Mike Tombs's Blog

This blog provides information about tax, accounting and other issues affecting small owner-managed businesses in the UK. It is intended as a general source of information but you should not assume that everything applies to your specific circumstances. We are always happy to discuss providing tailor-made solutions to suit your individul needs. Visit www.tlaservices.co.uk to sign up for our free monthly Tax Tips and News newsletter.

Category Archives: Owner-managed businesses

Paying voluntary NICs

There are various reasons as to why gaps may arise in an individual’s national insurance contributions (NIC) record, for example, because that person has been on low earnings for several years, they have been living abroad, or because they have been unemployed and have not been claiming benefits. In certain circumstances therefore, it may be possible, and beneficial, to pay voluntary Class 3 National Insurance Contributions (NICs) as this can safeguard entitlement to a future state retirement pension and certain other state benefits.

Broadly, voluntary contributions may be paid for any tax year in which the individual is aged over 16 and is:

  • employed, but not liable to pay Class 1 and/or Class 2 contributions (because earnings are too low to qualify for paying NICs);
  • excepted from paying Class 2 contributions (because earnings from self-employment have not reached the entitlement threshold);
  • not working;
  • resident in the UK but living or working on secondment abroad; or
  • self-employed.

An individual may get national insurance credits if there are unable to work, entitled to certain benefits, or in other specific circumstances, for example being on an approved training course or attending jury service. In addition, someone who cares for a child, or a sick or disabled person, payment of Home Responsibilities Protection (HRP) may cover gaps in a NIC record.

Topping up

Class 3 NICs are voluntary, so if a gap in contributions is discovered, the choice of whether to make good the shortfall is entirely up to the individual concerned. However, if the individual wishes to obtain full entitlement to benefits such as the state pension, contributions should be topped up in good time.

Voluntary contributions are payable at the rate of £14.25 per week for 2017/18. There are two main ways of paying Class 3 NICs:

  • monthly: by direct debit – download application form CA5603 from the GOV.uk website;
  • quarterly: HMRC will issue a bill every 13 weeks (if the individual lives in the UK), which can be paid at a bank, Post Office, or by Girobank.

Generally, the shortfall must be made up within six years. For example, Class 3 contributions for the 2011/12 year would need to be paid by 5 April 2018. Whilst the contributions do not need to be made until that date, the rate may increase, so it may be cheaper to do it sooner rather than later.

A self-employed individual may be exempt from paying Class 2 contributions because their income is below the small profits threshold (£6,025 for 2017/18), but he or she can currently pay voluntary Class 2 contributions to maintain their NIC record. These amounts are considerably cheaper than Class 3 contributions (the rate for 2017/18 is £2.85 per week) and they protect entitlement to more benefits. Class 2 NICs will be abolished from April 2018, so it may be worth checking NIC records before then.

In certain circumstances it is possible to pay up to an additional six years of voluntary Class 3 NICs to enhance entitlement to a basic state retirement pension. This is over and above those allowed under the usual time limits outlined above. See the GOV.uk website for further details.

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Mileage rates for electric and hybrid cars

Some confusion has been reported over how businesses should calculate mileage expenses rates for electric and hybrid company cars. This confusion has arisen largely because HMRC’s advisory fuel rates, or approved mileage allowance payments, only cover petrol and diesel cars. There are no separate ‘approved’ rates for electric or hybrid vehicles.

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Currently, whilst HMRC do recognise that employees should be reimbursed for costs incurred for business travel, they do not currently recognise electric charging costs as a ‘fuel’ expense and do not therefore, currently publish separate rates.

HMRC’s advisory fuel rates can be used to work out mileage costs in certain situations, for example, where an employer reimburses an employee for fuel they have used on business travel in a company car, or where an employee is required to repay the cost of fuel used for private travel. Where the employer uses the advisory fuel rates (or lower rates) then no liability to tax or NICs will arise on the payments and they do not need to be report to HMRC.

The treatment of mileage rates is relatively straight-forward for hybrid cars – they are treated as either petrol or diesel for the purpose of the advisory fuel rates, so employers can just use the appropriate current rates.

The situation is more difficult for employers with employees who drive electrics car as company vehicles. Such employers could use the advisory fuel rate based on the lower of the petrol or diesel tariff, or the calculated cost of the electricity used from a domestic supply to charge the car. Another option would be to pay a rate that can be calculated accurately as a true cost to the employee. Whichever method is used to reimburse mileage, it is imperative that the employer maintains adequate records to substantiate that the correct amount has been paid. Failure to keep adequate records may lead to additional tax and NIC liabilities, and penalties.

VAT: zero-rating of adapted motor vehicles

Finance Act 2017 introduced legislation designed to end perceived abuse of the VAT relief on substantially and permanently adapted motor vehicles for disabled wheelchair users.

The amended rules, which took effect from 1 April 2017, now specify a limit on the number of vehicles within a specified period of time that an individual can purchase under this relief.

An eligible individual will be able to purchase one vehicle every three years. There are some instances when this limit can be exceeded, so if an individual’s car is written off or stolen or if the vehicle has ceased to be suitable for the disabled person’s use because of changes in the person’s condition.

In addition to the new limitations above, there is now a mandatory requirement for eligibility declaration forms to be submitted to HMRC. This form clarifies exactly what information an individual needs to provide to support their claim to a zero rated supply.

Motor dealers are also required to send information regarding these zero-rated sales to HMRC.

Individuals in breach of these new requirements may be denied the benefit of the zero rate, or may be subject to a penalty (under VATA 1994, s 62) if the declaration they make is incorrect.

Working from home

Over recent years, it has become increasingly popular for employers to allow their employees to work from home, and in doing so, pay an amount to cover any additional household costs incurred. What are the tax implications of such expenses for the employee?

Broadly, no tax liability will arise where an employer makes a payment to an employee for reasonable additional household expenses, which the employee incurs in carrying out duties of the employment at home under ‘homeworking arrangements’.

‘Homeworking arrangements’ are arrangements between the employee and the employer under which the employee regularly performs some or all of the duties of the employment at home. There is no requirement for any part of the employee’s home to be used exclusively for the purposes of the employment – in fact, if any part of the home is used exclusively for work, problems could arise on the future sale of the house as part of the capital gains tax exemption on private residences may be lost.

HMRC have stated that they will accept that homeworking arrangements exist where:

  • there are arrangements between the employer and the employee; and
  • the employee works at home regularly under those arrangements.

The HMRC guidance also advises that:

‘the arrangements need not be in writing but usually will be. They do not need to apply to all employees. The exemption does not apply where an employee works at home informally and not by arrangement with the employer. For example, it will not apply where an employee simply takes work home in the evenings. It applies where an employee works at home by arrangement with the employer instead of working on the employer’s premises.’

HMRC accept that the ‘regularly’ condition is met if working at home is frequent or follows a pattern. The fact that the days spent at home vary from week to week is not a bar to claiming the exemption.

‘Household expenses’ are defined as expenses connected with the day-to-day running of the employee’s home. The exemption applies to additional household expenses, and HMRC have given the following guidance:

‘Typically this will include the additional costs of heating and lighting the work area or the metered cost of increased water use. There might also be increased charges for Internet access, home contents insurance or business telephone calls. Where working at home leads to a liability for business rates the additional cost incurred can also be included.

The additional household costs must be reasonable and must be incurred in carrying out the duties. This excludes costs that would be the same whether or not the employee works at home, for example mortgage interest, rent, council tax or water rates. It also excludes expenses that put the employee into a position to work at home, for example building alterations or the cost of furniture or office equipment.’

Amount of exemption

To minimise the need for record-keeping, employers can pay up to £4 per week (£208 per year) without supporting evidence of the costs the employee has incurred. If an employer pays more than that amount, the exemption will still be available but the employer must provide supporting evidence that the payment is wholly in respect of additional household expenses incurred by the employee in carrying out his duties at home.

If an employer wishes to pay more than the guideline rate per week tax-free, then it is recommended that the employer should agree in advance with HMRC a scale rate. Failing that, records will need to be kept of the actual additional costs incurred by each employee.

Reform of landlords’ taxation?

The government’s plans to allow landlords to use the cash basis for tax purposes were confirmed in the 2017 Spring Budget, but although the proposed legislation was included in Finance Bill 2017, it did not appear in the much reduced Finance Act 2017, which received Royal Assent on 27 April 2017. It is likely that the proposals have been temporarily shelved, pending the outcome of the General Election, and are expected to reappear in a second Finance Bill later this year. If the provisions are subsequently enacted, they are expected to apply retrospectively from 6 April 2017, i.e. for the current tax year.

Up to and including 2016-17, profits of a property business must be calculated in accordance with generally accepted accounting practice (GAAP), commonly referred to as the accruals basis. Although this remains the case for certain landlords (including companies, LLPs, corporate firms, and trustees of trusts), if the Finance Bill 2017 provisions are enacted, the position for 2017-18 onwards will be more complicated. The general rule is that the cash basis must be used. However, this is subject to some exceptions and there will be scope for the individual to elect to continue using the accruals basis if they so wish. The new property allowance will remove some landlords from income tax, whilst for others, it will provide a deduction from profits of £1,000.

Property allowance

The property allowance works as follows:

  • Full relief: if income from a property business for the tax year is equal to or less than £1,000, no income tax will payable in respect of that property business for that year. Individuals may elect to use the rules normally applying to calculate profits.
  • Partial relief: if income from a property business for the tax year exceeds £1,000, the individual may elect to deduct £1,000 from his income – rather than the expenditure actually incurred – in arriving at the profits of the property business.

A number of restrictions apply. The property allowance will not apply:

  • to income on which rent-a-room relief is given; or
  • where the ‘alternative method’ is not elected, but instead the actual allowable expenses are deducted.

Cash basis

The cash basis operates by reference to the tax year. This means that profits are calculated for the tax year by adding or subtracting:

  • all income received in connection with the property business in the tax year;
  • any income that is not taxable and for expenses which are not allowable.

Reform of capital expenditure rules

To date, the cash basis rules have prohibited a deduction for expenditure of a capital nature unless such expenditure would qualify for plant and machinery capital allowances under the ordinary tax rules. However, if the Finance Bill 2017 proposals are enacted this general disallowance of capital expenditure rule will be replaced from 2017/18 onwards with a more limited disallowance of capital expenditure incurred in relation to assets which are not used up in the business over a limited period.

So, if enacted, from 2017/18 onwards, relief will be prohibited only in relation to costs incurred in relation to the provision, alteration or disposal of:

  • any asset that is not a ‘depreciating asset’ (to be defined as having a useful life of up to 20 years);
  • any asset not acquired or created for use on a continuing basis in the trade;
  • a car (but of course business mileage-based relief is available);
  • land (as defined);
  • a non-qualifying intangible asset, (as per Financial Reporting Standard 105) including education or training; and
  • a financial asset.

Costs in relation to the acquisition or disposal of a business, or part of a business, will also be excluded.

On entering the cash basis, which many taxpayers will do for 2017-18, it will be necessary to adjust for:

  • amounts which, applying the cash basis, would have been brought into account for a period before the change and were not brought into account; and
  • amounts which, applying the cash basis, should be brought into account for a period after the change and were brought into account for a period before the change.

These adjustments are designed to ensure that no amounts are either left out of account or double counted. The adjustment income/expense is brought into account on the last day of the first period of account under the cash basis.

Similar rules apply where a taxpayer leaves the cash basis with the exception that adjustment income is automatically spread over six years unless an election is made to accelerate the charge.

Given the uncertainty of the current situation, clients are encouraged to ensure that all income and expenditure is recorded, particularly where clients are intending to make use of the property allowance. If the proposals are not enacted, or are delayed to a future tax year, the client will need to report their actual income and expenditure and so it is important that adequate records are kept.

CGT annual exemption: use it or lose it!

Capital gains tax (CGT) is normally paid when an item is either sold or given away. It is usually paid on profits made by selling various types of assets including properties (but generally not a main residence), stocks and shares, paintings, and other works of art, but it may also be payable in certain circumstances when a gift is made.

The most common method for minimising a liability to capital gains tax is to ensure that the annual exemption is fully utilised wherever possible. Whilst this is relatively straight-forward where only capital gains are in question, the computation can be slightly more complex where capital losses are also involved.

Where a loss arises on the sale of assets it can be offset against any other gains made in the same year or in the future. However, a strict order applies for setting-off losses.

Firstly, losses arising in the tax year are deducted from any other chargeable gains for the same year. All losses for the year must be deducted, even if this results in chargeable gains after losses below the level of the annual exempt amount. If the allowable losses arising in the tax year are greater than the total chargeable gains for the year, the excess losses can be carried forward to be deducted from chargeable gains in future years. In this situation, the annual exemption for the year in question may be lost.

If chargeable gains remain after deducting the allowable losses arising from the same year, unused allowable losses brought forward from an earlier year may then be deducted. It is only necessary to deduct sufficient allowable losses brought forward to reduce the chargeable gains after losses to the level of the annual exempt amount. Any remaining losses brought forward are carried forward again without limit, to be deducted from chargeable gains in future years.

Plan ahead

For 2017/18, most individuals will be entitled to an annual exemption of £11,300, which means that no CGT will be payable on gains up to that amount for that tax year. Since spouses and civil partners are each entitled to the exemption, for jointly held assets, there is scope for exempting £22,600 worth of gains in 2017/18.

The annual exemption is good only for the current tax year – it cannot be carried forward or taken back to an earlier year – so anyone planning to make a series of disposals, may want to consider the timing of sales between two or more tax years to use up as much and as many annual exemptions as possible.

HMRC launch consultation on employee expenses

As confirmed the Spring Budget 2017, HMRC have launched a consultation on the use of the income tax relief for employees’ business expenses, including those that are not reimbursed by their employer. The main objectives of the consultation, which will run until 12 June 2017, are to understand:

  • if the current rules or their administration can be clearer and simpler;
  • whether the tax rules for expenses are fit for purpose in the modern economy; and
  • why the cost to the exchequer of the tax relief for expenses which are not reimbursed has increased.

Expenses form an integral part of the tax system as tax relief can be claimed on eligible expenses. However, the cost of providing this relief is significant – HMRC state that the tax relief on expenses which employers do not reimburse and employees then claim from HMRC costs the Exchequer £800m per year, and there has been a 25% increase in claims between 2009-10 and 2014-15.

The current rules

It is important that employees and employers are both clear on what tax reliefs employees are entitled to claim. Broadly, tax relief is available when expenses are incurred ‘wholly, exclusively and necessarily in the performance of the duties of the employment’. Expenses which put an employee in a position to do their job (such as the cost of ordinary commuting) are not eligible for tax relief. There are also provisions for relief for specific expenses, such as professional fees and subscriptions, and travel and subsistence.

When employers pay for or reimburse expenses that are eligible for tax relief, the payment is not taxed. For example, if an employee pays for a train ticket to travel from their permanent office to another office for a business meeting, and their employer reimburses the cost of the train ticket, the reimbursement is not liable to income tax or National Insurance contributions. However, if an employer pays a round sum cash allowance to cover potential expenses, such payments will be taxable in full.

Simplified expenses

The administration of the tax relief for expenses paid for or reimbursed by the employer was simplified from April 2016 with the introduction of an exemption for paid or reimbursed expenses. Under this exemption, qualifying expenses can be paid by employers free of tax without the need for an employer to apply to HMRC for a dispensation. These expenses do not need to be returned to HMRC at the end of the tax year on form P11D, and employees no longer need to make a claim to HMRC for a corresponding tax relief.

When employers do not reimburse expenses that employees have incurred, the employee can deduct them from his taxable income and subsequently claim tax relief at his marginal tax rate on costs incurred.

For some expenses which are not reimbursed, employees can claim a flat rate expense allowance. HMRC have agreed allowances based on the amount typically spent each year by employees in a wide range of industries and occupations to remove the burden for employers and employees of calculating a large number of small claims and retaining evidence for these. For example, employees who need to pay for the cost of repairing and maintaining tools and specialist clothing for work can apply for tax relief in this way.

The future

Although the consultation document states that the government has no plans to remove the relief on employee expenses, changes to current procedures may be expected in the future.

VAT Flat rate scheme: changes take effect

The VAT flat rate scheme (FRS) is used by many small businesses to help simplify their VAT reporting obligations. Businesses could often gain a cash advantage from using the scheme, but this advantage has been significantly curtailed from 1 April 2017, particularly in relation to service-related businesses. Whilst the FRS continues to operate, many businesses will no longer find it economical to use.

Broadly, the FRS is a simplified VAT accounting scheme for small businesses, which allows users to calculate VAT using a flat rate percentage by reference to their particular trade sector. When using the FRS, the business ignores VAT incurred on purchases when reporting VAT payable, with the exception of capital items which cost £2,000 or more. If the business incurs few expenses, and it operates in a sector with a relatively low FRS percentage, it will pay out less VAT to HMRC under the FRS than it would outside the scheme. Historically, many businesses have registered for VAT voluntarily before their turnover reached the VAT registration threshold, so they could make use of the cash advantage offered under the FRS.

Common percentages used by service-related businesses in recent years include:

  • Accountancy and legal services 14.5%
  • Computer or IT consultancy 14.5%
  • Estate agents and property management 12%
  • Management consultancy 14%
  • Business services not listed elsewhere 12%

However, from 1 April 2017 a new 16.5% FRS rate applies for businesses with limited costs (see below). Since the rate of 16.5% of gross turnover equates to 19.8% of the net, the result is that there will be almost no credit for VAT incurred on purchases. Many businesses, particularly in the trade sectors listed above, are likely to see a significant rise is VAT payments.

A ‘limited cost’ business is defined as one whose VAT inclusive expenditure on goods is either:

  • less than 2% of their VAT inclusive turnover in a prescribed accounting period;
  • greater than 2% of their VAT inclusive turnover but less than £1,000 per annum if the prescribed accounting period is one year (if it is not one year, the figure is the relevant proportion of £1,000).

Goods, for the purposes of this measure, must be used exclusively for the purpose of the business but exclude the following items:

  • capital expenditure goods;
  • food or drink for consumption by the flat rate business or its employees;
  • vehicles, vehicle parts and fuel (except where the business is one that carries out transport services – for example a taxi business – and uses its own or a leased vehicle to carry out those services).

(These exclusions are part of the test to prevent traders buying either low value everyday items or one off purchases in order to inflate their costs beyond 2%.)

Practical Tip

Businesses who are trading under the VAT threshold (£85,000 from 1 April 2017) may consider deregistering from VAT. Businesses who are trading over that threshold may wish to withdraw from the FRS.

Tax-free savings update

Although interest rates for savings generally remain low, there are still a few tax-efficient savings opportunities on offer, with increased savings thresholds taking effect from 6 April 2018.

Individual Savings Accounts

Broadly, cash ISAs are available to investors aged 16 and over, who are resident in the UK, and stocks and shares ISAs are available to UK-resident individuals aged 18 and over. The maximum annual investment limit has been raised to £20,000 from April 2017, which means that a couple can now invest up to a sizeable £40,000 for 2017/18. Interest paid on the investment will be tax-free for both income and capital gains tax.

Junior ISAs operate along similar lines to ‘adult’ ISAs. The maximum investment limit for 2017/18 into Junior ISA accounts is £4,128, so there is scope for parents and grandparents to make tax-free savings investments on behalf of their children/grandchildren. Since it is also now possible for children to hold both Junior ISA and Child Trust Fund (CTF) accounts, parents are offered increased flexibility to look for higher-yielding products.

It might be worth noting that the Government has stated its intention to make regulations so that the ISA savings of deceased individuals can continue to benefit from income tax and capital gains tax advantages, where those savings are retained in an ISA. Although the start date for this change has yet to be confirmed, it should be borne in mind when thinking about ISA investments.

Help-to-buy ISAs continue to be available to assist first-time buyers save a deposit to purchase their first home. Broadly, up to £200 a month can be saved in the ISA (along with an initial deposit of £1,000) and, provided certain conditions are met, the government will provide a 25% boost to the savings up to a maximum of £3,000 per person. The maximum that can be saved in the ISA is £12,000. Taking into account the government bonus, a couple buying together could save up to £30,000 tax-free towards the purchase of their first home. It will take around four and a half years to achieve this level of savings under the scheme.

NS&I Premium Bonds

Although National Savings and Investments (NS&I) Premium Bonds cannot really be called an investment, any returns by way of ‘winnings’ will be tax-free. The odds on winning a prize in any one month currently stand at 30,000 to one. The number of monthly £100,000 prizes has been reduced from five to two and, for the £50,000 prizes, from 12 to just five. The prize fund rate was 1.25% until April 2017, but is reduced to 1.15% from May 2017. This rate represents the amount a typical saver will receive with average luck over a year – although many will receive far less than this. However, despite the reduction in prizes and odds, with more than £52 billion currently invested, premium bonds remain one of Britain’s favourite ways to save in a tax-efficient way.

Tax on savings income

The Personal Savings Allowance (PSA), which was introduced from 6 April 2016, remains at £1,000 for basic rate taxpayers and £500 for higher rate taxpayers, for 2017/18. Running alongside the PSA is the starting rate for savings, which, for 2017/18, remains at 0% on a maximum threshold of £5,000. The 0% band is restricted by non- savings taxable income so that none of the band will be available if that income is above the personal allowance (and blind person’s allowance if claimed) plus the £5,000 starting rate. The two allowances work together and are dependent on total taxable income.

In most cases, the annual personal allowance and PSA will cover any tax liability arising on interest earned. Therefore, when choosing a savings plan, the major consideration is likely to be the interest rate on offer and potential return on the investment, rather than the tax-free status of the account.

Salary v dividend

The questions surrounding the issue of how best to extract profits from a company in a tax-efficient manner remain as popular as ever. Despite the introduction of the dividend allowance, and the personal savings allowance, extraction by remuneration and by way of dividend remain the two most widely used methods. The tax effects of these methods may be broadly contrasted as follows:

  • Provided the amount is justifiable, remuneration is generally allowed as a deduction in arriving at the taxable profits of the company. The recipient is taxed on the remuneration through the PAYE system at the date of payment including a charge to NIC.
  • Dividends are not deducted in arriving at the taxable profits.

The main point to note is that the question of how best to extract profits from a company is rarely straight-forward and will be different in nearly every case. Seeking advance professional advice is always highly recommended.

It must be remembered here that payment of a salary will give rise to a liability to National Insurance Contributions (NICs), whereas payment of a dividend does not.

In considering the options, a number of other factors should also be taken into account:

  • A full NIC contribution record must be maintained to ensure maximum social security benefits. Therefore, a reduction in salary may have the knock-on effect for reducing future entitlement to certain earnings-related social security benefits.
  • The lack of a salary charge in the accounts may increase the value for capital gains tax (CGT) and inheritance tax (IHT) purposes of holdings valued on the basis of earnings. In addition, a higher dividend payment will increase the value of a holding calculated on a dividend yield basis, although it is unlikely to affect the valuation of a major interest.
  • Dividends are payable rateably to shareholders in proportion to their holdings in the company, which may not necessarily correspond to the relative efforts of the directors in earning the profits. Dividend waivers may assist in these circumstances, but care must be taken – always seek advice on such matters.
  • Dividends can only be paid out of distributable profits whereas, in theory, salaries may be paid out without reference to the level of profits.
  • The national minimum wage legislation should be considered, as this applies equally to directors under contracts of employment as it does to employees.

Given that dividends are treated as distributions of profits (after taking into account payments of salaries and wages), payment of a reasonable salary may be considered before thinking about a potential dividend payment. The situation will vary from company to company and there is no set rule. Seeking professional advice is recommended before any action is taken.

In deciding how profits are to be extracted, the following aspects should be considered:

  • The rates applicable to dividend income are currently the 7.5% ordinary rate, which applies up to the basic rate limit, the 32.5% dividend upper rate, and the dividend additional rate of 38.1% on dividends above the higher rate limit.
  • From 6 April 2016, 10% tax credit attaching to dividends was abolished and the new dividend allowance took effect. This means that the first £5,000 of dividends will be tax-free in the hands of the recipient. Whilst these changes mean that most taxpayers will thereby pay less tax, people with a share portfolio valued at £140,000 or more (according to the Treasury) will pay more. This forms part of the government strategy to reduce the incentive to incorporate businesses and take remuneration in the form of dividends.
  • Individual needs of shareholders may differ – some may require income, others may be more interested in capital appreciation. These conflicting interests may be met by the issue of separate classes of shares with differing distribution rights.
  • For the financial year 2017, the main rate of corporation tax is 19%, which means that the rate of tax payable on retained profits is potentially lower than current income tax rates.

For income tax purposes, and within family-owned companies, it is generally desirable to spread income around the family to fully utilise annual personal allowances and to take full advantage of nil and lower rate tax thresholds, wherever possible. The term ‘family’ includes all individuals who depend on a particular individual (e.g. the owner of the family company) for their financial well-being. This may include not only the spouse, civil partner and children but also aged relatives, retired domestic employees, etc. Care must be taken in this area not to fall foul of the ‘settlements’ legislation and other anti-avoidance measures in force at the time. Once again, professional advice is always recommended in advance of making any payments.

Distributions (usually dividends) from jointly owned shares in close companies are not automatically split 50/50 between husband and wife, but are taxed according to the actual proportions of ownership and entitlement to the income.

Possible methods of spreading income around the family include employing a spouse and/or children, waiving salary (to increase profits available as dividends) or dividends (to increase the amounts available to other shareholders), and transferring income-producing assets.

Some distributions of income to family members will not be beneficial for tax purposes. The following points require careful consideration:

  • salaries and wages paid to spouse, civil partner, children or other dependants will be a tax deductible expense of the company only if they can be justified in relation to the duties performed;
  • a salary paid to spouse, civil partner, children or other dependants will attract a liability to NIC if it is above the lower earnings limit; and
  • the investment income of an infant child (i.e. an unmarried child below the age of 18) is taxed on his parents, where it arises from a gift by them.

In the longer term, there is a risk that, at some future date, the relative advantages of each extraction method might be reversed at a time when the flexibility to switch between the two methods is restricted. Currently though, using a mixture of salary, benefits and dividends, which can be varied according to individual circumstances, remains the most sensible option.