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27/02/2013
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Wrestling with the rules
Paul Spindler, Partner, Kingston Smith LLP
27 February 2013
DISCLAIMER
This presentation covers topics only in general terms and are intended to give a wide audience, an outline understanding of issues in tax, and therefore cannot be relied on to cover specific situations; applications of the principles set out will depend on the particular circumstances involved. Furthermore, responses given in the seminar to questions are based on only an outline understanding of the facts and circumstances of the cases and therefore do not form an appropriate substitute for considered specific advice tailored to your circumstances. We recommend that you obtain professional advice before acting or refraining from acting on any of its contents. We would be pleased to advice you on the application of the principles outlined in this presentation to your specific circumstances, but in the absence of such specific advice cannot be responsible or liable.
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TOPICS
• Context of this seminar• Views of tax planning.• Employment v Self Employment• Tax avoidance structures• Film & TV specifics• Alternative business structures and profit extraction• GAAR
TAX PLANNING EXAMPLE
Employed Self Employed
Ltd Company
Structure
Gross £100,000 £100,000 £100,000 £100,000
Corporation Tax £20,000
Employers NIC £11,219 £618
Employee NIC / Self Employed NIC
£5,110 £4,289 £523
Income Tax £25,396 £29,884 £9,633 £772
Costs £14,212
Net £58,275 £65,827 £70,367 £83,875
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TAX PLANNING
Is it a question of morals?
V
TAX AVOIDANCE STRUCTURES
• Majority have in the past been loan based• Why?• Because for employees loans from EBT’s have some
pretty strong case law to back them up• How about Self Employed ?• Are there schemes that still work ?
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WHY DOES IT MATTER?
• Employment rights• Entitlement to Employment benefits• Tax and NIC
STATUS
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WHY DOES IT MATTER?
• Timing issues • As an employee the tax due is usually paid within 14 days
of the end of the tax month in which the salary is paid• Under self employment there can be as long as 21 months
between earnings and tax being paid (£1 earned on the 6 April 2011 is not taxed until 31 January 2013)
WHY DOES IT MATTER?
• Collection issues• Employees tax is collected by the employer and paid by
the employer, if it’s not paid then there is one place for HMRC to go to
• Each Self Employed person has to complete a tax return, and each one needs to be dealt with separately
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STATUS
• Is determined by a number of factors and has been the subject of endless litigation
• Control, is the most important factor, without it there is no employment
• Substitution is a good example of no control
STATUS
• Other relevant factors are:• Mutuality of obligation• Taking financial risk, i.e. are you in business on your own
account• Exclusivity• Length of contract• Contractual terms – though must be factual• Acting as ‘part and parcel’ of an organisation
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STATUS
HMRC publish a manual on employment status this is key reading for any person involved in making decisions about the tax treatment of employees (including agencies)
http://www.hmrc.gov.uk/manuals/esmmanual/index.htm
Facts are of primary importance – watch out for the ‘IR35’ proof contract!
TAX AVOIDANCE STRUCTURES
• Significant activity by HMRC in Anti Avoidance• Agency rules• IR35• MSC (Managed Service Companies)• Disguised remuneration• GAAR
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ANTI AVOIDANCE - IR35
Personal Service Company
• Avoids the question Employment v Self Employment for end user and worker
• Tax efficient, workable and simple• HMRC’s response – IR35
Personal Service
CompanyEnd client
Agency
HIRE OF FREELANCERS IN THE FILM & TV INDUSTRY
• The FILM & TV Guidance Notes 2012 contain full details of the rules.
• These rules apply to ‘behind the camera workers’ – NOT ‘in front of’.
• Listing of the grades of workers which HMRC regard as self employed.
• Specific rules for the treatment of those grades of workers not listed in the HMRC guidance notes.
• Only letters from Film & Production or TV Broadcasting Unit can be accepted.
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NI RULES AND ENTERTAINERS
• ‘In front of camera’ - definition SI1978/69- Social Security –(Categorisation of Earners) regulations 1978 (Reg 1) means:
• ‘a person who is employed as an actor, singer, or musician or in any similar performing capacity’.
• If payments have several characteristics they are treated as ‘salary’, and a national insurance liability (employer’s and employees) arises.
• Catches the majority of individuals. • HMRC Guidance Notes issued.• Recent ITV case.
USE OF LIMITED COMPANIES
• Many workers provide their services via their own companies – the above rules DO NOT apply to these.
• Many production companies insist on only engaging freelancers via their Limited Companies as this passes any tax and NI issues to the freelancers company.
• It is the Employer’s duty to determine the status of their workers.
• HMRC can go back 4 – 6 years depending on whether they think you have been careless.
• Getting employment status wrong can be a costly mistake!!!
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ALTERNATIVE BUSINESS STRUCTURES
• Choice of business structure (Companies, LLPs and hybrid structures)
• Tax efficient profit extraction• Planning for the end of the 50% Income Tax rate• Employee incentivisation• Exit Strategies
LIMITED COMPANIES
• Simple structure• Understood by HMRC• Ownership via rigid shareholding structure• Profits subject to Corporation Tax• Income extracted as salary or dividend• Employment related security issues – it’s difficult to
give away shares!• Entrepreneur’s Relief requires 5% holding
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BUSINESS STRUCTURES COMPANIES – LEGAL FRAMEWORK
Limited
Company
Shareholders
Directors
Employees
Shareholders’ Agreement
Mem and Arts
Service Agreements
Employment Contracts
Outside World
Commercial Agreements
PROFIT EXTRACTION - SALARY
2012/13 2013/14
40% 50% 40% 45%
Profit 100.00 100.00 100.00 100.00
Salary (87.87) (87.87) (87.87) (87.87)
Er’s NI (12.13) (12.13) (12.13) (12.13)
Nil Ni Nil Ni
Gross Salary
87.87 87.87 87.87 87.87
Tax (35.15) (43.94) (35.15) (39.54)
Ee’s NI (1.76) (1.76) (1.76) (1.76)
Net Salary 50.96 42.17 50.96 46.57
49.0% 57.8% 49.0% 53.4%
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PROFIT EXTRACTION - DIVIDEND
2012/13 2013/14
CT Rate 20% 25% 24% 20% 23.75% 23%
Profit 100.00 100.00 100.00 100.00 100.00 100.00
Corp Tax (20.00) (25.00) (24.00) (20.00) (23.75) (23.00)
PAT 80.00 75.00 76.00 80.00 76.25 77.00
Net (40% taxpayer)
60.00
40.0%56.25
43.8%57.00
43.0%60.00
40.0%57.19
42.8%57.75
42.3%
Net (50%/45% taxpayer)
51.11
48.9%47.92
52.1%48.56
51.4%55.56
44.4%52.95
47.0%53.47
46.5%
BUSINESS STRUCTURES COMPANIES
• Dividends remain more tax efficient than salary• However…
• Must normally be paid in proportion to rigid shareholding structure
• Difficult to give employees shares to entitle them to dividends in the first place
• Is there a better structure?
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BUSINESS STRUCTURES LIMITED LIABILITY PARTNERSHIPS
• Flexible structure (but not necessarily simple!)• Still poorly understood by banks and credit checking
agencies (but FSA are generally fine)• Entitlement to income and capital profits can change
each year with few tax consequences• Able to admit new partners without employment
related security problems
BUSINESS STRUCTURES LIMITED LIABILITY PARTNERSHIPS
• Profits subject to Income Tax and NI (but NOTemployer’s NI)
• Working capital subject to tax/NI even if left in the business
• Entrepreneur’s Relief does not have 5% requirement
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BUSINESS STRUCTURES LLPS – LEGAL FRAMEWORK
LLP
Members
Employees
Members’ Agreement
Employment Contracts
Outside World
Commercial Agreements
PROFIT EXTRACTION –PARTNERSHIP PROFIT SHARE
2012/13 2013/14
40% 50% 40% 45%
Profit 100.00 100.00 100.00 100.00
Tax (40.00) (50.00) (40.00) (45.00)
NI (2.00) (2.00) (2.00) (2.00)
Net58.00
42%48.00
52%58.00
42%53.00
47%
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BUSINESS STRUCTURES LIMITED LIABILITY PARTNERSHIPS
• Advantages• Flexible profit sharing arrangements with no rigid
shareholding structure• Ease of admission and retirement of members• Employer’s NI saving for “employees” promoted to being
“partners”
• Disadvantages• Complexity• Cost of retaining working capital
BUSINESS STRUCTURES LIMITED LIABILITY PARTNERSHIPS
• Retaining Working Capital in 2012/13:• Company retaining £1 of working capital requires profits
before tax of £1.32• LLP retaining £1 of working capital requires profits of
£2.08
• Is there a better structure?
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BUSINESS STRUCTURESHYBRIDS
The best of bothworlds?
LLP
Limited
Company
Members/
Shareholders
BUSINESS STRUCTURESHYBRIDS
• Hybrids give all of the flexibility of an LLP structure with the ability to shelter working capital at Corporate Tax rates
• No overall tax loss if corporate profits extracts as dividend at a later date
• Can have a single corporate member or one for each individual member
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BUSINESS STRUCTURESHYBRIDS
• Complex and more expensive to set up and run• Can give rise to complications at point of sale as
selling two entities instead of one• However – can present further opportunities for tax
planning (i.e. profit extraction at 23% tax rate)
BUSINESS STRUCTURESINCORPORATION?
• Corporation Tax rates are reducing to 22% (2014/15)• If profit sharing does not need to be flexible and no
succession issues then consider incorporating• Should you choose to pay Capital Gains Tax when
you incorporate?
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INCORPORATION PLANNING
Current Proposed
LLP
Individuals Individuals
Limited
Company
Owes
INCORPORATION PLANNING
• What has this achieved?• Payment of Capital Gains Tax at 10%? due on 31 January
2014 if done during 2012/13• Established a debt owing from the company to the
individuals• Profit extraction can now be by repayment of debt instead
of dividend/salary
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INCORPORATION PLANNING
Loan Account Repayment£
Profit 100.00
Corporation Tax (24.00)
76.00
Less: Capital Gains Tax paid
(7.60)
Net earnings(Effective rate of Tax)
68.40(31.6%)
INCORPORATION PLANNING
• Enables tax efficient profit extraction for partnerships that are happy to incorporate for as long as debt exists
• BUT• Valuation of business needs to be justifiable• Less flexibility in the future on profit shares
• HOWEVER – Dis-incorporation Relief !
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REMOVAL OF 50% TAX RATE
The 50% rate will reduce to 45% from 6 April 2013!
REMOVAL OF 50% TAX RATEPLANNING
• Delay dividends• Defer salary/bonuses but take care with accruals in
the accounts for directors• Delay having interest paid on shareholder loans• Delay exercising share options that will trigger a tax
charge – review terms now in case forced exercise pre-5 April 2013
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REMOVAL OF 50% TAX RATEPLANNING
• Non-domiciled individuals – delay remittances until after 5 April 2013
• Defer drawing pension income• Accelerate making pension contributions• Consider timing of Gift Aid payments (although able
to carry back one year anyway)
REMOVAL OF 50% TAX RATEPLANNING
• Sole traders/Partnerships – consider provisions that can be made in 2012/13 (e.g. bad debts, dilapidations, etc…)
• Partnerships – consider Corporate Partner to store profits otherwise taxable at 50% and then pay as a dividend in 2013/14
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REMOVAL OF 50% TAX RATEPLANNING
• Partnerships – trigger overlap relief at 50% rate for impending retirements
• Partnerships – change year end to move profits into 2013/14
GAAR
• What is it ?• When does it apply from?• How does it work?
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HMRC’S VIEW - GAAR
• Some quotes from the study• “The UK’s tax legislation is notoriously long and complex.
In many places it is virtually impenetrable”• “a moderate rule which does not apply to responsible tax
planning, and is instead targeted at abusive arrangements, would be beneficial for the UK tax system”
GAAR
• GAAR is not aimed at the contractor• Would GAAR stop the large corporations from
operating in the way they do – No !
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GAAR
“We’ve got to take sides on tax. Rich individuals, corporations, well-funded special interest groups and much of Fleet Street is on one (the wrong) side and then there is Richard Murphy plus a few others, including yours truly. But it is Murphy who is the heroic figure. Tireless and forensic, driven by an admirable moral fervour, I take my hat off to a campaigner with Duracell batteries”
QUESTIONS ?
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CONTACT DETAILS
Paul SpindlerTax Partner
Kingston Smith LLPDevonshire House60 Goswell Road
London EC1M 7AD
Telephone +44 20 7566 4000Fax +44 20 7566 4010
Web: www.kingstonsmith.co.uk
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