Tax answered…<br />Steve Crouch – Co-Founder<br />Head of Accountancy - Crunch.co.uk<br />27/06/2011<br />1<br />Visit www...
Summary<br />1. Dividends versus salary<br /><ul><li>Is it beneficial to pay dividends following the 2011 budget </li></ul...
Interim dividends
Final dividends
Dividends waivers – do they work?
Different classes of shares</li></ul>27/06/2011<br />Visit www.crunch.co.uk, the next generation of accountants<br />2<br />
Summary<br />4. Directors current accounts<br /><ul><li>What are the tax rules when this is overdrawn?
HMRC & timing of dividends
Is there any tax planning with loans?</li></ul>5. HMRC –Business records review<br /><ul><li>HMRC focus on poor record kee...
What records am I required to keep?
HMRC new penalty regime…</li></ul>27/06/2011<br />Visit www.crunch.co.uk, the next generation of accountants<br />3<br />
1. Dividends versus salary<br /><ul><li>Following budget 2011 - Is it still beneficial to pay dividends?
NIC rates increased; Up 1% for Employees & Employers: to 12% & 13.8%
Some compensation - increase in Lower Earnings Limit, Primary & Secondary Threshold
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Crunch & Wealth Matters Tax Saving Strategies Seminar

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  • Any questions at all. Contact 0844-500 8000 to speak to the Crunch Advisors.
  • Crunch & Wealth Matters Tax Saving Strategies Seminar

    1. 1. Tax answered…<br />Steve Crouch – Co-Founder<br />Head of Accountancy - Crunch.co.uk<br />27/06/2011<br />1<br />Visit www.crunch.co.uk, the next generation of accountants<br />
    2. 2. Summary<br />1. Dividends versus salary<br /><ul><li>Is it beneficial to pay dividends following the 2011 budget </li></ul>2. Spouses owning shares<br /><ul><li>Should shares still be transferred to spouse?</li></ul>3. Declaring Dividends Properly<br /><ul><li>Timing of dividends & supporting documents
    3. 3. Interim dividends
    4. 4. Final dividends
    5. 5. Dividends waivers – do they work?
    6. 6. Different classes of shares</li></ul>27/06/2011<br />Visit www.crunch.co.uk, the next generation of accountants<br />2<br />
    7. 7. Summary<br />4. Directors current accounts<br /><ul><li>What are the tax rules when this is overdrawn?
    8. 8. HMRC & timing of dividends
    9. 9. Is there any tax planning with loans?</li></ul>5. HMRC –Business records review<br /><ul><li>HMRC focus on poor record keeping
    10. 10. What records am I required to keep?
    11. 11. HMRC new penalty regime…</li></ul>27/06/2011<br />Visit www.crunch.co.uk, the next generation of accountants<br />3<br />
    12. 12. 1. Dividends versus salary<br /><ul><li>Following budget 2011 - Is it still beneficial to pay dividends?
    13. 13. NIC rates increased; Up 1% for Employees & Employers: to 12% & 13.8%
    14. 14. Some compensation - increase in Lower Earnings Limit, Primary & Secondary Threshold
    15. 15. Care required if wishing to minimise NIC but keep tax relief to max on salary; threshold now increased to £7475
    16. 16. Primary & Secondary thresholds previously aligned, now £3 per week differential:
    17. 17. If pay £7225 salary to keep below £139 Primary threshold (EES contributions) THEN PAY Secondary contributions
    18. 18. Very small amount of (£7225 - £7072) x 13.8% = £21.11 Still worth paying £7475 as tax relief is higher than the NIC saving - slight hassle factor to send a cheque!</li></ul>27/06/2011<br />Visit www.crunch.co.uk, the next generation of accountants<br />4<br />
    19. 19. 1. Dividends versus salary (part II)<br /><ul><li>Some prefer higher salary – still fear that this might increase HMRC spotlight re IR35(does it really?)
    20. 20. Upper Earning Limit
    21. 21. decreased £844 >£817 pw
    22. 22. rate per week above threshold increased 1% >2%
    23. 23. Small profits Corp tax
    24. 24. reduced 1% from 1 April 2011 to 20%
    25. 25. aligns with personal basic tax rate
    26. 26. Summary: still more beneficial to pay dividends versus salary</li></ul>27/06/2011<br />Visit www.crunch.co.uk, the next generation of accountants<br />5<br />
    27. 27. 2. Spouses owning shares<br /><ul><li>Should shares still be transferred to spouse?
    28. 28. Nothing new – Income Shifting rules still not brought in
    29. 29. For those unaware, here’s a recap:
    30. 30. Artic Systems case
    31. 31. HMRC tried to prevent income shift to spouse to utilise lower tax rates
    32. 32. Case won by Artic Systems;
    33. 33. Held that there is an exception under sec 626 ITTOIA 2005
    34. 34. There had been an outright gift
    35. 35. The property is not wholly or substantially a right to income</li></ul>27/06/2011<br />Visit www.crunch.co.uk, the next generation of accountants<br />6<br />
    36. 36. 3. Declaring Dividends properly<br /><ul><li>Timing of dividends & supporting documents
    37. 37. HMRC do not like dividend extraction on salary route
    38. 38. HMRC focusing on demonstrating a dividend has been properly paid;
    39. 39. therefore is a directors current account loan or salary
    40. 40. can create BIG tax problems if not planned properly
    41. 41. Directors current account deficit…
    42. 42. Interim Dividends
    43. 43. Under Model Articles , the directors may pay dividends if they believe the company has profits to support them
    44. 44. The directors may need to demonstrate that there was sufficient profit at the time the dividend is paid
    45. 45. The company must keep a copy of management information, showing the profit &balance sheet; to include corporation tax as this affects the distributable reserves
    46. 46. How many contractors do this? Interim dividends become a liability the instant they are paid
    47. 47. No shareholder approval is required &so can be treated as paid in the financial year
    48. 48. Payment of a dividend can include the crediting of a director's current account BUT the accounting entries MUST be done at the time the dividend is paid
    49. 49. HMRC looking at accounting records & if the entries have been recorded by the accountant when preparing the year end accounts they will argue that these dividends have not been "made available" until that later time - & after the year end
    50. 50. This can lead to dividends effectively becoming paid in a later financial year &likely to be in a different tax year - can have dramatic effect on the directors personal tax situation &the company can have problem with overdrawn directors current accounts</li></ul>27/06/2011<br />Visit www.crunch.co.uk, the next generation of accountants<br />7<br />
    51. 51. 3. Declaring Dividends properly (part II)<br /><ul><li>Final Dividends
    52. 52. Final dividends are only recognised in the company accounts when formally declared by shareholders at general meeting I.e. at the AGM - when signing off the accounts
    53. 53. There must be a formal resolution to pay it before the end of the financial year - supported by minutes
    54. 54. There can be no backdating! HMRC keen to view this as tantamount to money laundering &hit hard with penalty regime
    55. 55. Dividend waivers…
    56. 56. Do these work?
    57. 57. Dividends are declared per share thus in ratio to members shareholding
    58. 58. HMRC are suspicious of waivers as most shareholders would not turn down an opportunity to get paid
    59. 59. Important to keep proper documentation to support valid reason for a waiver. This might be for example where a major shareholder wants the value of shares to be maintained as an encouragement for other shareholders to invest
    60. 60. It is not possible to waive a dividend for an amount greater than the entitlement. If there are reserves of £10,000 and 50/50 ownership the maximum waiver would be £5,000 not £10,000!
    61. 61. To be used as last resort &better to get the shareholding right in the first instance
    62. 62. Different classes of shares
    63. 63. Of any use?
    64. 64. Alphabet shares can be used to share the dividend in the desired proportions without the need for waiver. However, it must again be stressed that there should be no restrictions to avoid settlement provisions applying</li></ul>27/06/2011<br />Visit www.crunch.co.uk, the next generation of accountants<br />8<br />
    65. 65. 4. Directors Current Accounts<br /><ul><li>What are the tax rules when overdrawn?
    66. 66. If the account is overdrawn at any time during the financial year it is reportable note on the accounts.
    67. 67. The rules are contained in sec 455 CTA 2010 (formerly sec 419 ICTA 1988)
    68. 68. Every time a director withdraws funds from the company it is going to be either:</li></ul>1. A repayment of a loan made by the director I.e. when setting up co in first instant and transferring assets<br />2. A reimbursement of out of pocket expenses<br />3. A net salary<br />4. A dividend <br /><ul><li>The accounting records should be good enough to distinguish between these otherwise a danger HMRC will simply see it as a loan to the director
    69. 69. The effect on the company:
    70. 70. If the loan is still outstanding at the company's financial year end then provision should be made for tax at 25%
    71. 71. A corporation tax return return entry will be required to state that the account was overdrawn and that tax is due at 25% of loan
    72. 72. If the loan is repaid within 9 months of the year end then there is no need to actually pay the tax over and a note to the accounts made accordingly
    73. 73. If the loan is not repaid then the tax is paid with the main corporation tax at the normal due date I.e. 9 months after year end
    74. 74. When the loan is repaid or written off this tax is repayable 9 months after the end of the accounting period when repaid
    75. 75. If the loan exceeds £5,000 at any time during the year then this will also give rise to a reportable P11d benefit in kind
    76. 76. The deemed benefit is normally calculated as the "average loan" outstanding in the tax year and then multiply by "official rate of interest" to give the benefit
    77. 77. This then carries with it a charge under Class 1A national insurance at 13.8%, payable by 6thJuly following the tax year
    78. 78. The effect on the director: The P11d benefit amount forms part of personal income and must be declared on personal tax return and tax paid accordingly</li></ul>27/06/2011<br />Visit www.crunch.co.uk, the next generation of accountants<br />9<br />
    79. 79. 4. Directors Current Accounts (part II)<br /><ul><li>HMRC and timings of dividends
    80. 80. An overdrawn loan can be achieved with "final" dividend. Note that the dividend would be when proposed, as mentioned previously and therefore this dividend would be dated in the tax year of that date for the shareholders personal tax return
    81. 81. In practice some accountants may still treat this dividend as being made at the balance sheet date but this is wrong and could give money laundering issues as mentioned
    82. 82. Is there any tax planning with loans?
    83. 83. If the director already has an income charged at higher rate then any further income will attract higher rate tax
    84. 84. Consider therefore whether there is going to be any change in circumstances in the future
    85. 85. If it is likely that in the following tax year the director may have a much reduced income then it may be preferable to take the loan
    86. 86. When personal tax is paid it is gone, whereas 455 tax can be repaid later on
    87. 87. If a loan is written off, as compared to a dividend being declared at some later time, then there is potentially national insurance liability thereon
    88. 88. However, the emphasis is on the documentation and proper loan agreement with interest rate etc., together with a formal deed of waiver where then there may not be a national insurance liability. This really is more for planning when a reasonable level of salary is already being taken as could be taken otherwise to be a replacement to salary
    89. 89. The loan write off route also allows a direct payment to one of the shareholders so could possibly used in preference to a waiver</li></ul>27/06/2011<br />Visit www.crunch.co.uk, the next generation of accountants<br />10<br />
    90. 90. 5. HMRC – Business records review<br /><ul><li>HMRC focus on poor record keeping
    91. 91. No real difference between soletraders or Ltd’s
    92. 92. Business record checks have been started by HMRC and with fine of up to £3,000 it is feared that they will be looking to fines and new penalty regime will breach the loss of tax following recession
    93. 93. What records am I required to keep?
    94. 94. Sales invoices and these should be sequentially numbered
    95. 95. Purchase invoices
    96. 96. Sales and purchase ledgers and cash books
    97. 97. All bank statements and credit card statements and savings accounts statements
    98. 98. Paying in slips
    99. 99. PayPal statements
    100. 100. Evidence of non business deposits - birthday presents and gambling winnings!
    101. 101. Claim to subsistence, where located etc. and in particular travel costs - there seem to have been many challenges as to the base of operations so as to potentially disallow as home to work.
    102. 102. Payments to subcontractors/freelancers etc. - may be tax status challenge as to why not treated as employee so be careful of a possible tax status challenge on you!
    103. 103. Private adjustments such as telephone calls
    104. 104. Business mileage log
    105. 105. VAT return backup figures
    106. 106. Irregular extraction of company funds
    107. 107. Please note that where understatements of income and over claim of expenses this can be construed as being taken by the directors and liability under sec 458 CTA 2010 This works in a very similar what to overdrawn director current accounts and therefore 25% tax together with potential nasty penalties
    108. 108. HMRC – new penalty regime
    109. 109. Which brings me to the new penalty regime coming into force from April 2011. New behaviour based penalty regime. Penalties from 0% to 100% depending on category of inaccuracy and co-operation.
    110. 110. When does it start?
    111. 111. What does it mean?
    112. 112. Mistake despite reasonable care Careless inaccuracy Deliberate not concealed Deliberate and concealed The minimums apply only where company discloses without prompting by HMRC enquiry Prompted rates are MINIMUM of 15, 35 and 50% </li></ul>27/06/2011<br />Visit www.crunch.co.uk, the next generation of accountants<br />11<br />
    113. 113. 5. HMRC – Business records review (part II)<br /><ul><li>Irregular extraction of company funds
    114. 114. Please note that where understatements of income and over claim of expenses this can be construed as being taken by the directors and liability under sec 458 CTA 2010
    115. 115. This works in a very similar way to overdrawn director current accounts and therefore 25% tax together with potential nasty penalties
    116. 116. HMRC – new penalty regime
    117. 117. New penalty regime coming into force from April 2011
    118. 118. New behaviour based penalty regime
    119. 119. Penalties from 0% to 100% depending on category of inaccuracy and co-operation
    120. 120. Mistake despite reasonable care - no penalty
    121. 121. Careless inaccuracy - between 0 &30% of lost revenue
    122. 122. Deliberate not concealed - between 20 and 70%
    123. 123. Deliberate and concealed - between 30 and 100%
    124. 124. Note: The minimums apply only where company discloses without prompting by HMRC enquiry
    125. 125. Note: Prompted rates are MINIMUM of 15, 35 and 50% </li></ul>27/06/2011<br />Visit www.crunch.co.uk, the next generation of accountants<br />12<br />
    126. 126. Other useful info…<br /><ul><li>Need a comparison calculation? Please call 0844-500 8000 & one can be done in 5 minutes
    127. 127. Wide ranging advice:
    128. 128. www.contractoradvisor.co.uk
    129. 129. www.freelanceadvisor.co.uk</li></ul>27/06/2011<br />Visit www.crunch.co.uk, the next generation of accountants<br />13<br />
    130. 130. 27/06/2011<br />Visit www.crunch.co.uk, the next generation of accountants<br />14<br />Any Questions?<br />

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