax

Famous actress and celebrity Joan Collins, whose most well known role was as Alexis Colby in Dynasty has spoken out over the Coalitions unfair and unjust tax policies. Joan spoke up for hard working families who are paying high amounts of income tax and hit out at people on long term benefits and tax credits.

The most recent budget has done little for people paying UK income tax in 2012. If you do pay income tax you want a reminder of the 2012 budget changes and how they affect UK income tax.

The personal tax allowance threshold was increased to £8,105 from 6 April 2012, with a further rise to £9,205 pledged by 2013.

More significant to business owners is a welcome drop to 24% in the main Corporation Tax rate, helping to soften the continued impact of the 50% personal tax rate, which will be reduced to 45% from 2013. Even when combined, the rate cuts remain at such levels that the bottom-line for entrepreneurs is that profit extraction planning proposals can provide substantial tax savings.

Despite suggestions that a General Anti-Abuse Rule (GAAR) would be introduced from April this year, the Government has also confirmed that a summer of consultation will be undertaken and legislation won’t be introduced until next year, at the earliest.  Specific anti-avoidance provisions have come in with immediate effect but this is more limited than expected.

There has been considerable media coverage regarding in anti-avoidance measures introduced will affect Stamp Duty Land Tax (SDLT).  We are busy looking at new arrangements to replace the SDLT schemes affected by the new anti-avoidance legislation and are able to provide advice regarding SDLT and the wider tax implications of the Budget, alongside the range of effective strategies and planning available.

Congratulations to glamorous Joan Collins for raising her concerns and speaking up for middle England.

As always we recommend taking professional advice on tax and any other planning issue.

Ray Best can help you protect your financial future. To find out more, simply click here!

Company tax avoidance, including pensions, ebt’s, e-furbs and approved share schemes

The government has over the recent years reduced the amount of contributions that high earners can pay into their pension schemes. Currently there is a cap of £ 50,000 for pension contributions (unless past years missed contributions are rolled forward). Of course the majority of employees with works pensions cannot afford to contribute the maximum pension. So these larger pension contributions are normally made by the directors of SME’s. Alternatively by employees paying substantial PAYE who would rather contribute to their pension than donate their hard earned monies to HMRC.

It is well known that the government, concerned about the increasing use of employee benefit trusts (EBTs), employer-financed retirement benefits schemes (EFRBS) and other arrangements as a means of tax avoidance by business owners have introduced additional legislation to restrict activity in these areas.

Both Employee Benefit trust and E-Furbs typically used to allow an employer to establish such  structures on behalf of employees and at a later date the trustees of the EBT would grant an interest-free loan to the employee or a family member. Tax would be charged on the basis of the value of the loan to the employee, that is the interest (at a commercial rate) not paid, rather than the actual money received. The EBT’s and subsequent loans were increasingly being used for tax avoidance rather than the settlement of a trust fund for all employees.

The loan could then be written off at a more tax-attractive time, for example when the employee was no longer employed and perhaps a non-UK resident. In view of the government’s legislation, employers/employees will need to turn their attention to other methods of providing employee benefits.

A contribution to a registered pension scheme, either a works pension or a private pension will be the main and most tax-efficient method of employee retirement provision. Aggregate contributions of up to £50,000, and possibly more if advantage can be taken of the annual allowance carry forward provisions, are permitted with full tax relief.

Any employer contributions to a registered pension scheme will need to be paid ‘wholly and exclusively’ for the purposes of the trade if they are to be tax relievable. Any member contributions will only be subject to tax relief if they do not exceed 100% of the member’s relevant UK earnings.

Top-ups can be paid to existing Employee Benefit Trusts, which still offer generous tax advantages in terms of tax deferral, although the employer will only get a corporate deduction for contributions when benefits are paid and have PAYE and NIC levied on them.

All of the above legislative changes mean that employers are seeking to find ways to reward the employees of a company and that includes the Directors.

For that reason it is worthwhile to consider the use of company share schemes.

There are two types of scheme available. Unapproved Share Option Plans and Enterprise Management Incentive Schemes.

It is worthwhile noting that unless specific tax rules apply, any share-based benefit passing from an employer to an employee will be subject to income tax and possibly also to national insurance contributions (NICs).  Costs can begin to total up dramatically for additional rate taxpayers (Additional rate of tax is currently 50%. This will reduce to 45% for 2013/14). This means a large part of your potential gain is swallowed up and this is the case with  an Unapproved Share Option Plan (USOP).

As the tax benefits of unapproved schemes are inefficient, companies will normally seek to make use of one or more of the government sponsored schemes, under which gains are normally taxed at the more favourable capital gains tax rates

One of the most popular government sponsored schemes is the Enterprise Management Incentive (EMI). The EMI is a highly tax-efficient method for providing targeted incentives to key employees or employee groups. Participant tax for EMI schemes is 18% for lower rate taxpayers, or 28% for higher rate taxpayers. It is structured as an option scheme, whereby the employee is granted the right to purchase company shares in the future at a price set at the date of grant.  The employee gains when the value of the shares rises above the purchase price and value is usually realised on an event i.e. sale of the Company.

The difference between an EMI scheme and a USOP are colossal when considering the tax implications, but the possibility of saving more of your gains does not end there. Due to the proposed changes involving the legislation interaction of EMI option exercise with availability of CGT Entrepreneurs’ Relief,  participants may, depending on when they exercise their options and when they sell the shares, now be looking at an astonishingly low effective  rate of tax of just 10% regardless of the size of their equity interest.

Latest News on Company Share Schemes

Previously, the criteria needed to qualify to establish eligibility for Entrepreneurs’ Relief included holding 5% of the share capital that equated to 5% of the voting capital (i.e. shares had to carry voting rights), and the participant must have held the shares (rather than the options) for at least  1 year prior to sale.

Now, provided the legislation is enacted next year as currently proposed, you no longer have to hold any defined amount of equity, nor voting shares and the only requirement to qualify for Entrepreneurs’ Relief in relation to shares acquired pursuant to the exercise of an EMI options is that the participant must still hold the held shares for a year prior to sale.

It appears there has never been a better time to consider an EMI scheme or to take a renewed look at an existing plan. If you would like more information about the benefits of share schemes, including EMI, please contact us on 01189 347 920 or e-mail us on amanda.roberts@paretolawrence.co.uk.

New HMRC crackdown on PAYE tax avoidance and IR35, HMRC PAYE tools can be of benefit but HMRC PAYE helpline is inundated with requests for assistance.

New HMRC plans to increase PAYE and NIC by taxation of “controlling persons”

On the 23rd May HMRC published a consultation ‘The Taxation of Controlling Persons’. This is a proposal by the Government to ensure that PAYE and NIC is accounted for by ensuring all “controlling persons” at any firm to be on the payroll. This will apply to both the public and private sectors. The Government is effectively planning to ban the use of limited company contractors, particularly in situations where they would be acting as “controlling persons” in a business. HMRC’s intention is to increase the amounts paid for in PAYE and NIC and If the proposals in this consultation are approved, IR35then it is likely that any legislation would not come into effect for at least a year.

The Government has also laid down separate plans which will come into effect in September but affect only the public sector.

Why is the Government doing this?

These measures are widely thought to be a response to the case of Ed Lester, former Chief Executive of the Student Loans Company, who was engaged via his own limited company.
The Government believes “there is a lack of transparency around the tax arrangements of public sector appointees, where the worker is not on the payroll”. To translate this more simply, HMRC wish to ensure that PAYE and NIC amounts due to them are paid in full.

The Government argues that someone in a senior position should be an employee, and that senior officials who are “off payroll” are benefitting financially by these arrangements.

A Government review recommended that “the most senior public sector staff should be on the payroll” and paying PAYE and should not be engaged via a limited company or similar arrangement. The Government intends to ban “controlling persons” from being “off payroll” in the public sector by September. Quite clearly this tax avoidance of PAYE and NIC practice recently become more widespread, do not expect a great deal of assistance from HMRC as their PAYE helpline in inundated and there is a very long wait for calls to be answered.

However, they also want this practice to be prevented in the private sector. This is why HMRC has produced a consultation document to examine ways of putting this into law.

They state “we believe that where people are in a position to control the major activities of a firm then the firm, whether in the private or the public sector, should be able to have an assurance that the worker who is in a controlling position in the company is meeting their tax obligations.”
In particular, the Government is looking to pin down a definition of a “controlling person”. In a separate review of the public sector, published alongside this consultation, this distinction is based in part on pay (see “What about the public sector?” below for details). For the private sector, the Government has yet to decide how to define a “controlling person”

What’s happened to IR35?

The Government believes that senior individuals working “off payroll” are disguised employees. Though IR35 is intended to address the problem of disguised employment, but does not deal with the problem of “controlling persons” – i.e. senior and responsible individuals. The Government suggests that this practice has been increasing despite the presence of IR35, and therefore further legislation is needed.

The Government denies that this is an attack on “Personal Service Companies” (PSCs). They acknowledge that “there are many cases where the use of a personal service company is for legitimate commercial reasons. The Government is very supportive of intermediaries including personal service companies, and it does not believe that personal service companies are necessarily avoidance devices”. They also acknowledge that this is common way to engage specialist skills.

What is the Government Proposing?

The Government is proposing that new legislation is drawn up which requires “controlling persons” at a firm or organisation to be on the payroll, and not via an intermediary such as a limited company.

This would apply even when an individual uses his or her own limited company for other purposes.

“Controlling Persons” would effectively be taxed as employees of the organisation they are controlling.
Who will this affect?

The Government state “this measure is intended to be targeted only at those who are able to influence the direction of the entity / organisation as controlling persons. We do not intend this measure to stop genuine commercial arrangements”

The Government propose that “a controlling person is defined as someone who is able to shape the direction of the organisation having authority or responsibility for directing or controlling the major activities of the engaging organisation during the year. This would be someone who has managerial control over a significant proportion of the organisation’s employees and/or control over a significant proportion of the budget of the organisation.”

If these measures are implemented, then this definition may need to be tested by case law to define what constitutes a “significant proportion” of an organisation’s budget or workforce. The Government have said on numerous occasions that this measure should only apply to the most senior individuals.

Working via an agency will not exempt a limited company contractor from these proposals as they currently stand.

Are there any exclusions?

It is planned that the measure will exclude “micro businesses” from having to ensure controlling persons are on their payroll. Micro businesses are defined as those employing fewer than 10 persons with a turnover of less than £1.7 million.

What will happen next?

These are only proposals at present. However, it appears unlikely that they will be dropped. There appears to be a political consensus on this issue, with all the major political parties condemning what “unacceptable tax avoidance” and disguised employment.

The presence of draft legislation suggests that proposals are in a more advanced stage than is typical for many early consultations. In other words, it is unlikely the Government will back off at this stage.

What about the public sector?

Measures to prevent disguised employment in the public sector will be implemented in September and are separate to this consultation. HMRC is clearly hoping to increase the amounts of PAYE and NIC paid to them.

Essentially any “off payroll engages” who are at Board level in the public sector, or those with significant financial responsibility must be on the payroll, unless there are exceptional circumstances. In such circumstances the Accounting Officer must “seek assurance” that the individual’s tax obligations are being met.

The right for the Government to “seek assurance” than an individual is meeting their tax/NIC obligations will exist in contracts for all other “off payroll” engagements which last over 6 months, and with a day rate of over £220 per day.

It is not clear what “seeking assurance” means – for example does this mean the individual would have to clarify their IR35 status with the department engaging them?

For “Off payroll” workers on £220 or less, but with contracts of over 6 months, it will be up to the individual Government Departments to determine whether it is worth seeking assurances.

Contracts under six months in duration will not be included in these proposals.
Workers on “off payroll” engagements in the public sector will still be subject to any new laws that emerge out of the Government’s wider proposals on “controlling persons” described above.

The use of an agency between the contractor and the Government Department makes no difference to their status as an “off payroll” worker.

Our Opinion

It is clear that the government intends to proceed with the taxation of “controlling persons” and intends to require such individuals to be subject to payroll taxes, IR35regardless of the legal nature of the contract between the parties involved.

However these proposals echo the original “personal service company” proposals before they became IR35. We are concerned about them as they appear to separate taxation from legality. Under these proposals, HMRC will be able to get all the tax and social security contributions it wants but in broad terms the quasi-employee will have no guarantee of the normal protections associated with employment. There is no direct link between taxation and employment rights but one has gone hand in hand with the other for decades.

We also recall that HMRC / HM Treasury tried something similar under the guise of so-called “False Self-Employment in Construction” in 2009. Given the number of times – and how badly – HMRC had lost on the issue of employment status in construction (such as IR35Castle Construction) then it seems as though HMRC believes it can ignore the courts and tax on its own terms. On that basis they will we believe they will be challenged.

We have a remedy for the above in the form of remuneration strategies that are within the law and highly effective in delivering high levels of tax efficient income and reducing PAYE and NIC payments whether you are “employed or self employed”. This is suitable for high earners and we understand not affected by the new legislation.

If you fall within this category, perhaps you would like to contact us?

Ray Best can help you protect your financial future. To find out more, simply click here!

Tax avoidance in the sun?

Is UK income tax avoidance acceptable by setting up an  offshore bank account or property?

Over the years HMRC have targeted their efforts on particular trades and professions in an attempt to counter tax evasion. More recently however they have begun to target the wealthy. Following a very successful campaign on offshore banking, HMRC are now planning to counter uk income tax avoidance and tax evasion and under-declaration arising from the ownership of overseas property.

They are anticipating that this initiative will collect around £560m as a contribution to the £7bn of tax the government hopes to raise by 2014/2015 in tackling tax evasion. HMRC have formed an investigation team of 200 to carry out this work.

It is commonly presumed that a number of owners of overseas property will not have declared rents or capital gains arising from these properties. The object of this initiative is to target overseas property owners who are liable higher rates of tax in the UK.  As HMRC believe that the majority of these may have deliberately chosen to evade UK tax.

The basic rule is that an owner who is UK resident for tax purposes is liable to both uk income tax and capital gains tax both rental income and profits arising from the sale of such properties.

At this stage the HMRC has not set out in detail the basis on which they believe taxpayers have not complied with their filing obligations but following the reference to “data mining” technology there is clearly more than a mere suspicion of unpaid tax.

  1. The main areas of concern are that:
  2. Owners are not paying uk income tax on rental income they receive on such properties

Declared levels of income and capital gains are not sufficient to have funded either the acquisition or ongoing maintenance costs.

This is an area of concern, as this may uncover people who based on their historical tax returns, would not normally be able to fund property investment. So this investigation may provide HMRC with an opportunity to open a can of worms with regard to the overall tax affairs of people, looking into potential tax avoidance in the past. Or if they are business owners, HMRC may investigate why they have not paid appropriate amounts of corporation tax or PAYE ?

What action should property owners take?

As always we point to taking professional advice as soon as possible to determine whether or not there is any undeclared income or gains. If there are, then these should be quantified and notified to the HMRC as soon as possible. This way if there is a penalty, the level of that penalty might be reduced for voluntary disclosure. Early payment of the tax should also be made to prevent further interest for late payment accruing.

If you have answered yes to either of the questions above then you need to make an Offshore Disclosure to HMRC. It is your legal obligation to declare any income you earn on offshore assets to HM Revenue and Customs through an offshore disclosure.

We can arrange for you to meet a specialist adviser in offshore disclosure. You would need to bring as much paperwork with you as you can so that our offshore tax experts can see what type of voluntary disclosure is the best for your situation and what approach to take. You will need to sign an HMRC authority form, called a 64-8, which allows an offshore disclosure to be made on your behalf and allows HMRC to correspond with the specialist.

Taking action at an early stage will allow you to minimise the tax and penalty payable, but also provide advice on how the property should be owned tax-efficiently for the future. This could include matters such as:

  • Transferring an interest so rental income is spread.
  • Electing for capital gains tax only or main residence relief to apply to the property
  • Operating as a qualifying furnished holiday let (check latest regulations).
  • Tax efficient ownership of the properties.

It is essential that proper records are kept of the following:

  • Rents received
  • Expenditure
  • Costs of acquisition and improvement
  • Proceeds and costs of sale

The longer you wait to submit an offshore disclosure, the more likely it is that HMRC will open an enquiry into your tax affairs.

What do you think?  Should HMRC pursue people with overseas assets  – or not ?

Ray Best can help you protect your financial future. To find out more, simply click here!

Salary, Bonus or Dividends – Which is the best to pay yourself?

Tax rates change regularly, so it is wise to regularly check whether it will be cheaper for your company to pay a dividend rather than a salary.

Recent changes mean that:

  • The personal tax allowance has increased to £8,105 as have the lower limits for National Insurance bands .
  • To preserve entitlement to state benefits pay a salary between £107 and £144 per week, this also avoids Employers NICs.

If you are paying low salaries and topping the balance up in dividends you will want to optimise your position for 2012/13 by having regard to marginal tax rates.

Marginal tax rates

There are now several points where income exceeds a certain level the marginal extra cost in tax of each £1 over the level is often disproportionately high:

  • £42,476 – liability to higher rate tax (40%)
  • £50,001 to £ 60,000- claw back of child benefits (as applicable) (up to around 58%)
  • £100,001 – claw back of personal allowances (60%)

When planning dividend payments, take these into account.

What are your views?

Ray Best can help you protect your financial future. To find out more, simply click here!

 

EIS income tax carry back relief

Five reasons why 20% income tax relief may be preferable to 30%­

Enterprise Investment Scheme (EIS) investors can take advantage of ‘carry back’ which allows the cost of shares to be treated as though they had been acquired in the previous tax year, enabling investors to benefit from income tax relief in the preceding year.  But with EIS income tax relief increased to 30% for the 2011/12 tax year why would anyone want to carry back to 2010/11 when only 20% income tax relief was available?

There are five reasons why investors may choose to carry back EIS investments to 2010/11 and sacrifice 10 per cent income tax relief:

  • Use it or lose it:  Many people assess their previous year’s tax after the end of the tax year and then invest in EIS using carry back to mitigate that tax bill.  Failing to carry back loses out on a valuable tax relief that cannot be regained in the future.  The 30% income tax relief will still be available through carry back the following tax year.
  • One off tax bill in previous year:  People with an unusually high income tax liability in 2010/11, which will not be repeated in 2011/12 can carry back to mitigate the previous year’s bill.
  • Access to tax relief cash earlier:  Under self assessment taxpayers must settle their outstanding tax bill by 31 January of the following year.  Investors carrying back current investments to 2010/11 tax year will benefit from a reduced tax bill in January 2012 rather than having to wait until January 2013.
  • Invest £1 million in EIS in 2011/12:  Investors who had not used their EIS tax relief in 2010/11 can double their investment in 2011/12 from £500,000 to £1 million by carrying back half the investment to 2010/11.
  • Capture CGT deferral:  EIS investors can defer taxation on capital gains incurred up to 36 months before the date the EIS shares were acquired.  Using carry back in 2011/12, investors with CGT liabilities can defer CGT gains right back to 2008/09 tax year.

Ray Best can help you protect your financial future. To find out more, simply click here!

Failed film partnership – causes tax avoidance grief – but not for the promoters!

Film Partnership schemes have been around for years, they are normally entered into with the hope of obtaining corporation tax relief or relief against income tax.

In recent years they have come under increasing scrutiny, the Eclipse Film partnership 35 was set up to secure income tax relief for its investors. It entered into a complex set of transactions with the Disney Group of Companies to license film rights and sub-license rights to distributor.

Under the financing arrangements, members of the LLP relied on loans from Barclays and were able to claim £117 million in loan interest – almost three times the amount that they invested. The structure of the scheme relied upon risk centred on Barclays’ solvency.

The failed tax avoidance scheme – Eclipse Film Partners 35 – was set up by Future Capital Partners Group Holdings; parent company of Eclipse and other film tax avoidance schemes. It was sold to the rich and famous including Manchester United boss, Sir Alex Ferguson, and Sven-Goran Eriksson, former England manager.

Account documents at the tax tribunal show that Future Capital Partners received £44m in 2007, £11.5m of  which was paid to directors, Stephen Margolis and Timothy Levy, in the year to the end of April 2007; the pair is  also alleged to have earned £10m in the previous year. The highest paid director, whose name is not on the tax tribunal accounts, is said to have received £6.6m in the same year.

Recently a First Tier Tax Tribunal ruled that investors in the film tax avoidance scheme – Eclipse Film Partners 35 – were not entitled to tax reliefs on their investments. The tribunal ruled that Eclipse was not classed as ‘trading’ as the film distribution rights they bought were leased straight back to Disney. The First Tier Tribunal denied tax relief on the basis that the LLP was not carrying activities that amounted to a trade.

The film schemes investors’ wanted to claim £117 in tax relief from complex payments, including £790m in bank loans. However; from the £50m of cash that was put into the film investment scheme only £6m went to Disney when Eclipse bought the rights to the films Underdog and Enchanted.

Future films have said they intend to appeal against the tax tribunal judgement: “We maintain that this investment is very much a commercial opportunity. We are disappointed with the decision and intend to vigorously appeal it,” a spokesman said.

When considering financial or tax planning or making tax savings you should take advice before entering into any “tax strategy” it is essential that due diligence is carried out on the structure of the scheme. You may be able to achieve the same results by adopting less complex business tax or corporate planning strategies. It is natural to want to save tax but there may be more than one way to skin the tax cat.

Ray Best can help you protect your financial future. To find out more, simply click here!

Tax Avoidance – Want to save Tax – you could save up to 78%!

Seeds or (SEIS) is a new form of  Enterprise Investment Scheme (SEIS): a new tax relief for start-ups introduced by the Finance Bill 2012.

Benefits

  • Taxpayers who invest up to £100,000 in a qualifying new start-up business will be eligible for income tax relief of 50 per cent.
  • Relief is offered regardless of the rate at which the investor pays tax.
  • The SEIS applies to investment in companies, and not in unincorporated businesses or LLPs.
  • Investment must be in subscription to new shares issued on or after 6 April 2012 until 5 April 2017.

SEIS Reinvestment relief

As an added incentive to encourage more people to back ‘riskier’ companies, a capital gains tax (CGT) break is also offered for investments made into the new scheme:

  • Capital gains arising on the disposal of an asset in 2012-13 and invested through the SEIS in the same year will be completely exempt from CGT – this represents up front tax relief of up to 78%.
  • Disposals of SEIS shares will also be exempt from CGT after a three year qualifying period.

Investors and companies must meet the following conditions:

An investor

  • Cannot be an employee of the company: a director is not treated as an employee
  • Must not hold more than 30% of the shares, voting power or entitlement to assets in the event of winding up, during the qualifying investment period
  • Must not have any related investment or linked loan arrangements in place
  • Must subscribe for genuine commercial reasons and not as part of a tax avoidance scheme.

A SEIS company must:

  • Have less than 25 employees
  • Have gross assets of less than £200,000
  • Have been trading for fewer than 2 years
  • Not have raised any money from EIS or VCT investors
  • Carry on a genuine new trade.

Although the tax breaks are very tempting, we would advise that you proceed with such schemes with caution. Seeds are really only for sophisticated investors. Most clients would be better off considering a normal EIS scheme.

Ray Best can help you protect your financial future. To find out more, simply click here!

Loan Defaults at 1990’s level – Cash flow planning?

A previous prime minister was quoted as saying “if it’s not hurting, it’s not working!”.

Judging from the alarming number of firms going into administration lenders are reporting the highest numbers of loan defaults for some time. It would appear therefore that the government strategy is hurting AND not working!

Business owners should ensure they have access to a secondary line of credit but for most business owners the standard route to obtaining a loan from their pension funds has effectively been blocked by regulations imposed by HMRC.

Despite the changes to regulations, it is still possible for many businesses to arrange their finances in such a way as to have access to £75,000 to £120,000 of cash at short notice at modest interest rates.

This type of cash flow planning is best arranged when you do not need the cash.

Ray Best can help you protect your financial future. To find out more, simply click here!

85% of taxpayers take no action to reduce Inheritance Tax!

Despite Inheritance Tax being one of the easiest taxes to avoid, very few people take active steps to reduce this tax. This lack of means that HMRC often will take a larger shares of the estate than the beneficiaries!

However one of the reasons for the tax being so prevalent, is that many people who take out life insurance are unaware that on death the proceeds will be paid to their estate. This means that your beneficiaries may not be able to get their hands on money when they most desperately need it (as often probate will take 6-9 months to complete), but it also means that the life insurance payout may tip your estate over into the inheritance tax bracket.

Ensuring your life insurance payout is excluded from your estate is often the simplest and most effective way to reduce inheritance tax. Placing your policy in trust makes the payout tax efficient and also allows you to control who the monies are paid to.

There are other technical steps required to ensure that the payment out of a life policy is speeded up (typically these are ignored in 90% of the policies we examine). So you cannot rely on a trust alone.

Please ensure that you obtain professional advice. On reviewing one of our clients financial affairs we discovered that his solicitor had forgotten to nominate himself and his wife in their wills!

In addition they had received advice on taking out a joint policy for inheritance tax and they had been advised that they both should be the trustees. As this policy would not payout until  after the second death I asked if it would be necessary to hold a séance to determine how the assets of the trust should be paid out.

The clients response is unprintable !!!!

Ray Best can help you protect your financial future. To find out more, simply click here!

 

Who would you trust with your children?

www.freefoto.co.uk

In the UK there are over 13.2 million dependent children. 76% of them live in a two-parent family but 24% have just one parent caring for them – most of these are women.

With statistics like these, it is important to consider how best to look after your children if you are not around to look after them yourself. It is imperative that you discuss fully your requirements for your children with a professional adviser.

Careful thought and consideration are required to ensure that your will is drafted correctly so that the directions concerning the care of your children are clear.

You will naturally consider the need to appoint guardians and ensure that your choice is both suitable and practical. What is often overlooked is that you have a financial responsibility not only to your children but to the guardians themselves. After all they may be friends who love your children but that why should they bear the financial cost of bringing them up?

There are a variety of ways to fund the care of your children and to ensure that your wishes are taken into account. You should also wish to appoint trustees and ensure that they have the flexibility to increase payments to the guardians if required.

This all sounds as though this could cost a great deal of money, money that you do not currently have, but don’t let that put you off dealing with your responsibilities. You can pass the financial burden to a third party – an insurance company.

If you are able to pass on your immediate financial responsibilities in this way then you are not quite off the hook as you have to ensure firstly that you maintain the regular premiums on the policies. Secondly you also need to ensure that the life policies are written in trust (the salesman may not suggest it – as they get paid to sell a policy- not provide advice on trusts).

Otherwise you may have wasted part of the monies you have paid as the policy may be otherwise subject to inheritance tax. Hold a conversation now with your partner, before it’s too late.

All figures: ONS, Families and households, 2001 to 2011. January 2012