We were introduced to a client who had been operating his business as a sole trader for several years in transport and his annual turnover had increased substantially and was engaging subcontract drivers on a regular basis. Apart from the tax advantages of operating a Limited Company (the ability to take dividends rather than salary and tax at 20% up to £300k of profits), there was also the risk element of using subcontract drivers who used the businesses vehicles to make deliveries. We recommended that the client incorporate his business for both risk management purposes and also the evident tax advantages.
A client was approached by another company in the same industry to merge with them to create a larger group that could offer clients a more comprehensive service. During the due diligence process, both buyer and seller’s advisers requested sight of the Statutory Records. Our client’s records were complete and up to date but, unfortunately, the buyer’s records were nowhere to be seen until after completion. A warranty was provided by the buyers as, without the existence of a Shareholders’ Register, the substantial amounts of dividends paid in previous years could have been deemed to be illegal and classed as salary, thus potentially creating an unnecessary liability to Tax and NIC.
Shareholders’ Agreements and Partnership Agreements
Both these documents are of vital importance where there are several individuals involved in a business. We engaged with a client and very shortly after our engagement, one of the shareholder directors was diagnosed with a terminal illness. The directors had previously implemented insurance policies on each other for just this occurrence of terminal illness and death so the pay-out would be made and the shares were to be transferred to the surviving director. The shareholder who was ill received his pay out from the insurance company but when the other shareholder asked for the shares only to be met with the statement “I don’t know what you’re talking about”. No documents had been prepared for this nor was there a Shareholders’ Agreement in place and to this day the company is still in a state of turmoil with the deceased shareholder’s wife holding 50% of the company’s shares and effectively blocking all decisions.
We are often met with advisers having looked at alternative methods of remuneration for shareholder directors and stating “there’s not much in it” whereas if the calculations had been properly done, the business and individuals could have reduced taxes substantially. We were introduced to a company several years ago operated by two shareholder directors. One was taking an annual salary of £650,000 and the other £350,000! We suggested that they may want to use dividends as an alternative method and by gifting shares to Wives and “income shifting” their tax liabilities would be substantially lower. From their in-house adviser stating “not much in it”, we demonstrated that they could have been some £200,000 a year better of tax-wise!
Business Sales and Exit Planning
We have been involved in several trade sales and management buy outs and are very experienced in assisting sellers with the due diligence process. One of our largest clients received an “offer they couldn’t refuse” for their business and we assisted them through the due diligence and sales process. On the day of completion, the buyers’ solicitor threw in the “curved ball” claiming that VAT should be charged on the properties that were being retained by the sellers and transferred to an existing Limited Company. We thought we had resolved this issue several months earlier and it delayed completion whilst the buyers’ advisers checked and rechecked the position and finally confirmed that our advice was absolutely correct.
Where a Company goes out of business and HMRC considers there has been negligence on the part of the employer, they can issue a Regulation 29 Determination against the directors for the amounts of Tax and NIC they consider should have been paid by them. This is in extreme circumstances and HMRC has to prove negligence or recklessness. We had such a case with two directors being assessed for almost £300,000 each following the liquidation of their company. Following several months of arguments backwards and forwards with HMRC, they finally conceded and agreed that the assessed amounts were not due – to the absolute relief of our clients!
Research and Development Tax Credits
An existing client has developed a new locking system for double-glazed windows and doors and the costs they have incurred may well be eligible for R&D Tax Credits. The costs have already been included in the computation for Corporation Tax purposes but there can be an additional claim of a further 130% of that cost which will reduce Corporation Tax for the company.
Embedded Capital Allowances
A client operates a care home and we have assisted them in claiming the ECAs on the property they use in the business. Allowances just short of £50,000 have been identified which can be used in the current year, carried forward against future profits or carried back a maximum of two years. The owners had paid 45% Tax in the previous two years and 40% in the current year so the claim was a mixture of 45% and 40% which made the client quite happy!