Dean Statham |
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Dean Statham Tax Alert. |
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Disincorporation? |
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What does this mean?
Disincorporation is the process of moving a trade from a limited company to its shareholders who would then use the business assets to trade as a sole trader or partnership.
Presently there are a number of significant tax disadvantages when a trade is disincorporated. It is with this in mind that the Office of Tax Simplification is currently considering the introduction of a small company disincorporation relief to enable smaller businesses to disincorporate without incurring significant, additional tax charges.
What are the present disadvantages?
- The transfer of chargeable assets, property etc, may be subject to corporation tax at the company's marginal rate.
- The transfer of goodwill at disincorporation may create additional tax liabilities for the company.
- The transfer of stock and work in progress will be deemed to have occurred at market value as the shareholders are connected to the company.
- The trade is deemed to have ceased on the transfer to the new unincorporated business, so any accumulated trading losses that are not utilised in the final chargeable period are lost.
- On the cessation of the trade, all plant and machinery is deemed to be disposed of at market value, resulting in balancing allowances and charges. It is possible to jointly elect to transfer plant and machinery at tax written down value (known as a succession election), although if the company has trading losses to absorb balancing charges, it may be more beneficial not to make the election.
- The transfer of a business as a going concern is outside the scope of VAT provided the new unincorporated business registers for VAT but a charge to Stamp Duty Land Tax could arise on the transfer of property at up to 5% of the proceeds.
Many or all of these disadvantages may be removed if a favourable disincorporation relief is introduced. In the meantime businesses considering a change from limited liability status to self employed status may be advised to wait until the outcome of the present deliberations are published. Changes to the present legal position are unlikely to be concluded before the 5 April 2013.
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Overdrawn directors' loan accounts |
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If you are a director of a small company you may have made private payments using the company's bank account or other resources. Unless these private amounts are reimbursed to the company you would become a creditor, owe money to, your company - in accountant speak you would have an overdrawn director's loan account.
There are three principal tax and NIC consequences:
- Your company may have to make a corporation tax payment based on the overdrawn balance.
- Unless you pay an HMRC agreed rate of interest on your loan you may suffer a benefit in kind charge.
- If a benefit in kind charge does apply, your company will also need to pay Class 1A National Insurance contributions.
There are ways to mitigate, or eliminate, these various charges as long as you comply with the relevant regulations. For instance:
- If you repay any overdrawn loan before the end of your business accounting period, or within 9 months of this date, you can avoid the 25% corporation tax charge.
- Even if you are unable to repay your loan within the 9 month period, when you do subsequently repay the loan you can apply to have the 25% corporation tax refunded. There will be a delay in this process.
- As long as you have paid interest, at the agreed HMRC minimum rate, on your loan account, there will be no benefit in kind charge. If this is so, your company will also have no Class 1A NIC to pay.
If you want to safeguard your tax position regarding a current director's loan you may have with your company, please call so that we can work out the most effective strategy.
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VAT special schemes for retailers |
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As most retailers sell a high volume of lower priced commodities, some subject to zero rate and some standard rate VAT, HMRC have created a number of special schemes that simplify the calculation of VAT due.
What schemes are available?
Standard retail schemes are suitable for most retail businesses. However, there are special arrangements and rules for caterers and catering, chemists and florists.
There are three main categories of published, standard retail schemes and a DIY version:
- Point of sale scheme: businesses calculate the tax due on sales by identifying the correct VAT liability at the time a sale is made. This is usually done by way of an electronic till system that can differentiate between goods sold at different VAT rates.
- Apportionment schemes: Number 1: Only suitable for businesses whose total tax exclusive turnover from retail sales does not exceed £1m per annum. The scheme is relatively simple to use and looks at the value of a retailer's purchases for resale at each VAT rate, and applies these proportions to total sales; Number 2: Under this scheme, businesses calculate the Expected Selling Prices (ESPs) of standard and lower-rated goods they receive for retail sale. The ratio of ESPs to all goods is then used to calculate what proportion of DGT relates to VAT on sales of standard and lower rated goods.
- Direct calculation schemes: Number 1: The first version of the scheme is available to businesses with a tax exclusive turnover of up to £1 million. Under this scheme businesses calculate the ESP of goods for retail sale at one or more rates of VAT so that they can calculate the proportion of takings on which VAT is due. Number 2: Works in the same way as the first scheme except that businesses need to make an annual stock adjustment. Businesses can use the scheme if their annual tax exclusive retail turnover does not exceed £130 million.
- Bespoke schemes: Retailers with turnover in excess of £130m can design their own system. Usually they are based on a published scheme and will need to demonstrate that the scheme is fair and reasonable.
Note: Businesses that achieve a higher mark-up for zero-rated goods may find that the apportionment scheme would result in them paying more VAT to HMRC than would otherwise have been the case.
Which scheme to use?
It is probably best to test the various schemes by applying them to real data and see which produces the best result.
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DISCLAIMER - PLEASE NOTE: The ideas shared with you in this email are intended to inform rather than advise. Taxpayers' circumstances do vary and if you feel that tax strategies we have outlined may be beneficial it is important that you contact us before implementation. If you do or do not take action as a result of reading this newsletter, before receiving our written endorsement, we will accept no responsibility for any financial loss incurred. |
Dean Statham,
29 King Street, Newcastle, Staffs, ST5 1ER.
Tel: 01782 614618 Fax: 01782 717287.
Web: www.dsonline.co.uk.
Dean Statham is a limited liability partnership, registered for VAT under reference 812 0016 96. Partners in the firm are members of the Institute of Chartered Accountants in England and Wales (ICAEW). This body has its headquarters in the UK and its rules of professional conduct can be obtained from its web site.
Dean Statham are authorised to act as statutory auditors by the ICAEW. |
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