Take advantage of the Annual Investment Allowance
The annual investment allowance (AIA) allows businesses to obtain an immediate deduction against profits for capital expenditure up to the limit of the allowance.
Where a business prepares accounts using the more traditional accruals basis, they are not allowed to deduct capital expenditure in computing profits; instead relief for capital expenditure is given under the capital allowances system, whether in the form of the AIA, a first-year allowance or a writing down allowance.
Where a business prepares accounts using the cash basis, different rules apply to capital expenditure. Under the cash basis, capital expenditure can be deducted in computing profits unless the expenditure is of a type where such as deduction is prohibited, for example, as is the case for land and cars. Capital allowances are not in point (except for cars), and the annual investment allowance is not available.
What expenditure qualified for the AIA? - The AIA is available on most items of plant and machinery, the main exception being cars. The AIA is likewise not available on items owned for another reason before they were used in the business or on items given to the proprietor or the business.
The AIA can only be claimed for the period in which the item of plant or machinery was purchased. If the payment is due within four months, the date of purchase is when the contract is signed. Where payment is due more than four months later, the date is that of when the payment is due.
The claim is made in the company or self-assessment tax return, as appropriate.
How much is the AIA? - The allowance is set at £200,000 for 12-month periods. The allowance is reduced proportionately for accounting periods of less than 12 months (so, if the accounting period is nine months, the AIA limit for that period is £150,000 (9/12 x £200,000)).
If qualifying expenditure in the period is less than the AIA for that period, the AIA can be claimed for the full amount of the expenditure. However, if qualifying capital expenditure in the period is more than the AIA for that period, the AIA can only be claimed up to the amount of the allowance, with relief for the balance of the expenditure being given by means of writing down allowances.
Example 1 - Harry buys three vans costing £20,000 each in the year to 30 September 2018. The total expenditure of £60,000 is less than the AIA available for the period, so he is able to claim the AIA for the full amount of the expenditure.
Example 2 - George buys new machinery costing £300,000 in the year to 31 October 2018. The expenditure exceeds the available AIA for the period of £200,000. He is able to claim the AIA on the first £200,000 of the expenditure. Relief for the remaining £100,000 is given by way of writing down allowances.
How is relief given? - Relief is given as a deduction in computing profits for the period. Thus, claiming the AIA provides immediate 100% relief for capital expenditure.
What happens when the item is sold? - If the item is sold, the proceeds are added to the relevant pool. This may trigger a balancing charge.
Do we have to claim the AIA? - No – a claim is not mandatory. It will not always be beneficial to claim the AIA, for example if profits are insufficient or the item is likely to be sold after a short period triggering a balancing charge; it may be preferable to claim writing down allowances instead. The claim can be tailored to the business’ circumstances.
Overdrawn director’s loan accounts
In a personal or family company, the lines between the directors as individuals and the company are often blurred – the director may lend money to the company when cashflow is tight and the company may lend money to the director or pay personal bills on the director’s behalf. Transactions between the director and the company are tracked via the director’s account.
If the director’s account is overdrawn at the end of the accounting period (such that the director owes the company money) and the company is close, there are tax consequences to consider. Broadly, a close company is one that is controlled by five or fewer shareholders (participators).
Potential tax charge - A tax charge arises on the company if the director’s loan account is overdrawn at the end of the accounting period and remains overdrawn nine months and one day after the end of that accounting period. This is the date on which corporation tax for the accounting period is due. The overdrawn amount constitutes a loan to the director from the company
The tax charge (known as the ‘section 455 charge’ after the section of the Corporation Tax Act 2010 which imposes the charge) is 32.5% of the amount of the loan. The rate of section 455 tax is the same as the higher dividend rate.
The tax is paid with, but is not the same as, the corporation tax for the period.
Example - Nigel is the director of his personal company N Ltd. Accounts are prepared to 31 March each year.
On 31 March 2018, Nigel’s director’s loan account is overdrawn by £20,000. The account remains overdrawn on 1 January 2019 (the date on which corporation tax for the period is due).
The company must pay section 455 tax of £6,500 (£20,000 @ 32.5%).
Avoiding the charge - Even if the loan account was overdrawn at the end of the accounting period, the section 455 charge can be avoided if the loan is cleared by the corporation tax due date of nine months and one day after the end of the period. This can be done in various ways:
• the director can pay funds into the company to clear the loan;
• the company can declare a dividend to clear the loan balance;
• the director’s salary can be credited to the account to clear the loan balance;
• the company can pay a bonus to clear the loan balance.
It should be noted that with the exception of the director introducing funds into the company, the other options will trigger their own tax bills.
Clearing the loan may not always be the best option – it may be preferable to pay the section 455 tax instead. This will be the case if the tax on the dividend or bonus credited to the account to clear the loan is more than the section 455 tax.
A temporary tax - Section 455 tax is a temporary tax in that it is repayable nine months and one day after the end of the tax year in which the loan is cleared.
Anti-avoidance provisions - It should be noted that anti-avoidance rules apply to prevent the director clearing the loan shortly before the section 455 trigger date, only to re-borrow the funds shortly thereafter.
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Tax efficient remuneration using pension contributions
In the lead-up to the 2018 Autumn Budget there was plenty of speculation that the Chancellor would take the opportunity to cut tax relief on pension contributions, which currently costs the Government around £38 billion a year. In the event, this was not to be the case, and the generous tax relief provisions continue to apply in their current form for the foreseeable future.
Subject to certain conditions, tax relief is currently available on pension contributions at the highest rate of income tax paid, meaning that basic rate taxpayers get relief on contributions at 20%, higher rate taxpayers at 40%, and additional rate taxpayers at 45%. In Scotland, income tax is banded differently, and pension tax relief is applied in a slightly different way.
Pensions are a particularly tax-efficient form of savings since nearly everyone is entitled to receive relief on contributions up to an annual maximum regardless of whether they pay tax or not. The maximum amount on which a non-taxpayer can currently receive basic rate tax relief is £3,600. So an individual can pay in £2,880 a year, but £3,600 will be the amount actually invested by the pension provider.
The total amount of tax relief available on pension contributions is calculated with reference to ‘relevant UK earnings’. If you own a limited company and you take both salary and dividends, the dividends do not count as ‘relevant UK earnings’. This means that if you take a small salary and a large dividend from your company, your pension tax relief limit will be low - tax charges will apply if the limit is exceeded.
If you want to increase your tax-free contributions limit, you could consider either increasing the amount of salary you take from the company (to increase your relevant UK earnings), or making the pension contribution directly from your company as an employer contribution. Making an employer contribution has additional advantages.
Qualifying employer contributions count as allowable business expenses, so the company could currently save up to 19% in corporation tax. In order to qualify for a deduction, the pension contributions should be ‘wholly and exclusively’ for the purposes of business. HMRC will check for evidence that this is the case, for example whether other employees are receiving comparable remuneration packages.
Another advantage of making a company contribution is that employer National Insurance Contributions will not be payable, saving the company up to 13.8% on the contribution amount.
This means that the company can potentially save up to 32.8% by paying money directly into your pension rather than paying money in the form of a salary. Depending on your circumstances, this may or may not be more beneficial to you than paying personal pension contributions.
Benefits for employees - An employer-provided pension can be a significant benefit. Employers can make contributions to occupational or personal pension plans without triggering a tax charge. This can significantly enhance an employee’s remuneration package and is a tax efficient way of rewarding employees. It is also worth noting that, subject to a couple of conditions, a relatively new tax exemption may cover the first £500 worth of pension advice paid for by an employer. The exemption covers advice not only for pensions, but also on the general financial and tax issues relating to pensions.
Conclusion - Of course we do not know at present whether there will be any changes further down the line affecting tax relief on pension contributions. It is therefore strongly recommended that anyone considering topping up their pension pot should think about doing it sooner rather than later.
Private residence relief and the final period exemption
Private residence relief (also called main residence relief) is well known. It prevents a liability from capital gains tax arising on any gain on the disposal of a property which has been the taxpayer’s only or main residence throughout the period of ownership.
Where a property has not been the only or main residence throughout, the amount of private residence relief is reduced. It is available both for the period during which the property was the taxpayer’s only or main residence and, currently, the final 18 months of ownership (the ‘final period exemption’). Where the property has been let, the chargeable gain may be further reduced by lettings relief (but note this is to be curtailed).
The final period exemption is a useful exemption. It shelters the gain in the final period of ownership as long as the property has at some point during the period of ownership been the taxpayer’s only or main residence. It prevents a gain from arising if, for example, the taxpayer moves into a new home before the sale of the former home has completed. It also reduces the chargeable gain in respect of a let property that at some time has been the only or main residence. It is also a useful planning tool where a taxpayer has more than one residence.
The final period exemption
The final period exemption currently applies to the last 18 months of ownership. This is increased to 36 months where the taxpayer moves into care or is disabled.
However, at the time of the 2018 Budget it was announced that the final period exemption would be halved from 6 April 2020. Where residence is disposed of on or after that date, only the last nine months of ownership qualifies for the final period exemption. However, it is to remain at 36 months when the taxpayer moves into care or is disabled. The government are to consult on the change.
As the change does not come into effect until 6 April 2020, there is time to plan ahead. If a disposal is on the cards and the property has been the only or main residence at some point, but not throughout, the period of ownership, disposing of the property before that date shelters the last 18 months of ownership. Assuming that the legislation follows the same format as for the reduction in the final period exemption from 36 months to 18 months with effect from 6 April 2014, the critical date will be the date on which contracts are exchanged, which must be before 6 April 2020.
Jack purchased a house on 1 November 2014. Until 31 October 2018 he lived in it as his main residence. On 1 November 2018 he completed on the purchase of a flat, which he lived in during the week. As he was planning to sell the house, he elected for the flat to be his only or main residence from 1 November 2018.
If contracts on the sale of the house are exchanged before 6 April 2020, the last 18 months will be exempt, so the whole gain will qualify for PRR. However, if exchange occurs after 6 April 2020, only the final nine months will qualify for relief bringing some of the gain into charge.