It’s well known that tax law is unclear, if not impenetrable. What is less well known is how much it’s grown in recent years. In 2009, UK tax law stood at 11,520 pages . But by 2016, it comprised around 21,000 pages.
At some 10 million words, it’s 12.5 times as long as the Bible and 12 times as long as the complete works of Shakespeare. In comparison, Hong Kong’s tax law stretches to a miserly 276 pages and just 150,000 words .
But given its complexity there is no excuse for not understanding or complying with the duties that it sets down. That said, with the help of good advice and planning it’s entirely possible – and legitimate – to take advantage of the numerous schemes, reliefs and allowances that HMRC has put in place to help business.
According to Yen-pei Chen, corporate reporting and tax manager at the ACCA, one of the UK’s professional accounting bodies, printers should take a multifaceted approach to tax planning. Some actions can even aid cashflow.
One such action is claiming tax relief for losses. Trading losses can be set against other current year income, carried forward, or even carried back against trading profits, but only for the preceding 12-month period.
Chen says incorporated businesses need to be aware of new loss relief rules as “changes in the Finance Act 2017 reformed the loss relief mechanism from April 2017”. The changes mean firms can offset both trading and non-trading losses against all types of future profits. However, she adds that the losses for any given year will be restricted to £5m: if you’re lucky enough to earn taxable profits above that threshold, the loss relief will be limited to 50% of taxable profits.
R&D development allowances
Simon Palmer, partner at Garbutt & Elliott, BPIF specialist services advisers, says printers can take advantage of the tax loss regime. Thinking outside of the box, he says “printers who have been involved in a research and development project (and a lot of printers do so when setting up new production lines) can utilise the Research and Development tax credit against losses to obtain 33% repayment of tax against qualifying expenditure”.
But the problem, as he sees it, is that while printers are pretty switched on when it comes to machinery and the tax reliefs, “few recognise the fact that they are doing what could be classed as R&D and many are needlessly paying too much tax”.
These are a favourite of Palmer and he reckons that every printer should have a discussion about these allowances with their tax advisor because “a 235% tax deduction of qualifying expenditure effectively results in an additional 26% of expenditure in additional corporation tax relief... for every £50,000 of qualifying expenditure you will get an additional £17,000 reduction in tax as opposed to £9,500 if you didn’t make the claim”.
His advice is simple: “Look for anything the business has done that has advanced the current technology used. How has a particular technological headache been overcome? Have there been production failures that have had to be addressed? Has the print process had to be reworked in order to deliver a particular product? Can the process be said to be smaller, faster, more ecological, more user friendly or more efficient? If any of these are true you could be looking at a current-year claim and maybe going back a further two years to obtain a corporation tax repayment against tax previously paid.”
Tax deductions for refitting premises
Repair or improvement? When it comes to refitting premises the first thing Chen says to get straight is whether it relates to repairs or improvement: “The distinction might seem pedantic, but it makes all the difference. If the costs relate to repair, they are deductible as an expense from taxable profit. If the costs relate to improvement, HMRC will consider them to be capital expenditure; as such, no deductions from taxable profit are allowed.”
Essentially, Chen is saying that replacing or fixing something to get your premises back into working order is fine as a repair but doing anything to improve it in such a way as to provide “enduring benefit to the business” (the taxman’s words) could stray into capital expenditure.
HMRC’s manual, written for its inspectors, gives the example of a company that needed to have its roof repaired but decided to open up the roof area for extra office space. “The fact that the roof was unsound and needed to be repaired was beside the point,” says Chen, “the additional work done on the roof made what happened improvement, not repairs.”
Tax relief for capital expenditure
But if your refitting costs fall within the ‘capital’ category: you may still get tax deductions in the form of capital allowances. First off, the Annual Investment Allowance (AIA) allows firms to claim tax deductions on 100% of qualifying expenditure, up to £200,000.
Over and above the AIA limit, lower capital allowances are available each year – these are currently 18% for plant and machinery and at 8% for integral features.
Garbutt & Elliott’s Palmer says this allowance is “fantastic and could apply to any company that has bought short-life assets (say computers or printers) over and above the £200,000 as they can be included in a short-life pool and when scrapped at the end of their useful life will accelerate tax deductions.”
But the process is a little murky, says Chen: “To qualify as plant and machinery, the expenditure has to be kept ‘for permanent employment in the business’, so this excludes stock in trade or expendable equipment with a life of less than two years; and function as ‘an apparatus employed in carrying out the activities of the business’ and not as part of the premises in which the business is carried on.”
Chen says the second point needs a bit of unpicking and notes that in a production setting, the basic principle is that anything which can reasonably be expected to form part of your building – for example, walls, partitions, ceilings, floors, doors, windows and lighting – should be considered to be premises and not plant.
If the allowances for plant don’t apply, you can look at 8% special rate allowances that are available on assets which are integral to buildings – the ‘integral features’: such as electrical systems (including lighting) and cold-water systems.
But Chen suggests considering what you’re putting the electrical systems in for. If an electrical system is installed purely to support qualifying plant and machinery – printing equipment, cooling systems or burglar alarms, for example – the cost of the electrical system could count as plant and machinery and may be eligible for higher plant and machinery allowances.
Whether your machinery counts as fixed assets or stock also determines how you will be taxed when you sell the assets on. The sale of stock is taxed as a taxable income; the sale of fixed assets is taxed as a chargeable gain.
According to Chen, the question that HMRC will ask is ‘what is the nature of the business?’ She says that if it’s your business to sell printing equipment, then HMRC will assume that the machines are intended for sale, and therefore are trading stock. But for those actually in the printing trade, using the equipment to print, it’s very unlikely that their machinery will be considered stock because they’re involved in the income generating process.
If you do find yourself faced with a chargeable gain, it’s worth considering whether tax reliefs apply.
Chen says that if you’re planning to use the proceeds from the sale to buy other assets for use in the business, it may be possible to delay paying tax on any capital gain by using Business Asset Rollover Relief. She says: “This relief applies if you buy new qualifying business assets within three years after selling the old business asset or up to one year before selling the old business asset.”
Allied to this, Palmer notes that “perhaps the most valuable relief for those who are selling (or passing on) their businesses is Entrepreneur Relief. I would recommend that all shareholders plan ahead and get advice to secure their 10% rate of tax.” A note of caution, however: “Transferring shares to family members or to trusts before selling the business, without advice can be a disaster and you may be kissing goodbye to your 10% Entrepreneurs Relief on the sale of business.”
Another area to explore, and one not often thought about according to Palmer, is that of employee uniforms. In essence, he says that employers can get a tax deduction and a full VAT reclaim on all workwear and uniforms.
While on the subject of employees, Palmer adds that while employee salary sacrifice schemes have largely disappeared “there still remains the opportunity to use pension contributions as a salary sacrifice. This is cost neutral for the employer as the National Insurance Contributions (NIC) saved is additionally contributed to the employee’s pension while the employees’ NIC savings are also contributed. This a huge benefit for them.”
Income Tax is an issue for all, and Chen says that the most obvious area to watch out for is tripping over a tax threshold or finding yourself in a marginal relief band.
There are a number of thresholds for the 2018/2019 tax year that taxpayers need to be aware of. Breach any and more tax will be due:
- Higher rate income tax band where anything over £46,351 is taxed at 40%
- Additional rate income tax band where income above £150,001 is taxed at 45%
- Personal allowance reduction threshold where the personal allowance of £11,850 is reduced by £1 for every £2 above £100,000
- High income child benefit charge threshold which means that child benefit begins to be clawed back once income exceeds £50,000
Business owners need to watch out particularly for the dividend allowance. “From April 2018 the dividend allowance dropped to £2,000, down from £5,000 for 2017/18,” Chen warns. “If you receive dividends above this amount – which is likely as the owner-manager of an incorporated business who extracts profits through dividends – your dividend income will be hit with a higher rate of tax.
“This reduction in the dividend allowance means that, compared to 2017/18, basic rate taxpayers would be £225 worse off (7.5% of £3,000); this increases to £975 for higher-rate taxpayers and £1,143 for additional-rate taxpayers.”
Part of the tax planning process, says Palmer, involves getting the structure right so that small firms, for example, use a spouse or other family connection and give them shares. “Passing shares to a spouse is free of any tax in a family business. This is still very effective tax planning from a dividend planning point of view, but HMRC will no doubt pay more attention to this in the future. And by using different classes of shares, you can pay variable dividends to basic rate tax payers.”
She also advises being very careful when extracting profits above £100,000 “as you lose your personal allowance and very high marginal rates of tax will start to apply”.
Another concern involves interest income. As Chen points out, it’s not a huge deal in the scheme of things, but nevertheless, needs outlining: “Since April 2016, a tax-free savings allowance has exempted up to £1,000 of savings income from tax – but if you are a higher-rate taxpayer, you will only be exempt up to £500.”
So, bearing these thresholds in mind, what can business owners do? Chen says that there are four options – make pension contributions for yourself and your family; transfer shares or bonds to a spouse to make the most of the dividend nil band and savings allowance; switch investments into tax-efficient investment schemes; or make donations to charity.
For most, making pension contributions is a tax-efficient way to put money aside. Not only is there tax relief on pension contributions, but since 2015 pension schemes are now more flexible, allowing savers to draw down their pension pot from age 55.
Further, as Chen explains, “when you pay into a pension, you receive tax relief on your pension contributions up to an annual allowance of £40,000. The tax relief is at the highest rate of income tax that you pay”.
But there is a note of caution: If you have a large pension pot (over the lifetime allowance) or have a taxable income over £110,000 you should think about seeking professional advice. The lifetime allowance rose from £1m to £1.03m in April 2018.
In terms of a company, Palmer explains that pension contributions made by a company is a particularly tax efficient way of getting profit out while obtaining a full corporation tax deduction at 19%. He says: “Astute printers who are wanting to buy their own premises often maximise the directors’ pension contributions and borrow 50% of the fund to buy a property.”
Getting more out of investments
Lastly, with interest paid by high-street banks still low, some investments might prove a tax-efficient alternative to saving for those with an appetite for risk.
Top of the list of recommendations from Chen would be to load up ISAs to benefit from tax-free income and capital gains. She notes: “Adult UK residents can put up to £20,000 each into savings, investments or a combination of both. In addition, parents can pay up to £4,260 per child into a junior ISA. First-time buyers can now save up to £200 per month over four years in the new Help-to-Buy ISA and get a 25% tax-free bonus capped at £3,000 for savings of £12,000. There is also a Lifetime ISA, which allows savers to put in up to £4,000 per year (counted as part of the annual £20,000 ISA limit) until they’re 50. This can then be used to buy a first home – although note, if you have both a Lifetime ISA and a Help-to-Buy ISA, you can only use the government bonus from one of them to buy your first home.”
There are also several other tax efficient investment schemes such as the enterprise investment scheme, investing directly in an unlisted company, venture capital trusts, the Seed Enterprise Investment Scheme, Innovative Finance ISAs, and social investment tax reliefs. It’s worth noting that they are high risk, so only seasoned active investors should consider them.
Tax law is a quagmire that is riddled with traps. Good advice is an expense, but will undoubtedly offer long-term savings that will benefit the individual, business owner and the business. The key is to plan well ahead and most certainly not leave the implementation of planning until the end of the tax year.
Quite simply, and as Palmer asserts, printers should see a tax advisor at least twice a year with the pre-year end meeting being the most crucial: “A good accountant will look at the company’s tax position, the owner’s tax liability and where applicable, involve the family in the discussions.”