Directors – between a rock and a hard place

Directors that have drawn remuneration from their companies as a mix of low salary and higher dividends would seem to be overlooked by the schemes announced in the past two weeks to support the employed and the self-employed.

In the first news story published by government announcing the Self-Employed Income Support arrangements (26 March 2020), the following paragraph was inserted:

“Those who pay themselves a salary and dividends through their own company are not covered by the scheme but will be covered for their salary by the Coronavirus Job Retention Scheme if they are operating PAYE schemes”. 

On this basis, the only financial support that directors could claim is the Job Retention Scheme. This will be based on their salary – not salary plus dividends – and only if they furlough themselves (play no active role in their businesses). It is likely that a director's statutory responsibilities will not count as work if a claim under the Coronavirus Job Protection Scheme is made.

 

Take advantage of the Annual Investment Allowance

The Annual Investment Allowance (AIA) allows business owners to claim the total amount of qualifying expenditure on plant and machinery, up to certain limits. This deduction reduces profits subject to tax.

The AIA can be claimed by an individual, partnership or company carrying on a trade, profession or vocation, a UK non-residential property business or a furnished holiday let business. Please note, that partnerships or trusts with a mixture of individuals and companies in the business structure are unable to qualify for AIA.

The AIA was permanently set at £200,000 for all qualifying expenditure on or after 1 January 2016. However, this limit was temporarily increased to £1 million for a 2-year period from 1 January 2019 to 31 December 2020. This increased limit is a generous allowance and should cover the annual spend of most small and medium sized businesses. 

The AIA is available for most assets purchased by a business, such as machines and tools, vans, lorries, diggers, office equipment, building fixtures and computers. The AIA does not apply to cars.

There is now just three months left until the end of the tax year. If you are thinking of incurring large items of capital expenditure for your business, now is a good time to consider your investment options.

Basis periods and change of accounting date

HMRC’s guidance lists the following useful examples about a change of accounting date:

If your accounting date in 2016 to 2017 is more than 12 months after the end of the basis period for 2015 to 2016, your basis period is the period between the end of the basis period for 2015 to 2016 and the new accounting date.

For example, your basis period for 2015 to 2016 ended on 31 May 2015, and the new accounting date is 31 August 2016, your basis period is the 15-month period 1 June 2015 to 31 August 2016.

If your accounting date in 2016 to 2017 is less than 12 months after the end of the basis period for 2015 to 2016, your basis period is the 12 months ending on the new accounting date.

For example, your basis period for 2015 to 2016 ended on 31 December 2015 and the new accounting date is 31 July 2016, your basis period is the 12-month period 1 August 2015 to 31 July 2016, see ‘Overlap profits’, below.

If your new accounting date is 31 March or 1, 2, 3 or 4 April, see Accounting dates in the period 31 March to 4 April below.

In the first example, above an overlap occurs because of the change in accounting date. A portion of profits is effectively taxed twice, this is known as overlap profit. Overlap profits relief can be used to reduce the profits on the final tax return when the business ceases trading or if the accounting period changes but the ideal scenario would usually be not to create the overlap in the first place.

Basic business structures

It is important to be aware of the main basic business structures available if you are considering starting a new business. There are three commonly used forms of business structure.

  • A sole trader – this is the simplest way of starting and running a business. However, you are personally responsible for your business’s debts. You also have accounting responsibilities.
  • A limited company – the business is quite separate to you as a person, but there are more reporting and management responsibilities. In most cases you will not be personally liable for business debts, but it also means that you cannot draw money from the business whenever you feel like it without generating tax issues.
  • Partnership – There are two main types of partnership, a conventional version where you work with one or more partners in the business. This is the simplest way to run a business for 2 or more people. There is also a limited liability partnership or LLP, This more complex structure provides you and your partners with the protection of limited liability, much like a limited company.

Which business structure is best suited to your new business will depend on a number of factors. For example, cash flow, your longer-term plans for the business, whether or not you need the protection of limited liability, your willingness to comply with legal and administrative obligations of companies and LLPs and the nature of any investment you are seeking to capitalise the business.

Planning before you make a start is essential. Please call if you would like to discuss your options. Getting it wrong can be a painful and costly experience.

What is a joint venture?

A joint venture is a commercial enterprise undertaken by two or more parties who otherwise retain their separate identities. The parties to the joint venture usually bring together different resources and areas of expertise to help fulfil a specific project or business activity.

HMRC’s manuals make the point that on close examination many of these associations prove to be partnerships, despite the name applied to them. The manuals state that a joint venture, which is not a partnership, is most likely to be found where parties already carrying on businesses of their own agree to co-operate in a single project, but they do not agree to share net profits or losses. Where they do agree to share net profits or losses, it is likely that a partnership will result even where the parties are already engaged in their own businesses.

For a partnership to exist, there must be a business and that business must be a business that is separate and distinct from any other business that the joint venture parties may conduct on their own account.

Treatment of capital expenditure if using the cash basis

The cash basis scheme helps many sole traders and other unincorporated businesses to manage their financial affairs. The scheme is not open to limited companies and limited liability partnerships. Using the scheme, allows qualifying businesses to use the cash basis when recording income and expenditure.

You must have a turnover of £150,000 or less to join the scheme and you can continue using the scheme until your turnover reaches £300,000. However, certain small businesses are more suited to using the case basis than others. The scheme is most suitable to relatively modest businesses especially those that provide services.

If you are using the cash basis scheme, then capital expenditure is usually treated as an allowable business expense with the following exceptions:

  • The acquisition or disposal of a business or part of a business
  • Education or training
  • The provision, alteration or disposal of certain non-depreciating assets, assets not acquired or created for continuing use in the trade, land, non-qualifying intangible assets and certain financial assets.

In addition, if you buy a car you can claim the purchase as a Capital Allowance on the condition that the business mileage rate has not been claimed on the car. This is because the rate already contains an element to allow for depreciation.