Slides from the Crunch & Wealth Matters tax saving strategies seminar.

1. Tax answered… Steve Crouch – Co-Founder Head of Accountancy - Crunch.co.uk 27/06/2011 1 Visit www.crunch.co.uk, the next generation of accountants

3. Interim dividends

4. Final dividends

5. Dividends waivers – do they work?

6. Different classes of shares27/06/2011 Visit www.crunch.co.uk, the next generation of accountants 2

8. HMRC & timing of dividends

10. What records am I required to keep?

11. HMRC new penalty regime…27/06/2011 Visit www.crunch.co.uk, the next generation of accountants 3

13. NIC rates increased; Up 1% for Employees & Employers: to 12% & 13.8%

14. Some compensation - increase in Lower Earnings Limit, Primary & Secondary Threshold

15. Care required if wishing to minimise NIC but keep tax relief to max on salary; threshold now increased to £7475

16. Primary & Secondary thresholds previously aligned, now £3 per week differential:

17. If pay £7225 salary to keep below £139 Primary threshold (EES contributions) THEN PAY Secondary contributions

18. Very small amount of (£7225 - £7072) x 13.8% = £21.11 Still worth paying £7475 as tax relief is higher than the NIC saving - slight hassle factor to send a cheque!27/06/2011 Visit www.crunch.co.uk, the next generation of accountants 4

20. Upper Earning Limit

21. decreased £844 >£817 pw

22. rate per week above threshold increased 1% >2%

23. Small profits Corp tax

24. reduced 1% from 1 April 2011 to 20%

25. aligns with personal basic tax rate

26. Summary: still more beneficial to pay dividends versus salary27/06/2011 Visit www.crunch.co.uk, the next generation of accountants 5

28. Nothing new – Income Shifting rules still not brought in

29. For those unaware, here’s a recap:

30. Artic Systems case

31. HMRC tried to prevent income shift to spouse to utilise lower tax rates

32. Case won by Artic Systems;

33. Held that there is an exception under sec 626 ITTOIA 2005

34. There had been an outright gift

35. The property is not wholly or substantially a right to income27/06/2011 Visit www.crunch.co.uk, the next generation of accountants 6

37. HMRC do not like dividend extraction on salary route

38. HMRC focusing on demonstrating a dividend has been properly paid;

39. therefore is a directors current account loan or salary

40. can create BIG tax problems if not planned properly

41. Directors current account deficit…

42. Interim Dividends

43. Under Model Articles , the directors may pay dividends if they believe the company has profits to support them

44. The directors may need to demonstrate that there was sufficient profit at the time the dividend is paid

45. The company must keep a copy of management information, showing the profit &balance sheet; to include corporation tax as this affects the distributable reserves

46. How many contractors do this? Interim dividends become a liability the instant they are paid

47. No shareholder approval is required &so can be treated as paid in the financial year

48. Payment of a dividend can include the crediting of a director's current account BUT the accounting entries MUST be done at the time the dividend is paid

49. HMRC looking at accounting records & if the entries have been recorded by the accountant when preparing the year end accounts they will argue that these dividends have not been "made available" until that later time - & after the year end

50. This can lead to dividends effectively becoming paid in a later financial year &likely to be in a different tax year - can have dramatic effect on the directors personal tax situation &the company can have problem with overdrawn directors current accounts27/06/2011 Visit www.crunch.co.uk, the next generation of accountants 7

52. Final dividends are only recognised in the company accounts when formally declared by shareholders at general meeting I.e. at the AGM - when signing off the accounts

53. There must be a formal resolution to pay it before the end of the financial year - supported by minutes

54. There can be no backdating! HMRC keen to view this as tantamount to money laundering &hit hard with penalty regime

55. Dividend waivers…

56. Do these work?

57. Dividends are declared per share thus in ratio to members shareholding

58. HMRC are suspicious of waivers as most shareholders would not turn down an opportunity to get paid

59. Important to keep proper documentation to support valid reason for a waiver. This might be for example where a major shareholder wants the value of shares to be maintained as an encouragement for other shareholders to invest

60. It is not possible to waive a dividend for an amount greater than the entitlement. If there are reserves of £10,000 and 50/50 ownership the maximum waiver would be £5,000 not £10,000!

61. To be used as last resort &better to get the shareholding right in the first instance

62. Different classes of shares

63. Of any use?

64. Alphabet shares can be used to share the dividend in the desired proportions without the need for waiver. However, it must again be stressed that there should be no restrictions to avoid settlement provisions applying27/06/2011 Visit www.crunch.co.uk, the next generation of accountants 8

66. If the account is overdrawn at any time during the financial year it is reportable note on the accounts.

67. The rules are contained in sec 455 CTA 2010 (formerly sec 419 ICTA 1988)

69. The effect on the company:

70. If the loan is still outstanding at the company's financial year end then provision should be made for tax at 25%

71. A corporation tax return return entry will be required to state that the account was overdrawn and that tax is due at 25% of loan

72. If the loan is repaid within 9 months of the year end then there is no need to actually pay the tax over and a note to the accounts made accordingly

73. If the loan is not repaid then the tax is paid with the main corporation tax at the normal due date I.e. 9 months after year end

74. When the loan is repaid or written off this tax is repayable 9 months after the end of the accounting period when repaid

75. If the loan exceeds £5,000 at any time during the year then this will also give rise to a reportable P11d benefit in kind

76. The deemed benefit is normally calculated as the "average loan" outstanding in the tax year and then multiply by "official rate of interest" to give the benefit

77. This then carries with it a charge under Class 1A national insurance at 13.8%, payable by 6thJuly following the tax year

78. The effect on the director: The P11d benefit amount forms part of personal income and must be declared on personal tax return and tax paid accordingly27/06/2011 Visit www.crunch.co.uk, the next generation of accountants 9

80. An overdrawn loan can be achieved with "final" dividend. Note that the dividend would be when proposed, as mentioned previously and therefore this dividend would be dated in the tax year of that date for the shareholders personal tax return

81. In practice some accountants may still treat this dividend as being made at the balance sheet date but this is wrong and could give money laundering issues as mentioned

82. Is there any tax planning with loans?

83. If the director already has an income charged at higher rate then any further income will attract higher rate tax

84. Consider therefore whether there is going to be any change in circumstances in the future

85. If it is likely that in the following tax year the director may have a much reduced income then it may be preferable to take the loan

86. When personal tax is paid it is gone, whereas 455 tax can be repaid later on

87. If a loan is written off, as compared to a dividend being declared at some later time, then there is potentially national insurance liability thereon

88. However, the emphasis is on the documentation and proper loan agreement with interest rate etc., together with a formal deed of waiver where then there may not be a national insurance liability. This really is more for planning when a reasonable level of salary is already being taken as could be taken otherwise to be a replacement to salary

89. The loan write off route also allows a direct payment to one of the shareholders so could possibly used in preference to a waiver27/06/2011 Visit www.crunch.co.uk, the next generation of accountants 10

91. No real difference between soletraders or Ltd’s

92. Business record checks have been started by HMRC and with fine of up to £3,000 it is feared that they will be looking to fines and new penalty regime will breach the loss of tax following recession

93. What records am I required to keep?

94. Sales invoices and these should be sequentially numbered

95. Purchase invoices

96. Sales and purchase ledgers and cash books

97. All bank statements and credit card statements and savings accounts statements

98. Paying in slips

99. PayPal statements

100. Evidence of non business deposits - birthday presents and gambling winnings!

101. Claim to subsistence, where located etc. and in particular travel costs - there seem to have been many challenges as to the base of operations so as to potentially disallow as home to work.

102. Payments to subcontractors/freelancers etc. - may be tax status challenge as to why not treated as employee so be careful of a possible tax status challenge on you!

103. Private adjustments such as telephone calls

104. Business mileage log

105. VAT return backup figures

106. Irregular extraction of company funds

107. Please note that where understatements of income and over claim of expenses this can be construed as being taken by the directors and liability under sec 458 CTA 2010 This works in a very similar what to overdrawn director current accounts and therefore 25% tax together with potential nasty penalties

108. HMRC – new penalty regime

109. Which brings me to the new penalty regime coming into force from April 2011. New behaviour based penalty regime. Penalties from 0% to 100% depending on category of inaccuracy and co-operation.

110. When does it start?

111. What does it mean?

112. Mistake despite reasonable care Careless inaccuracy Deliberate not concealed Deliberate and concealed The minimums apply only where company discloses without prompting by HMRC enquiry Prompted rates are MINIMUM of 15, 35 and 50% 27/06/2011 Visit www.crunch.co.uk, the next generation of accountants 11

114. Please note that where understatements of income and over claim of expenses this can be construed as being taken by the directors and liability under sec 458 CTA 2010

115. This works in a very similar way to overdrawn director current accounts and therefore 25% tax together with potential nasty penalties

116. HMRC – new penalty regime

117. New penalty regime coming into force from April 2011

118. New behaviour based penalty regime

119. Penalties from 0% to 100% depending on category of inaccuracy and co-operation

120. Mistake despite reasonable care - no penalty

121. Careless inaccuracy - between 0 &30% of lost revenue

122. Deliberate not concealed - between 20 and 70%

123. Deliberate and concealed - between 30 and 100%

124. Note: The minimums apply only where company discloses without prompting by HMRC enquiry

125. Note: Prompted rates are MINIMUM of 15, 35 and 50% 27/06/2011 Visit www.crunch.co.uk, the next generation of accountants 12

127. Wide ranging advice:

128. www.contractoradvisor.co.uk

129. www.freelanceadvisor.co.uk27/06/2011 Visit www.crunch.co.uk, the next generation of accountants 13

130. 27/06/2011 Visit www.crunch.co.uk, the next generation of accountants 14 Any Questions?