Credit Control

Obtaining new customers is great for business, unless they fail to pay you. If you fail to check that the customer can support the amount of credit you are granting, then commencing legal action when they do not pay can be a long drawn out and potentially costly process.

If payment from the customer is not obtained and the goods or services have been provided, your cash flow is likely to be under pressure. Ensuring that customers pay on time will make managing your business easier.

If you fail to pay your suppliers because you have not been paid by your customer then you could also be damaging their business as well. This is not only bad business practice but could be regarded as corporate social irresponsibility. Treat your suppliers as you want your customers to treat you.

Factors to consider

The first thing you should do is get to know your customer. This should start before you take on a new customer and before you give them any credit. The bare minimum of what you should know is:

• the exact name of the customer and the trading address (consider using Companies House Webcheck service)
• their type of business structure, e.g. are they a sole trader, a partnership or a limited company?
• names and personal addresses of the proprietors’ if their structure is unincorporated (consider verifying letter headed paper to support this information)
• contact other suppliers to obtain references
• their credit rating.

Before you provide goods or services to any customer make sure you address the following:

• discuss and agree payment terms with the customer before accepting the order
• agree the terms in writing
• review any documentation from the customer where they try to change the agreed payment terms
• negotiate and agree payment terms with suppliers before accepting the order
• if there is a gap between customer and supplier payment terms, consider whether finance is available to bridge the gap, this will require an understanding of your working capital management
• produce a cash flow forecast covering all expected income and expenses
• have a standard policy in place to ensure that payment terms cannot be altered without appropriate authorisation
• ensure that you have the right to apply late payment and interest charges on invoices.

After you have provided goods or services to a customer ensure that you:

• raise invoices promptly
• raise invoices accurately to ensure all items are included at the quoted prices
• include a reference number for the order and then quote this if any dispute arises
• have everything the customer requires on the invoice
• have a process for chasing invoices
• have a process for dealing with disputes
• keep a log of disputes to ascertain whether similar disputes or customers occur
• ensure that your invoices are fully compliant with HMRC for VAT purposes.

Consider your suppliers – treat them as you would like to be treated

Remember that not paying your suppliers on time is a bad business habit and it may result in a drop in your credit rating. You should:

• ensure you advise your suppliers of any disputes as soon as they occur
• pay on time by ensuring that your creditor’s ledger is accurately aged and
• keep your suppliers up to date with any issues you have with paying on time.

Some businesses unfortunately go ‘bad’ so you may wish to consider obtaining credit insurance where the business:

• would not be able to function if key customers went insolvent
• does not have the controls in place to ascertain whether a customer is likely to go insolvent
• is struggling to obtain information on prospective customers
• needs to improve credit management
• is considering a new market venture.

Businesses should consider obtaining factoring and financing options when:

• insufficient cash reserves are available to pay suppliers on time
• the business needs to grow
• the level of short term finance (including any overdraft facility) is insufficient
• staff do not have the right level of credit management skills.

How we can help

If you are struggling with your cash flow in these difficult times then we would be happy to discuss this further with you. Please contact us for more detailed advice.

Companies – Tax Saving Opportunities

Due to the ever changing tax legislation and commercial factors affecting your company, it is advisable to carry out an annual review of your company’s tax position.

Pre-year end tax planning is important as the current year’s results can normally be predicted with some accuracy and time still exists to carry out any appropriate action.

We outline below some of the areas where advance planning may produce tax savings.

For further advice please do not hesitate to contact us.

Corporation tax

Advancing expenditure

Expenditure incurred before the company’s accounts year end may reduce the current year’s tax liability.

In situations where expenditure is planned for early in the next accounting year the decision to bring forward this expenditure by just a few weeks can advance the related tax relief by a full 12 months.

Examples of the type of expenditure to consider bringing forward include:

• building repairs and redecorating
• advertising and marketing campaigns
• redundancy and closure costs.

Note that payments into company pension schemes are only allowable for tax purposes when the payments are actually made as opposed to when they are charged in the company’s accounts.

Capital allowances

Consideration should also be given to the timing of capital expenditure on which capital allowances are available to obtain the optimum reliefs.

Single companies irrespective of size are able to claim an annual investment allowance which provides 100% relief on expenditure on plant and machinery (excluding cars). The amount of AIA available for a particular accounting period varies depending on the accounting period.

Periods from:	Annual limit
1 April 2012	£25,000
1 January 2013	£250,000
1 April 2014	£500,000
1 January 2016	£25,000 (under review)

There are special rules where accounting periods straddle one of the above dates.

Groups of companies have to share the allowance. Expenditure on qualifying plant and machinery in excess of the AIA is eligible for writing down allowance (WDA) of 18%. Where the capital expenditure is incurred on integral features the WDA is 8%.

100% allowances on designated energy saving technologies continue to be available in addition to the annual investment allowance. Details can be found at www.etl.decc.gov.uk.

Limited allowances are also available for investments in certain types of building.

Trading losses

Companies incurring trading losses have three main options to consider in utilising these losses:

• they can be set against any other income (for example bank interest) or capital gains arising in the current year
• they can be carried forward and set against trading profits arising in future years
• they can be carried back for up to one year and set against total profits.

Extracting profits

Directors/shareholders of family companies may wish to consider extracting profits in the form of dividends rather than as increased salaries or bonus payments.

This can lead to substantial savings in national insurance contributions.

Note however that company profits extracted as a dividend remain chargeable to corporation tax at a minimum of 20%.

Dividends

From the company’s point of view timing of payment is not critical, but from the individual shareholder’s perspective, timing can be an important issue. If the shareholder is a higher/additional rate taxpayer, a dividend payment which is delayed until after the tax year ending on 5 April may give the shareholder an extra year to pay any further tax due.

The deferral of tax liabilities on the shareholder will be dependent on a number of factors. Please contact us for detailed advice.

Loans to directors and shareholders

If a ‘close’ company (broadly, one controlled by its directors or by five or fewer shareholders) makes a loan to a shareholder, this can give rise to a tax liability for the company.

If the loan is not settled within nine months of the end of the accounting period, the company is required to make a payment equal to 25% of the loan to HMRC. The money is not repaid to the company until nine months after the end of the accounting period in which the loan is repaid by the shareholder.

A loan to a director may also give rise to a tax liability for the director on the benefit of a loan provided at less than the market rate of interest.

Rates of tax

For the 2015 financial year the rate of corporation tax will be 20%

Self assessment

Under the self assessment regime most companies must pay their tax liabilities nine months and one day after the year end.

Companies which pay (or expect to pay) tax at the main rate are required to pay tax under the quarterly accounting system. If you require any further information on the quarterly accounting system, we have a factsheet which summarises the system.

Corporation tax returns must be submitted within twelve months of the year end and are required to be submitted electronically. In cases of delay or inaccuracies interest and penalties will be charged.

Capital gains

Companies are chargeable to corporation tax on their capital gains less allowable capital losses.

Indexation allowance

In order to counteract the effects of inflation inherent in the calculation of a capital gain, an indexation allowance is given. However the allowance is not allowed to increase or create a capital loss.

Planning of disposals

Consideration should be given to the timing of any chargeable disposals to ensure advantage is taken where possible of minimising the tax liability at small profits rate rather than full rate. This could be achieved depending on circumstances by accelerating or delaying sales. The availability of losses or the feasibility of rollover relief (see below) should also be considered.

Purchase of new assets

It may be possible to avoid a capital gain being charged to tax if the sale proceeds are reinvested in a replacement asset.

The replacement asset must be acquired in the four year period beginning one year before the disposal and only certain trading tangible assets qualify for relief.

How we can help

Tax savings can only be achieved if an appropriate course of action is planned in advance. It is therefore vital that professional advice is sought at an early stage. We would welcome the chance to tailor a plan to your specific circumstances. Please do not hesitate to contact us.

Fixed Rate Expenses

We consider an optional system of fixed rate expenses which is available for some businesses.

The rules allow the use of a ‘simplified’ fixed rate deduction instead of actual costs paid or incurred. It is optional, but using fixed rates may reduce the need for some of the detailed record keeping and calculations necessary to support tax deductible expenses. The amount of the overall tax allowable deductions could be greater or smaller compared to an actual cost comparison depending on the business circumstances.

Am I eligible?

The use of fixed rates is available to anyone who is self-employed. Partnerships can also use them as long as all the members of the partnership are individuals.

What do the fixed rates apply to?

Principally they apply to the following:

• business mileage
• deductions for business use of home
• adjustments for private use of business premises

We consider the rules for calculating the fixed rates and when these are available.

Business mileage

Rather than claiming the actual deductions for purchasing, maintaining and running a motor vehicle or motorcycle businesses can calculate allowable expenditure using a fixed rate based on mileage. The rates are:

Cars and vans
Up to 10,000 miles	45p per mile
Over 10,000 miles	25p per mile
Motorcycles	24p per mile

It is important to note that once the fixed rate is used for a particular vehicle, the same method must continue to be used for as long as the vehicle remains in the business. It will therefore be important to keep a detailed mileage log/diary. Additional business costs that are journey specific, such as parking fees and congestion charges will still need to be recorded and claimed. If capital allowances have been claimed the fixed rate cannot be used. Additionally, where for example a van has been claimed as an allowable payment under the cash basis, then the fixed rate cannot be used.

Business use of home

It is very common for self-employed individuals to work at least some of the time from home. Some tax relief is available if part of a home is used solely for the purpose of the business for a specified time. It is important however to ensure that part of the home is not exclusively used for business purposes unless absolutely necessary as this restricts the capital gains tax main residence exemption on the eventual sale of the home. Instead of recording actual costs on running a home (e.g. utilities, telephone and internet charges) and claiming a business proportion, a fixed rate deduction can be claimed. If you decide to adopt the fixed rate then the following rates apply:

Number of hours worked per month	Allowable amount
25 or more	£10
51 or more	£18
101 or more	£26

Hours worked is the number of hours spent wholly and exclusively on work done by yourself or an employee in your home wholly and exclusively for the purposes of the business. You can revert to actual costs in another year after choosing to use the fixed rate for one year.

Private use of business premises

If you use premises both as a home and as business premises for example a pub, the total expenses of the property need to be adjusted for private use. A fixed scale can be used to adjust for the private use which will increase taxable profits. Only premises which are used mainly for the purposes of carrying on a trade will qualify.

The fixed scale is as below and is for each month (or part month) falling within the period:

Number of relevant occupants	Flat rate per month
1	£350
2	£500
3 or more	£650

The ‘number of relevant occupants’ is based on how many people (including children) use the businesses premises each month (or part of a month) as a private home.

HMRC have advised that the flat rate includes all household goods and services, food and non-alcoholic drinks and utilities but not mortgage interest, rent, council tax or rates. This appears to make the rates above expensive addbacks as a further adjustment is therefore required for these other expenses.

How can we help

We would be happy to review whether claiming fixed rate expenses would be beneficial in your business circumstances so please do contact us.

Seed Enterprise Investment Scheme

The Enterprise Investment Scheme (EIS) has been in place for a number of years and provides tax relief for individuals prepared to invest in new and growing companies. Investors can obtain generous income tax and capital gains tax (CGT) breaks for their investment and companies can use the relief to attract additional investment to develop their business. A junior version of EIS known as Seed Enterprise Investment Scheme (SEIS) has been introduced from 6 April 2012 onwards.

Key features

The key features of the new relief can be summarised as follows:

• a qualifying investor will be able to invest up to £100,000 into qualifying companies in a tax year
• they will receive income tax relief of up to 50% of the sum invested
• unused relief in one tax year can be carried back to the preceding tax year if there is unused relief available for that year
• the maximum amount that a company can attract in investment qualifying for SEIS is £150,000 in total
• the company must not have net assets of more than £200,000 before any SEIS investment
• an individual who makes a capital gain on another asset and uses the amount of the gain in making a SEIS investment will not pay tax on that gain in 2012/13 and 50% of the liability for 2013/14 and beyond subject to certain conditions
• there is a huge amount of anti-avoidance legislation to prevent exploitation for tax avoidance purposes.

Who can invest?

The official term is a ‘qualifying investor’. The primary requirement is that the investor or someone who is associated with them must not be an employee of the company in which the investment is being made. They can however be a director. They must also ensure that they do not have (directly or indirectly) a substantial interest in the company. This is defined by reference to holding more than 30% of any of the following (in either the company itself or a 51% subsidiary of the company):

• ordinary shares
• issued shares
• voting rights
• assets in a winding up.

Which shares qualify?

The shares must be ordinary shares which have been subscribed for wholly in cash and are fully paid up. They must be held for a three year period from the date of issue. The company must have issued the shares for the purpose of raising money to fund a qualifying business activity which either involves the carrying on (or preparations to carry on) a new trade. Using the funds to meet the costs of research and development intended to create or benefit a new qualifying trade will also be acceptable. The money must be spent within three years of the date of issue of the shares. The anti-avoidance requirement is that there must be no pre-arranged exit for the investor involving the purchase of the shares, or the disposal of assets.

Which companies qualify?

The rules are intended to benefit new companies. The basic requirements are that the company must be unquoted. The trade must be a ‘new’ qualifying trade. This is one not carried out by either the company or any other person for longer than two years at the date the shares are issued. The company must exist wholly for the purpose of carrying out one or more qualifying trades throughout the three year period from the date of issue of the shares. If the company goes into receivership or administration or is wound up during this period, this will not prevent the relief being given provided there was a commercial justification for the action.

The other main conditions relating to the company can be summarised as follows:

• the company must have a permanent establishment in the UK
• the company must be effectively solvent at the date of issue of the shares
• the company may have a qualifying subsidiary
• the company must not be a member of a partnership
• immediately before the investment, the gross assets of the company plus the value of any related entity (one that holds more than 25% of the capital or voting power in the issuing company) must not exceed £200,000
• there are less than 25 full-time employee equivalents in the company and any related entity
• the company must not have had EIS or Venture Capital Trust (VCT) investment before the SEIS shares are issued
• the company can seek EIS or VCT investment after it has received SEIS investment but must show that it has spent at least 75% of the money received under SEIS, and
• the total amount of investment made under SEIS in the company must not exceed an aggregate of £150,000.

Which trades qualify?

The primary requirement is that the company must carry on a genuine new trading venture. There may be a problem if the same activities had been carried on as part of another trade. Basically any trading activity will qualify unless it is an excluded activity within the definitions used for EIS. This means that activities such as property development, retail distribution, hotels, nursing homes and farming will not qualify. The trade must be carried out on a commercial basis.

How is relief obtained?

The relief is given as a reduction against the total tax liability for the year but cannot turn a tax liability into a tax repayment. In that situation the individual would be able to carry back the unused relief to the preceding tax year for use if there was any tax unrelieved for that year.

Examples Samantha invests £60,000 under SEIS in 2014/15. Potentially her tax relief is 50% of her investment which is therefore worth £30,000. As her tax liability for the year is £45,000, the maximum relief is available to reduce her tax liability to £15,000. Richard also invests £60,000 under SEIS in 2014/15. His forecast tax liability for 2014/15 is only £20,000 so the claim to relief under SEIS will be limited to £20,000 for that tax year. However, Richard can in addition make a claim to carry back the unused relief of £10,000 (£30,000 less £20,000 relieved in 2014/15) to the preceding tax year 2013/14. The relief must be claimed and requires a certificate from the company issuing the shares.

Can the relief be withdrawn?

The short answer is yes if certain events happen within three years of the date on which the shares are issued. The most obvious event is the disposal of the shares in that period. There are complex rules that will cause the relief to be withdrawn if the investor receives value from the company during this period.

What about the CGT position?

Where shares are sold more than three years after the date on which they are issued then any resulting gain is free of CGT. Shares sold within three years would be chargeable but may qualify for the 10% rate of CGT under Entrepreneurs’ Relief if the various conditions are met.

Where a disposal is exempt for gains purposes, this would normally mean that a loss would not be allowable for CGT purposes, but an allowable loss is available under the scheme. Where SEIS income tax relief has been obtained and is not withdrawn then the capital loss is reduced so that tax relief is not duplicated.

Example Murat invested £25,000 in SEIS in 2012/13 for which he received £12,500 relief against his income tax liability of £35,000. If 4 years later the company is unsuccessful and is liquidated with no value returned to the shareholders then his allowable capital loss will be £12,500 being the amount invested of £25,000 less the income tax relief obtained of £12,500. Clearly investors will hope that they are not in a capital loss position but where this does happen, the allowable loss qualifies for relief against either gains or income. The facility to use a capital loss against income is only available in certain specified circumstances which include a capital loss on SEIS. It can be used in the year of the loss and/or the preceding year to relieve net income and can therefore potentially save tax at the individual’s highest rate of tax.

A bonus exemption

There is also an additional exemption where assets are disposed of at a gain in that year and funds equal to the amount of the gain are invested in SEIS shares. Reinvestment relief is available at 50% of the matched gain where the proceeds are invested in SEIS shares (100% relief was available for 2012/13 only).

Where only part of the gain is invested in such shares then only that part is exempt. The maximum gain to be relieved is capped at £100,000. Further, this relief will only be allowed where the investment also qualifies for income tax relief and a claim is made. If for any reason the SEIS relief is withdrawn on the shares then the gain will be reinstated.

Example Isaac sells some more quoted shares in 2014/15 for £200,000 making a gain of £80,000. He invests £80,000 of the proceeds in new shares which qualify under SEIS. He will be able to claim a reduction of £40,000 (being 50% of the amount invested in SEIS) in the chargeable gain on the shares.

Comparison to EIS

The introduction of SEIS supplements the current long established EIS scheme. Some aspects of both schemes are similar but there are also key differences. These are not considered in detail here but for example, consider the position of the individual investor. Improvements to the EIS scheme mean that those investing in qualifying companies under that scheme be able to put up to £1 million into EIS companies, for which they will receive income tax relief at up to 30%. From a tax relief perspective on investments up to £100,000, the SEIS is more favourable but it clearly cannot be used for larger investments.

Future changes

It was announced in Budget 2015 that the government will make amendments to the scheme, subject to EU state aid approval:

• Introduce a cap on total investment received under tax-advantaged venture capital schemes of £15 million, increasing to £20 million for knowledge-intensive companies
• Increase the employee limit for knowledge-intensive companies to 499 employees, from the current limit of 249 employees.
• The government will encourage the transition from SEIS to the other venture capital schemes by removing the requirement that 70% of the funds raised under SEIS must have been spent before EIS or VCT funding can be raised.

How we can help

SEIS is a welcome addition to the existing EIS and related Venture Capital Trust investment schemes particularly as it may be an alternative way of attracting funds at a time when it is still difficult to obtain finance from traditional sources such as banks. Great care will be required to ensure that all opportunities to use it are obtained for investor and qualifying company alike. Please do contact us if this is an area of interest.

Age Discrimination

The Equality Act 2010 replaces all previous equality legislation, including the Employment Equality (Age) Regulations 2006. The Equality Act covers age, disability, gender reassignment, race, religion or belief, sex, sexual orientation, marriage and civil partnership and pregnancy and maternity. These are now called ‘protected characteristics’.

The Act protects people of any age, however, different treatment because of age is not unlawful if you can demonstrate that it is a proportionate means of meeting a legitimate aim. Age is the only protected characteristic that allows employers to justify direct discrimination.

Employers need to ensure they have the appropriate policies and procedures in place to deal with age discrimination and should raise awareness of it so that acts of discrimination on the grounds of age can be prevented.

Discrimination

Discrimination occurs when someone is treated less favourably than another person because of their protective characteristic.

There are four definitions of discrimination:

Direct Discrimination: treating someone less favourably than another person because of their protective characteristic

Indirect Discrimination: having a condition, rule, policy or practice in your company that applies to everyone but disadvantages people with a protective characteristic

Associative Discrimination: directly discriminating against someone because they associate with another person who possesses a protected characteristic

Perceptive Discrimination: directly discriminating against someone because others think they possess a particular protected characteristic

Examples of Age Discrimination

An example of direct discrimination would be where someone with all the skills and competencies to undertake a role is not offered the position just because they completed their professional qualification 30 years ago. Other examples could include refusing to hire a 40 year old because of a company’s youthful image, not providing health insurance to the over 50’s and not promoting a 25 year old because they may not command respect.

A business requiring applicants for a courier position to have held a driving licence for five years is likely to be guilty of indirect discrimination. A higher proportion of people aged between 40 and above will have fulfilled this criteria than those aged 25. Other examples of indirect discrimination could include seeking an ‘energetic employee’, requiring 30 years of experience or asking clerical workers to pass a health test.

An example of perceived discrimination could be where an older man who looks much younger than his years is not allowed to represent his company because the Managing Director thinks he is too young.

However, different treatment because of age is not unlawful if it can be objectively justified and you can demonstrate that it is a proportionate means of meeting a legitimate aim. For example, an employer might argue that it was appropriate and necessary to refuse to recruit people over 60 where there is a long and expensive training period before starting the job. However, cost by itself is not capable of justifying such an action.

Harassment

Harassment on the basis of age is equally unlawful. For example, a mature trainee teacher may be teased and tormented in a school on the grounds of age during the teaching experience. If no action is taken by the head teacher, this may be treated as harassment. An employee may be written off as ‘too slow’ or ‘an old timer’. This too could be seen as harassment.

The Equality Act 2010 covered harassment by a third party, making employers potentially vicariously liable for harassment of their staff by people they don’t employ. However, this has been repealed with effect from October 2013, and employers will no longer have the risk of being held responsible if an external third party harasses an employee. However, employers must continue to take ‘all reasonable steps’ to ensure that employees don’t suffer harassment at work; therefore it is recommended that your harassment policy still states that you show “zero tolerance” towards such behaviour.

Recruitment

Employers must be aware of the significance of the legislation at all stages in the recruitment process and to avoid breaking the age rules they should consider:

• removing age/date of birth from adverts for example: ‘Trainee Sales Representatives.. envisaged age 21-30 years’
• reviewing application forms to ensure they do not ask for unnecessary information about periods and dates
• avoiding asking for ‘so many years of experience’ in job descriptions and person specifications for example: ‘graduated in the last seven years’
• avoiding using language that might imply a preference for someone of a certain age, such as ‘mature’, ‘young’, ‘energetic’ or ‘the atmosphere in the office, although demanding, is lively, relaxed and young’
• ensuring that other visible methods are used to recruit graduates as well as university milk rounds, to avoid limiting opportunities to young graduates
• focusing on competencies to undertake a role and not making interview notes that refer to age considerations
• never asking personal questions nor make assumptions about health or physical abilities
• never ask health related questions before you have offered the individual a job.

Service related benefits

Employers are allowed to use a length of service criterion in pay and non-pay benefits of up to five years’ service. Benefits based on over five years service are also allowed if the benefit reflects a higher level of experience, rewards loyalty or increases or maintains motivation and is applied equally to all employees in similar situations. It is for the employer to demonstrate that the variation in pay/benefits over five years can be objectively justified.

Employers are recommended to review their pay and benefits policies to ensure that they are based on experience, skills and other non-age related criteria.

Redundancy

The existing statutory payment provisions remain in place. Employers can, as before, pay enhanced redundancy payments. However, to avoid discriminating, employers should use the same age brackets and multipliers as used when calculating statutory redundancy pay.

Retirement

The default retirement age and the statutory retirement procedure were abolished from 6th April 2011.

Employers that wish to prescribe a compulsory retirement age may do so only if it is a proportionate means of achieving a legitimate aim.

Action for employers

Employers need to undertake the following to ensure that they are not breaking the law:

• review equality policies
• review employee benefits
• review policies and procedures on retirement
• undertake equality training covering recruitment, promotion and training.

How we can help

We will be more than happy to provide you with assistance or any additional information required. Please contact us for more detailed advice.

Capital Gains Tax

A capital gain arises when certain capital (or ‘chargeable’) assets are sold at a profit. The gain is the sale proceeds (net of selling costs) less the purchase price (including acquisition costs).

What are the main features of the current system?

• Capital gains tax (CGT) at the rate of 18% applies to gains (including any held over gains coming into charge) where net total taxable gains and income is below the income tax basic rate band of for 2015/16 £31,785 (2014/15 £31,865). Gains or any parts of gains above this limit will be charged at 28%.
• Entrepreneurs’ relief may be available on certain business disposals.

Entrepreneurs’ Relief (ER)

ER may be available for certain business disposals taking place on or after 6 April 2008 and has the effect of charging the first £10m (from 6 April 2011) of gains qualifying for the relief at an effective rate of 10%. The lifetime limit has previously been £5m, £2m and £1m since the introduction of the relief.

The relief will apply to gains arising on a disposal of:

• the whole, or part, of a trading business that is carried on by the individual, either alone or in partnership;
• shares in a trading company, or holding company of a trading group, provided that the individual owns broadly a 5% shareholding and has been an officer or employee of the company;
• assets used by a business or a company which has ceased;
• assets used in a partnership or by a company but owned by an individual, if the assets disposed of are ‘associated’ with the withdrawal of the individual from participation in the partnership or the company.

A trading business includes professions but only includes a property business if it is a ‘furnished holiday lettings’ business.

Restrictions on obtaining the relief on an ‘associated disposal’ are likely to apply in certain specific situations. This includes the common situation where a property is currently in personal ownership, but is used in an unquoted company or partnership trade in return for a rent. Under ER the availability of relief is restricted where rent is paid from 6 April 2008 onwards.

What is clear is that careful planning will be required with ER but if you would like to discuss ER in detail and how it might affect your business, please do get in touch.

Simplification of the share identification rules

All shares of the same class in the same company are treated as forming a single asset, regardless of when they were originally acquired. However, ‘same day’ transactions are matched and the ‘30 day’ anti-avoidance rules will remain.

Example On 15 April 2015 Jeff sold 2000 shares in A plc from his holding of 4000 shares which he had acquired as follows: 1000 in January 1990 1500 in March 2001 1500 in July 2005 Due to significant stock market changes he decided to purchase 500 shares on 30 April 2015 in the same company. The disposal of 2000 shares will be matched firstly with later transaction of 500 shares as it is within the following 30 days and then with 1,500/4,000 (1000+1500+1500) of the single asset pool on an average cost basis.

CGT annual exemption

Every tax year each individual is allowed to make gains up to the annual exemption without paying any CGT. The annual exemption for 2015/16 is £11,100 (2014/15 £11,000). Consideration should be given to ensuring both spouses/civil partners utilise this facility.

Other more complex areas

Capital gains can arise in many other situations. Some of these, such as gains on Enterprise Investment Scheme and Venture Capital Trust shares, and deferred gains on share for share or share for loan note exchanges, can be complex. Please talk to us before making any decisions.

Other reliefs which you may be entitled to

And finally, many existing reliefs continue to be available, such as:

• private residence relief;
• business asset roll-over relief, which enables the gain on a business asset to be deferred until a point in the future;
• business asset gift relief, which allows the gain on business assets that are given away to be held over until the assets are disposed of by the donee; and
• any unused allowable losses from previous years, which can be brought forward in order to reduce any gains.

How we can help

Careful planning of capital asset disposals is essential. We would be happy to discuss the options with you. Please contact us if you would like further advice.

Annual Leave

Background

Under the Working Time Regulations 1998 (as amended) workers are entitled to paid statutory annual leave of 5.6 weeks (28 days if the employee works five days a week), this basic entitlement is inclusive of bank holidays. This annual leave entitlement is now closer to that of workers in other European countries, where holiday allowance is typically more generous. Workers in Ireland are entitled to 29 days; the highest minimum entitlement is in Austria at 38 days.

Payment for annual leave

A worker is entitled to be paid in respect of any period of annual leave for which they are entitled, at a rate of one week’s pay for each week’s leave. For employees with normal working hours a week’s pay is the pay due for the basic hours the employee is contracted to work. Any regular contractual bonuses or allowances (except expense allowances) which do not vary with the amount of work done are also included.

Commission has previously not been included in the calculation of holiday pay, however, following a recent ruling by the European Court of Justice, when commission is related to the number of sales made whilst at work, these should also be included in the calculation of holiday pay. The method of calculating such payments is not yet defined and will be a matter for the national courts to decide when the case is heard next year, but is likely to be an average of previous month’s commission. Voluntary overtime payments are excluded.

Under the Regulations any statutory annual leave may not be replaced by a payment in lieu, except on termination of employment. In such cases, a payment can be made for any untaken leave in the leave year that termination occurs, payment may also be due for any carried over leave because of maternity/adoption leave or sickness.

Rolled up leave

The ECJ has ruled that it is unlawful for employers to roll up workers’ annual leave payments. In accordance with this it is recommended that employers renegotiate contracts involving such pay for existing workers as soon as possible so that payment for statutory annual leave is made at the time when the leave is taken.

Requesting leave

Employees should be allowed to choose when they take some of their leave although many employers do set certain conditions, for example that only a certain number of workers may take leave at the same time or that workers may not take more than a certain number of consecutive working days off in one go.

It is common for employers to have a procedure in place for these instances and it should include the procedure for notification. If this is excluded then the legal position is that an employee requesting a period of leave must give notice of at least twice the period of leave to his or her employer. A similar arrangement of notice must be given by the employer if they are requesting the employee to take leave at specific times.

First year of employment

Workers accrue their annual leave entitlement on a pro rata basis during their first year of employment. This is calculated in relation to the proportion of the employment year worked.  Therefore, the annual leave entitlement will accrue over the course of the worker’s first year of employment at the rate of 1/12 of the annual entitlement starting on the first day of each month. If the calculation does not result in an exact number of days then the figure will be rounded up to the nearest half day.

Annual leave and part time employees

Under the Regulations time off for bank holidays should be pro rated. Part time workers are currently entitled to 5.6 weeks’ holiday, based on the hours a week that they work, regardless of whether they work on days on which bank holidays fall.

Contractual annual leave entitlement

An employer can increase a worker’s statutory annual leave entitlement via a contractual arrangement. In such cases any unused additional annual leave may be carried over to the next leave year. This is often a matter of employer discretion and will depend on the terms of the contract.

Annual leave and maternity

An employee continues to accrue their statutory annual leave entitlement of 5.6 weeks and any additional contractual annual leave entitlement throughout both ordinary maternity leave (OML) and additional maternity leave (AML).

Sickness during holiday

Employees are now entitled to reclassify statutory holiday as sick leave if they fall ill whilst on prearranged statutory holiday. This means that they are entitled to take the statutory holiday they have missed at a later date. If they are unable to take the rest of their statutory holiday that holiday year they can carry it over to the next holiday year. If you offer more than 5.6 weeks holiday a year, you do not have to allow an employee to reclassify any additional (contractual) holiday as sickness absence. However, you will have to ensure that they can take their full statutory holiday at other times. If you pay contractual sick pay, you can minimise the scope for abuse by making contractual sick pay in these circumstances contingent on the employee notifying you on the first day of illness that they are ill and, possibly, requiring them to provide a medical certificate from day 1.

Employees who are on sick leave can ask their employer to re-classify their absence as statutory holiday in order to receive holiday pay. If an employee on sick leave does not want to take their outstanding statutory holiday before your current leave year ends, they should be permitted to carry it over into the next leave year. Employees returning from sick leave can take their statutory holiday entitlement for the current year on their return but, if there is insufficient time for them to take it, they should be allowed to carry it forward to the next leave year.

Recovery of overpayment of holiday

Employee contracts should make clear that if an employee takes more holiday than he or she is entitled to during the course of a leave year, the company will be entitled to recover the overpayment of holiday pay by deducting it from the employee’s wages or salary. It is advisable for the company to consult with the employee before making the deduction.

How we can help

We will be more than happy to provide you with assistance or any additional information required. Please contact us for more detailed advice.

Travel and Subsistence for Directors and Employees

Travelling and subsistence expenditure incurred by or on behalf of employees gives rise to many problems.

We highlight below the main areas to consider in deciding whether tax relief is available on travel and subsistence.

Employees with a Permanent Workplace

Many employees have a place of work which they regularly attend and make occasional trips out of the normal workplace to a temporary workplace. Often an employee will travel directly from home to a temporary workplace and vice versa.

An employee can claim full tax relief on business journeys made.

A business journey is one which either involves travel: from one place of work to another or from home to a temporary workplace or to home from a temporary workplace.

Journeys between an employee’s home and a place of work which he or she regularly attends are not business journeys. These journeys are ‘ordinary commuting’ and the costs of these have to be borne by the employee. The term ‘permanent workplace’ is defined as a place which the employee ‘regularly’ attends. It is used in order to fix one end of the journey for ordinary commuting. Home is the normal other end of the journey for ordinary commuting.

Example 1 An employee usually commutes by car between home in York and a normal place of work in Leeds. This is a daily round trip of 48 miles. On a particular day, the employee instead drives from home in York to a temporary place of work in Nottingham. A round trip of 174 miles. The cost here is the cost of the travel undertaken (174 miles). A deduction would be available for that amount.

Example 2 An employee who normally drives 40 miles in a northerly direction to work is required to make a 100 mile round trip south to a client’s premises. His employer reimburses him for the cost of the 100 miles trip. A deduction would be available for that amount.

Subsistence payments

Subsistence includes accommodation and food and drink costs whilst an employee is away from the permanent workplace. Subsistence expenditure is specifically treated as a product of business travel and is therefore treated as part of the cost of that travel.

Anti-avoidance

Some travel between a temporary workplace and home may not qualify for relief if the trip made is ‘substantially similar’ to the trip made to or from the permanent workplace.

‘Substantially similar’ is interpreted by HMRC as a trip using the same roads or the same train or bus for most of the journey.

Temporary postings

Where an employee is sent away from his permanent workplace for many months, the new workplace will still be regarded as a temporary workplace if the posting is either:

• expected to be for less than 24 months, or
• if it is expected to be for more than 24 months, the employee is expected to spend less than 40% of his working time at the new workplace.

The employee must still retain his permanent workplace.

Example 3 Edward works in New Brighton. His employer sends him to Wrexham for 1.5 days a week for 28 months. Edward will be entitled to relief. Any posting over 24 months will still qualify provided that the 40% rule is not breached.

Site-based Employees

Some employees do not have a normal place of work but work at a succession of places for several days, weeks or months. Examples of site-based employees include construction workers, safety inspectors, computer consultants and relief workers.

A site-based employee’s travel and subsistence can be reimbursed tax free if the period spent at the site is expected to be, and actually is, less than two years.

There are anti-avoidance provisions to ensure that the employment is genuinely site-based if relief is to be given. For example, temporary appointments may be excluded from relief where duties are performed at that workplace for all or almost all of that period of employment. This is aimed particularly at preventing manipulation of the 24 month limit through recurring temporary appointments.

Other Employees with no Permanent Workplace

Travelling appointments

For some employees, travelling is an integral part of their job. For example, a travelling salesman who does not have a base at which he works, or where he is regularly required to report. Travelling and subsistence expenses incurred by such an employee are deductible.

Home based employees

Some employees work at home occasionally, or even regularly. This does not necessarily mean that their home can be regarded as a place of work. There must be an objective requirement for the work to be performed at home rather than elsewhere.

This may mean that another place becomes the permanent workplace for example, an office where the employee ‘regularly reports’. Therefore any commuting cost between home and the office would not be an allowable expense. But trips between home and temporary workplaces will be allowed.

If there is no permanent workplace then the employee is treated as a site-based employee. Thus all costs would be allowed including the occasional trip to the employer’s office.

The home may still be treated as a workplace under the objective test above. If so, trips between home and any other workplace in respect of the same employment will be allowable.

How we can help

Full tax relief can be given for travel and subsistence costs but there are borderline situations.

We can help you to decide whether an employee can be paid expense payments which are covered by tax relief and do not result in a taxable benefit.

Please note that if you do make payments for which tax relief is not available, there may be PAYE compliance problems if the payments are made free of tax.

Please contact us if you require advice whether payments can be made to employees tax free.

Enterprise Investment Scheme

The purpose of the Enterprise Investment Scheme (EIS) is to help certain types of small higher-risk unquoted trading companies to raise capital. It does so by providing income tax and CGT reliefs for investors in qualifying shares in these companies.

There are really two separate schemes within EIS:

• a scheme giving income tax relief on the investment and a CGT exemption on gains made when the shares are disposed of and/or
• a scheme aimed at providing a CGT deferral.

An individual can take advantage of either or both of these schemes.

EIS reliefs available

Income tax relief

• Investors may be given income tax relief at 30% on their investments of up to £1,000,000 (£500,000 prior to 6 April 2012) a year.
• The income tax relief is withdrawn if the shares are disposed of within three years.

CGT exemption

• Gains on the disposal of EIS shares are exempt unless the income tax relief is withdrawn.
• The CGT exemption may be restricted if an investor does not get full income tax relief on the subscription for EIS shares.
• Losses on the disposal of EIS shares are allowable. The amount of the capital loss is restricted by the amount of the EIS income tax relief still attributable to the shares disposed of.
• A capital loss arising on the disposal of EIS shares can be set against income.

CGT deferral

• Gains arising on disposals of any assets can be deferred against subscriptions for shares in any EIS company.
• Shares do not have to have income tax relief attributable to them in order to qualify for deferral relief.
• The gain will become chargeable in the tax year when the subscription shares are disposed of.
• There is no upper limit on the amount of deferral relief available to an individual although there is a limit on investment in a single company or group of companies.

Qualifying Companies

Companies must meet certain conditions for any of the reliefs to be available for the investor.

• The company must be unquoted when the shares are issued and there must be no arrangement in existence at that time for it to cease to be unquoted.
• All the shares comprised in the issue must be issued to raise money for the purpose of a qualifying business activity.
• The money raised by the share issue must be wholly employed within a specified period by the company.
• The company or group must have fewer than 250 full time employees.
• The size of the company is limited to £15 million (gross assets).
• The amount of capital raised in any 12 month period is limited to £5 million.
• The company must not be regarded as an ‘enterprise in difficulty’ under EC guidance.
• The company need only have a permanent establishment in the UK rather than carrying on a qualifying trade wholly or mainly in the UK.

Qualifying business activities

A trade will not qualify if excluded activities amount to a substantial part of the trade. The main excluded activities are:

• dealing in land, in commodities or futures or in shares, securities or other financial instruments
• financial activities
• dealing in goods other than in an ordinary trade of retail or wholesale distribution
• leasing or letting assets on hire
• receiving royalties or licence fees, other than, in certain cases, such payments arising from film production, or from research and development
• providing legal or accountancy services
• property development
• farming or market gardening
• holding, managing, or occupying woodlands
• operating or managing hotels, guest houses or hostels
• operating or managing nursing homes or residential care homes
• ship building
• coal and steel production.

Time period in which the money is invested

The time limit for the employment of money invested is to two years from the issue of the shares or if later two years from the commencement of the qualifying activity if later.

How to qualify for income tax relief

Eligibility for income tax relief is restricted to companies with which you are not ‘connected’ at any time during a period beginning two years before the issue of the shares and ending three years after that date, or three years from the commencement of the trade if later.

You can be connected with a company in two broad ways:

• by virtue of the size of your stake in the company or
• by virtue of a working relationship between you and the company.

In both cases the position of your ‘associates’ is also taken into account.

Size of stake

You will be connected with the company at any time when you control directly or indirectly possess, or are entitled to acquire, more than 30% of the ordinary share capital of the company.

Working relationship

You will be connected with the company if you have been an employee or a paid director of the company.

There is an exception to this rule if you become a paid director of the company after you were issued with the shares.

You must never previously have been connected with the company and must not become connected with it in any other way. Also, you must never have been involved in carrying on the whole or any part of the trade or business carried on by the company.

How to qualify for CGT deferral relief

You can defer a chargeable gain which accrues to you on the disposal by you of any asset. In addition, you can defer revived gains arising to you in respect of earlier EIS, Venture Capital Trust (VCT) or CGT reinvestment relief investments.

There are some restrictions on investments against which gains can be deferred. These are designed, broadly, to prevent relief being obtained in circumstances where there is a disposal and acquisition of shares in the same company.

Receiving value from a company

The EIS is subject to a number of rules which are designed to ensure that investors are not able to obtain the full benefit of EIS reliefs if they receive value from the company during a specified period. If relief has already been given, it may be withdrawn.

Examples of the circumstances in which you would be treated as receiving value from the company are where the company:

• buys any of its shares or securities which belong to you
• makes a payment to you for giving up the right to payment of a debt (other than an ordinary trade debt)
• repays a debt owed to you that was incurred before you subscribed for the shares
• provides you with certain benefits or facilities
• waives any liability of yours or an associate’s to the company
• undertakes to discharge, any such liability to a third party
• lends you money which has not been repaid before the shares are issued.

Receipts of ‘insignificant’ value will not cause the withdrawal of relief.

Future changes

It was announced in Budget 2015 that the government will make amendments to the scheme, subject to EU state aid approval:

• Require that companies must be less than 12 years old when receiving their first EIS investment, except where the investment will lead to a substantial change in the company’s activity
• Introduce a cap on total investment received under tax-advantaged venture capital schemes of £15 million, increasing to £20 million for knowledge-intensive companies
• Increase the employee limit for knowledge-intensive companies to 499 employees, from the current limit of 249 employees.

How we can help

It is not possible to cover all the detailed rules of the schemes in a factsheet of this kind. If you are interested in using the EIS please contact us.

We can also help to guide you through the implementation of a scheme which is suitable for your circumstances.

Social Enterprise Entity Structures

A social enterprise entity is a business with primarily social objectives. Any surpluses made are reinvested into the main principle of that entity (or into the community) rather than maximising profit for shareholders. Examples of types of objectives are regeneration of the local environmental area, promoting climate change awareness and training for disadvantaged people. There are various legal forms that should be considered when setting up this type of entity. Which one you choose will depend upon what the social enterprise actually does and the style of management of those running it.

The possible options available are as follows:

• Limited company
• Trust
• Unincorporated association
• Community interest company (CIC)
• Charitable incorporated organisation (CIO)
• Co-operative or community benefit society

Limited company

A limited company is a separate legal entity from its members and gives them limited liability. A limited company set up with a social purpose needs to set out its objectives which can also include commercial objectives. There are two choices of limited companies for social enterprise entities, a company limited by shares and a company limited by guarantee. In the case of a company limited by shares, dividends can be paid to the shareholders.

Limited company accounts need to be filed at Companies House and consideration needs to be given as to whether an audit is required.

If the limited company’s objectives are exclusively charitable and for the public benefit it may also be set up as a charity. Where this is the case the company will need to consider whether it needs to register with the Charity Commission. If it is a charity then it will need to follow Charities Act 2011 and the Charity Commission will require the submission of Annual Returns. In return, however it will have the benefits of being a charity such as potentially qualifying for a number of tax exemptions and reliefs on income and gains, and on profits for some activities.

Trust

Trusts are unincorporated bodies which do not distribute profits. The trust is set up as a legal entity which governs how its assets are to be used and as such can hold property and other assets for the community. Trustees act on behalf of the community in looking after the assets but it is important to note that the trust does not have its own legal identity The trustees are therefore liable for the trust’s liabilities.

Trust deeds are set up to protect the trust’s objectives. The trust is able to write an asset lock into its rules in order to secure assets for its intended community.

Like limited companies trusts can also be charities. The same points which are noted above for charitable limited companies should be considered for charitable trusts.

Unincorporated association

The simplest form for a social enterprise entity is an unincorporated association and it should be used when a number of individuals come together for a common ‘social’ purpose. There are very few formalities to setting up this way which is the key advantage. The members can set their own rules and a management committee is elected to run the entity on behalf of any members it may have. Associations are also able to carry out commercial activities.

The problem with the unincorporated association is that it has no separate legal identity. If there are any debts, the members are legally liable to pay those debts down to their last worldly possession. This type of entity is not likely to be suitable if you wish to employ staff, raise finance, take on leases or purchase property, apply for grants or enter into contractual arrangements.

Like limited companies and trusts, unincorporated associations can also be charities. The same points which are noted above for charitable limited companies should be considered for charitable unincorporated associations.

Community interest company (CIC)

These are specific limited companies that provide benefits to the community and the legal form has only been available since 2005. The reason behind the development of CICs was the lack of legal structures for non-charitable social enterprises. They can be set up as either companies limited by shares or companies limited by guarantee and thus have the benefits of limited liability. CICs need to be registered and comply with the CIC Regulations. They need to pass the ‘community interest test’ before they can register as CICs. Thus the main difference compared to other companies is that they are operating for the benefit of the community and not for the benefit of shareholders. An existing company can be converted to a CIC although a CIC cannot hold charitable status.

Like trusts, they have an asset lock which stops profits from being distributed and ensures that the assets are used for the community purpose. On winding up a CIC, all of the assets must be transferred to another similar asset-locked body.

A key advantage of a CIC (rather than a charity) is that the directors of a CIC can be remunerated (charity trustees generally are not remunerated). They are also not as heavily regulated (although are still regulated under a ‘light touch’ regime). They obviously do not have the taxation advantages that charities are entitled to and they have to file a community interest report annually with the CIC regulator (which is made available publicly).

Charitable incorporated organisation (CIO)

Since early 2013, the Charity Commission (the charity regulator for England and Wales) has started to register CIOs. CIOs have benefits similar to a limited company charity. This means that the members and trustees are usually personally safeguarded from the financial liabilities of the charity and that the charity has its own legal personality which means trustees do not have to take out contracts in their own names. CIOs do not have to register with Companies House but they do need to register with the Charity Commission.

In Scotland, SCIOs (Scottish Charitable Incorporated Organisations) have been available for a number of years now.

Co-operative or community benefit society

Community benefit societies (BenComs) are incorporated registered societies which operate for the benefit of the community in which they operate. They must be able to demonstrate their social objectives and why they wish to register as a society instead of a company. Registration is with the FCA for an applicable fee which will depend upon its rules.

BenComs are not the same as co-operatives as these operate for the benefit of members. Depending on how they distribute profits and what activities they undertake, co-operatives can also be social enterprise entities.

How we can help

All of the above structures require specialist advice so please contact us to find out more. We will be happy to discuss your plans and the most appropriate structure with you. The most appropriate structure will depend on a number of factors including consideration of taxation implications, the legal entity, regulation and management style.