Tax newsletter – important information

AGENCY WORKERS AND PAYE

Changes introduced in the 2014 Finance Act have tightened up the rules for “self-employed” workers who supply their services through UK agencies, employment businesses and other intermediaries.

From 6 April 2014 an agency has to decide whether ‘the way in which a worker does his/her works’ is subject to, or to a right of, supervision, direction or control by the end client or someone else.

If it is, then the worker will have to be treated for income tax and national insurance as an employee so, the worker’s pay will be subject to PAYE and to Class 1 employees and employers NI contributions.

HMRC have confirmed that the agency legislation will not generally apply where a worker is engaged via a personal service company (PSC).

This is because the agency legislation will only apply when remuneration is received by the worker as a consequence of providing the services. Dividends paid to a worker as a genuine consequence of his/her shareholding in the PSC will not normally constitute “remuneration” for the purposes of the agency legislation. However, such workers will still potentially, be subject to the “IR35” rules.

IMPROVED TAX BREAKS FOR INNOVATIVE COMPANIES

Two generous tax breaks exist for companies involved in research and development (R&D). Some of these companies may not be claiming all the relief to which they are entitled. Firstly, R&D tax credit relief provides companies with an enhanced corporation tax deduction of up to 225% for qualifying R&D expenditure.

So, for example, £100,000 of qualifying expenditure attracts a tax deduction of £225,000. Qualifying expenditure would include scientists’ and engineers’ salaries involved on the research project. Many companies involved in R&D make a loss in the early stages but rather than carry the losses attributable to the enhanced R&D spend forward they are able to claim a repayment from HMRC.

The repayment rate was increased to 14.5% from 1 April 2014, turning a £225,000 loss into a £32,625 refund (ie. 32.625% of the actual qualifying spend). Secondly, the “Patent Box” tax break entitles a company to a lower corporation tax rate on profits from the sale, licensing or other receipts from patented products.

This lower corporation tax rate is currently being phased in but will decrease to just 10% from 1 April 2017. In order to qualify for the Patent Box the company must register a UK or European patent over their invention. Although software development can qualify for R&D tax relief, it does not currently qualify for the Patent Box relief. Please contact us if you would like to see if either of these tax breaks applies to your company.

INTEREST ON LOANS TO YOUR BUSINESS

If you have made a loan to your business you should consider paying interest on the loan, as this will be an allowable deduction against the business profits. However, the interest will be taxable on you, the lender, so you need to consider the tax rate applicable to both borrower and lender.

For example, if your company pays tax at 20% and you the director/shareholder pay tax at 40% an interest charge would not make sense!

However, for a lender who only has a small amount of other income, (e.g. Salary/pension less than £10,000) then the first £2,880 of savings/loan income is only taxed at 10%, which can be used to advantage. From 2014/5 the first £5, 000 of savings income will be tax free, which provides a planning opportunity for some, as shown by the example below:

‘Mr Wonger needs £100,000 to expand his sole trader business. His wife has just inherited a similar amount from her mother and decides to loan it to her husband’s business at 5% per annum. Her only other income is a small salary of £10,000 a year from her husband’s business. The £5,000 interest would potentially save up to 45% income tax plus national insurance for Mr Wonger, whereas Mrs Wonger would receive her £5,000 interest free from tax’.

CAPITAL TAX IMPLICATIONS OF THE LOAN

Although the loan to the business in the example above is tax efficient (in that there is no income tax due from 6 April 2014) it would also be important to consider the CGT and IHT implications of the loan. Should the business default, it may be possible to obtain relief as a capital loss against capital gains in the same or future years. There would, however, be no inheritance tax business property relief should the lender die with the loan in place. Please contact us for further advice in this area.