Top Tax Tips for a Family Company
There are a number of tax strategies available that could save time and money for a growing business. Today, we outline five of these below:
- Reducing corporation tax: Where qualifying research and development (“R&D”) work is performed, smaller companies can receive a deduction from their profits of 230% of eligible expenditure. In addition, this relief can be surrendered to HM Revenue & Customs in return for a cash repayment of 14.5% of the surrendered amount. Large companies can also benefit from R&D but at a less beneficial rate.
- Reducing VAT: Where annual business turnover is below £150,000, a company could join the flat rate scheme for VAT. The scheme allows a business to calculate VAT at a flat rate rather than complete detailed returns. It is cost effective for many, but not all, businesses. Alternatively, cash accounting for VAT can improve cash flow so that VAT is only paid once your customer has paid, although VAT can only be offset once your suppliers have been paid. Businesses where VAT refunds are usually generated can consider monthly VAT returns so that the refund is received more quickly than from quarterly returns.
- Raising funds: There are a number of share schemes available for shares issued to external investors. The Seed Enterprise Investment Scheme (“SEIS”) and the Enterprise Investment Scheme (“EIS”) provide both income tax and capital gains tax reliefs to qualifying investors. EIS is slightly less beneficial but allows more funds to be raised. The new Investors Relief may also be considered for its 10% tax rate on capital gains, with slightly different criteria to Entrepreneurs Relief.
- Attracting and retaining employees: The Enterprise Management Incentive (“EMI”) share scheme allows qualifying companies to grant share options to employees so they can purchase shares in a tax efficient manner. A valuation will have to be agreed with the Revenue for the shares, but a discount can be allowed to reflect the minority holding. An income tax charge will arise for the employee, unless they actually pay for the value of the shares. There is also a corporation tax deduction for the company based on the value of the shares. In addition some of the requirements for Entrepreneurs Relief to apply are relaxed, so a 10% rate of capital gains tax is more likely to apply to a gain on sale by the employee.
- Reducing income tax: With effect from 6 April 2016, the income tax rates on dividends have increased in most circumstances. In order to mitigate this, a high earning spouse may consider gifting some shares to a lower earning spouse to make the most use of lower rate tax bands for dividend income. Advice should be taken before implementing this to be sure it is more efficient and to ensure that anti-avoidance legislation does not apply. Other ways to mitigate the dividend tax changes may be available, depending on the circumstances.
If you would like more information about a particular relief or for further options, please contact our Tax Director, Jenny Marks.
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