Corporate Tax newsletter – October 2021

Will dividends be an attractive cash extraction method after 1 April 2023?
Super-deduction extension to benefit property landlords
Electric cars
The benefits of operating your business as a limited company
Cryptocurrency


Will dividends be an attractive cash extraction method after 1 April 2023?

Running a small company poses significant challenges for directors/shareholders. It is important to retain earnings in the business, but it is also necessary to be able to extract cash to provide a personal income. A current tax-efficient method of cash extraction is to take a low salary topped up with dividends. However, with the corporation tax rate increasing from 19% to 25% from April 2023 combined with increases of 1.25% on both national insurance contributions and dividend tax rates from April 2022– will this still give a favourable result?

Below are various methods for a business owner to extract cash from a company:

Salaries and bonuses

These payments are subject to PAYE and employer/employee national insurance. A salary between the national insurance threshold (£9,500) and the personal allowance amount (£12,570) may be chosen so that no income tax is payable whilst ensuring future entitlement to state pension and benefits.

Dividends

Directors should be aware that the company needs to have distributable reserves before declaring any dividends as well as recording the decision at a board meeting. Regardless of any other income, a taxpayer does not pay tax on their first £2,000 of dividend income. However, dividend income is added to any other taxable income and may raise the taxpayer into a higher tax band.

Pension contributions

This can be seen as tax efficient as contributions can reduce both corporate and income tax liabilities. The annual allowance for contributions is £40,000 for anyone earning up to £200,000 per annum. Also, if contributions are larger than personal income for the year, tax must be paid on the difference. However, it is important to remember that this money would be tied up until retirement.

Directors loan

This is treated as a form of income and is subject to income tax if greater than £10,000 or the company interest on the loan is below the official rate set by HMRC. This should be repaid before the end or within 9 months after the end of the company financial year to avoid the additional tax on the loan outstanding. The s455 tax is a charge of 32.5% on the outstanding director’s loan and will be repayable once the loan is repaid, released or written off.

This is a general breakdown of potential methods; all owner managed businesses will have their own circumstances to take into account. A more in-depth detail of these key points can be found on the main article here.


Super-deduction extension to benefit property landlords

You may remember from our May newsletter we highlighted the new super-deduction which allows companies who invest in qualifying new plant and machinery assets which normally fall into the main pool to claim capital allowances at 130%.

When the new deduction was first announced in March 2021, property letting companies were excluded from the scheme, however, amendments set out in the latest Finance Bill means they are now eligible to apply for the tax break.

Following this amendment, property landlords that hold commercial property should qualify for the super-deduction if the expenditure incurred (which means an unconditional obligation to pay has arisen) on or after 1 April 2021 but before 1 April 2023 is on ‘new and unused’ plant and machinery. However, contracts entered into before 3 March 2021, regardless of when the unconditional obligation arises, will not qualify for the new relief.

Please note that this relief does not apply to self-employed landlords, and is only applicable to property letting companies.


Electric cars

As we approach the 2030 new petrol and diesel car ban, many companies are considering the introduction of electric company cars and the tax implications behind them for the business. Following on from our personal tax newsletter article on electric cars, we have outlined the relief for a company.

For corporation tax, the purchase of a new (not second hand) electric car would qualify for First Year Allowances (“FYA”) at 100% which means the total cost of the purchase – including the irrecoverable VAT – would be given as a deduction against profits in the year of purchase. A £35,000 purchase would reduce the taxable profit by £35,000 and give a corporation tax saving of £6,650 (£35,000 x 19%). It is worth noting here that although they qualify for FYAs, cars do not qualify for annual investment allowance. This means that if you have other spend that uses up your annual investment allowance, you will still get 100% for your new electric car.

If the car was leased under an operating lease, as the CO2 emissions for an electric car is 0% (less than 110g/km) there would be no restriction to the amount of the lease payments which are allowable as a deduction against corporation tax. For cars with emissions over 110g/km, 15% of the operating lease payments are disallowable.

If you have any questions on the tax relief for electric cars, our team would be happy to help.


The benefits of operating your business as a limited company

We believe that choosing to run your business as a company instead of a sole trader can be beneficial as there can be annual tax savings, but this in dependant on individual circumstances of the directors and the profitability of the business. Below are some of the reasons why we think this:

Rate of corporation tax and Taxation of dividends

Profits are taxed at 19%, this is increasing to 25% on profits of £250,00 or more from April 2023.

The cash dividend received is the gross amount potentially subject to tax. The current rates of tax on dividend income are 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for additional rate taxpayers. A dividend tax allowance taxes the first £2,000 of dividends received in a tax year at 0%.

National Insurance and Pension provision

The National insurance rate for the self-employed is 9% on profits above £9,568, reducing to 2% on profits above £30,270 for 2021/22. Dividends are not subject to National Insurance, making dividends much more tax efficient in certain instances in comparison to salary.

Companies receive a corporation tax deduction for the net pension contribution made, £100 of contribution will only cost £81 due to tax relief making this a very tax efficient way of extracting funds.

Employee share ownership

Companies can get a corporation tax deduction where employees get shares at a discount to  market value. Two ways in which this can be done are a transfer of shares issued on incorporation and EMI share options. A transfer of shares issued are gifted shares, making them tax efficient as it is possible for the transferor to claim relief under the gift holdover rules in relation to the gift of shares, on the basis the company is classified as a trading company. If the employee does not pay market value for the shares, there can be income tax and NIC implications for the employee. EMI share options can also be tax efficient; employees are granted with options to acquire shares at a later date. Provided the share price paid by the employee is not less than the market value at date of grant, there are no income tax or NIC for the employee.

A more in-depth detail of these key points can be found on the main article here.


Cryptocurrency

Since the first and most widely known cryptocurrency Bitcoin was first created in 2009, their use and market value has continued to grow to an estimated global market of more than $2 trillion.  With that in mind it may be useful to have a brief overview of the potential tax implications and impact on businesses that are either involved or looking to involved with them.

Though commonly referred to as cryptocurrency, they are known as “cryptoassets” or “tokens”. There are different classes of token. For example, a Security token could be used to give specific rights within a business such as a share of profits. The most common type, of which Bitcoin is one, is an Exchange token and is the focus below.

HMRC does not view Exchange tokens as currency and currently there is no specific detailed tax treatment from HMRC regarding them. Guidance has been issued however, on how businesses should treat these tokens and if you are involved in using or holding them, you will still be liable to pay tax.

For tax purposes, as HMRC do not view the Exchange tokens as currency, these do not fall within the loan relationship rules. Instead, HMRC will look at the use and nature of the token, not the actual definition. For example, a business may earn tokens because they accept them as payment for goods or services or buy tokens to pay suppliers. This would be considered part of an existing trade and they should be included in calculating trading income and chargeable to corporation tax.

If a business holds cryptoasset tokens from non-trading activity, such as for investment purposes, any gains or losses will typically be classed as chargeable gains and corporation tax will be liable. The guidance is very similar to shares. Each token can be pooled in the same way as shares using an S104 pool. Same day and 9-day matching rules will apply upon any disposal. 

Cryptoassets are a very complex area, and this is just a couple of the tax treatments to consider. Should you wish more information or already hold tokens and unsure of their tax treatment, our team be happy to help.


Get in touch

Paul Carrie

Paul Carrie

I am a corporate tax specialist with experience in both corporate and partnership tax compliance and have worked with businesses ranging from small local businesses to multi-national corporations and private equity houses. I spent 10…
Dawn MacDougall

Dawn MacDougall

I was previously head of tax in EY’s Inverness office where I worked with owner-managed businesses and landed estates throughout the UK. I qualified as a Chartered Accountant in EY’s Edinburgh office and before re-joining…