HORNBEAM
HIGHLIGHTS 19
November
2002
Hornbeam Highlights is an
information news sheet for clients and associates of Hornbeam
Since the last issue
of Hornbeam Highlights Julia has left us to pursue her career as an Accountant
in the Engineering Industry and we all wish her well in her new post.
Just to keep everyone
confused, we have recruited two Pauls.
Paul Cox has joined us as a Chartered Accountancy trainee having
obtained his accountancy degree earlier this year. Paul Estcourt has joined us as Manager having merged his Salhouse
based Chartered Accountancy practice into Hornbeam. We are extremely pleased to have this major influx of expertise
into our practice.
IS
YOUR BUSINESS SET UP TO MINIMISE TAX?
Because of rapid
changes in tax legislation many business people should be reviewing the
structure to their businesses. Simple
changes in business structure can save spectacularly large amounts of tax.
Conversely doing nothing can be very expensive. I have devoted the rest of this highlights to setting out five
examples, which cover the most typical situations.
The One Man Band.
Now historically most
one-man-band businesses, such as decorators, plumbers, maintenance contractors,
taxi drivers, and proprietors of small shops have operated as self-employed
sole traders. And historically this has
made sense. The self-employed have
relatively minimal administrative requirements in comparison with companies and
enjoyed much more favourable tax treatment than employees.
This has changed
spectacularly in the last few years. Today a self-employed man creating £15,000
profit will have to pay £2,913 in tax and NI, and next years NI increase will
probably push this over £3,000, about 1/5 of his income. By putting this business into a Limited
Company, paying himself £5000 salary and £10,000 dividend (well £9,945 after
employers National Insurance) this sole trader can reduce his tax bill to
£145! This is a spectacular saving and
is equivalent to a 24% increase in take home pay!
There are some
disadvantages of course, record keeping rules are much more onerous,
accountants fees may rise by £500 or more per year, some mortgages, pensions,
and life assurance may be more difficult to get, and probably the chancellor
will act to stop this haemorrhage of tax before very long. But when he introduced a £10,000 zero rate
tax band for limited companies Gordon Brown created the biggest tax avoidance
opportunity that most self-employed will see in their lifetime!
Which is why we are now Hornbeam Accountancy Services Ltd!
The Successful Executive.
Company cars have
been a tax-effective perk for so long that they have become embedded in the way
that many successful businesses are run.
And yet changes in the way that benefits are calculated mean that most
executive cars are rated as a benefit at 35% of the cars list price. Thus a £50,000 car will cost the director
and the company together £8,960 in tax every year that the executive keeps the
car.
If the executive also
gets private fuel paid by the company then the tax bill will rise to
£10,640. In fact cumulative increases
in the fuel scale benefit charge have created a situation where for many
employees the tax cost is more than the cost of the petrol. We calculate that in most cases an employee
would have to be doing 30,000 private miles for private fuel to be a tax
effective benefit.
Whilst the fuel
benefit charge can easily be avoided by providing your own petrol (and charging
the company for business mileage) the £50,000 car can be more of a
problem. You can however set up a self
-employed trading entity for part of your business. And of course it is this enterprise and not the limited company
that provides the car(s). A £50,000 car
may cost about £16,000 per year to run.
If the executive does 50% private miles the Revenue will disallow £8000
of costs. This will result in a £3,200 tax cost to the executive. A tax saving of £7,440 – per year.
The Partnership.
Most successful
traders will have long-since been structured into husband and wife
partnerships. But with corporation tax
rates at 19% on profits of up to £300,000 the tax saving from incorporation can
be significant for more successful businesses as well as the one-man-bands
discussed above.
We calculate that on
£80,000 profit a sole trader will pay £26,548 tax and national insurance,
husband and wife partners will pay £21,096 tax and national insurance, but for
an incorporated business paying out all its profits as dividends the total of
tax and NI will be only £14,916
The savings here
accrue from the fact that dividends don’t attract national insurance (£3,500
saved) and that the tax rate is 3% lower across £55,000 of profit (£1,650
saved) and £6,000 less finds its way into 40% tax bands (£1,200 saved).
The IR35 Victims.
Whilst creating a
number of tax loop-holes for the self-employed who are prepared to put their
businesses into limited companies – the government has waged war on one
particular set of incorporated small traders.
Those individuals who contract their services to single large
enterprises for long periods are targeted by the much-detested regulation known
as IR 35. The additional tax and
National Insurance charged to a contractor billing £60,000 per annum could
easily be £15,000 per annum. This tax
catches oil industry and aircraft engineers as well as IT consultants and could
raise an additional £1.5 billion for the government.
And yet if three
consultants get together to form one company, and that company signs one
contract to provide 6,000 hours of consultancy per year, this cannot be a
contract of employment and the contract cannot be caught by IR35.
Many successful
businessmen find themselves heading groups of Companies that took something
like the following:
·
Successful Trading
Company Ltd. (making £ 250,000 pa)
·
Failed
Diversification Ltd. (making £5,000 pa)
·
Hobby Company Ltd.
(losing £5,000 pa)
This structure is
costing the owner’s £ 68,125 in Corporation Tax every year. However, if failed diversification Ltd and
Hobby Company Ltd were closed down the Corporation Tax bill would fall to
£47,500, a saving of £20,625. The
reason for the saving is that the Corporation Tax rate increases from 19% to
32.75% at £300,000 profit, but in a group of 3 Companies, this band is divided
by three, thus £150,000 has been taxed at 32.75% when it could have been taxed
at 19%.
We provide a number
of useful documents on our web-site at hornbeam-accountancy.co.uk including a check-list of things to do on incorporation
and a model contract for the
self-employed, but this article is written to stimulate ideas and we would
not recommend anyone to take further action without proper consultation and
full professional advice.
We try incredibly
hard to make sure that our clients are set up to minimise their tax
liabilities, but if you feel that you own situation needs to be reviewed,
please do not hesitate to contact us.
Don’t forget that next year employees and self employed National
Insurance go up 1% on all income with no upper limit and employers National
Insurance also goes up by 1% with no upper limit. So now is the time to be finding ways to find a compensating
reduction.
DISCLAIMER
Most
of the information contained in this Hornbeam
Highlights is of necessity greatly oversimplified. We are trying to bring
to your attention tax planning opportunities.
However, you should not take action based upon this leaflet without
obtaining specific professional advice.
Whether you are a client or not, if we can provide further help or advice concerning any of the matters covered here, please do not hesitate to telephone us on (01603) 720424