Accounting

End of Year Tax Planning Tips

By Stuart Shaw
3 min read

With less than a month left of the current tax year, it is time to consider end of year tax planning opportunities.

Pension and Gift Aid contributions

Pension contributions and gift aid contributions made prior to the end of the tax year can help mitigate your tax liabilities – even more so when your income is near certain thresholds. For example, your personal allowance is reduced by £1 for every £2 that your income exceeds £100,000. This means that for the income band from £100,000 to  £123,700 the effective rate of tax is an eye-watering 60%. The flip side to this is that if your income is within this band you will get tax relief on pension contributions and gift aid payments at 60%.

Another scenario where additional relief is available is in respect to the withdrawal of child benefit. This occurs when the highest earner in the household’s income exceeds £50,000 and the benefit is clawed back at a rate of 1% for every £100 of income in excess of £50,000. The benefit is fully withdrawn when the individual’s income exceeds £60,000. Pension contributions and gift aid payments within this band of £50,000 and £60,000 will, therefore, attract a higher rate of effective relief. The rate of relief will depend on the number of children you are claiming benefit for.

Tax Efficient Investments

The end of the tax year is the perfect time to consider making tax efficient investments:-

ISAs

A range of ISAs are available to savers, including the Lifetime ISA for those under the age of 40; the Help to Buy ISA for first-time homebuyers; and the Junior ISA for individuals aged under 18.

Savers are able to invest in any combination of cash or stocks and shares, up to the overall annual subscription limit of £20,000. An individual may only pay into a maximum of one Cash ISA, one Stocks and Shares ISA, one Help to Buy ISA, one Lifetime ISA and one Innovative Finance ISA

Venture Capital Trusts (VCT)

These are investment vehicles that are invested in small higher-risk trading companies.

Investments in VCTs attract an income tax relief of 30% of the amount invested. This tax relief will be recouped if the investment is sold within 5 years.

Dividends and capital gains are tax-free.

The maximum annual investment for a taxpayer is £200,000.

EIS/SEIS

These are tax advantaged schemes that involve direct investments into small higher-risk trading companies.

EIS shares attract income tax relief of 30% and SEIS shares attract income tax relief of 50%. The relief is clawed back if the shares are sold or if there is a disqualifying event within 3 years.

Any gains on the shares are tax-free provided they are held for a minimum of 3 years and in most cases are fully relieved from Inheritance tax if held for two years.

In addition to the above, capital gains tax on gains invested in EIS shares where the relevant disposal was either 36 months prior to or 12 months after the EIS investment can be deferred until the subsequent disposal of the EIS shares.

The maximum that can be invested in EIS shares annually is £1M (or £2M for knowledge intensive companies) and for SEIS shares the limit is £100,000.

Inheritance Tax (IHT)

There is an annual £3,000 IHT gift exemption and you can also utilise any unused exemption from the previous year. Gifts covered by the exemption will fall outside of your estate immediately for IHT purposes.

There is also a £250 small gift exemption which allows you to give up to £250 annually to any number of friends and family. Again qualifying gifts will fall out of your estate immediately for IHT purposes.

Gifts to individuals that are not covered by the exemptions are potentially exempt transfers and you would have to survive the gift by seven years for them to fall outside your estate.

Capital Gains Tax

Each individual has a capital gains tax exemption of £11,700 for the year ended 5 April 2019. If it is not utilised then it is lost.

If you have investments standing at a gain you may wish to you consider making an appropriate disposal to utilise the annual exemption.

Alternatively, you may have already made gains in excess of the annual exemption and look to crystallize a loss prior to 5 April to offset against the gain.

Care should be taken if you are looking to bed and breakfast a share (i.e. sell the holding and then repurchase it shortly afterwards). If you repurchase the share within 30 days of the disposal then this purchase is matched with the recent disposal for tax purposes so is unlikely to crystallize a gain or loss as intended.

You could still dispose of a shareholding then immediately have your spouse purchase the same shareholding or alternatively, a SIPP could purchase the shares if you have one.

Loucas can help you to build a tax-efficient financial plan that ensures you are making the most of the reliefs and allowances available to you.  If you would like to discuss any of the issues raised in this guide please call 01622 758257.

Can you claim vat back on your staff Christmas party?

By Stuart Shaw
2 min read

With Christmas fast approaching many Company Directors want to thank and reward their staff for their hard work. For limited companies, there are certain tax benefits on staff annual and Christmas parties and giving gifts to employees.

Tax free staff Annual and Christmas parties

For any annual event, be it a summer BBQ or Christmas Party, HMRC provides a tax relief for all employees set at £150 per head. The total claim for any annual events combined requires being below the £150 limit to qualify per employee.

How to calculate the cost per head?

The cost per head for the whole event from start to finish can include;

  • food
  • drink
  • entertainment
  • taxis home
  • overnight accommodation

If the VAT, inclusive of cost of the event is over the £150 limit the whole benefit is taxable as a benefit in kind. To calculate the cost per head of your annual or Christmas party, divide the total cost of the function by the number of employees.

Can you bring a guest?

The events are mainly for entertaining employees. If the company has several branches then the event is open to all staff in their location. The £150 threshold is per employee and is split between any employees’ partners or guests who attend too. The cost of the whole event is an allowable expense for your business.

Can you invite suppliers or customers?

When inviting customers or suppliers to the Christmas party, VAT relief may be restricted as non-employees are also being entertained. Event’s for only directors, partners or sole proprietors,  will not be tax deductible as all employees are required to be invited for it to qualify.

What gifts can you give that are tax allowable?

Employers can give gifts listed below to employees as tax deductible, trivial benefit, as long as it does not exceed £50.

  • Turkey,
  • a bottle of wine
  • a box of chocolates

Unfortunately, a hamper with food and wine will not be classed as a trivial benefit. Christmas presents paid in cash to staff are taxed as earnings with tax and national insurance. This also applies with gift vouchers in excess of £50 which are exchangeable for goods and services too.

Record keeping for your annual and Christmas parties

For all events, keep the receipts. By make a note of the employees who attended keeps records organised too.

From Loucas we hope you enjoy your Christmas festivities and that your employees also enjoy their seasonal gifts.

Have a great time.

For more advice on trivial benefits read more on trivial benefits and what they are?

Ratio Analysis: Measuring Business Performance

By Athos Louca
2 min read

Ratios are calculated from an organisation’s financial statements and are an effective business tool in measuring its performance. By comparing the ratios to those of the previous year it is possible to determine whether a business is doing better this year than last year.

It is also possible to compare ratios of one organisation against those of another in a similar industry, a practice known as Benchmarking.  This helps identify areas in which one business is either under performing or indeed is out performing another.  Undertaking ratio analysis and making comparisons to market leaders within your industry will help focus on areas which require attention. It is important not to simply calculate as many ratios as possible, but to identify those most relevant to your business.

Ratio Categories

There are many different ratios that can be calculated and which can be grouped together into five main categories:

  • Profitability
  • Liquidity
  • Operational
  • Solvency
  • Gearing

Different interpreters of the financial statements will be more interested in certain ratios than others.  For example, lenders will be interested in Gearing ratios such as interest cover and debt to equity. Whilst other business owners are likely to concentrate on Profitability and Operational ratios.

Measuring Business Performance and Target Setting

By carefully selecting the most suitable ratios business owners and managers can use the results to gain a better understanding of how their organisation is performing.  The same ratios can also be used to set future targets.

For example, a business may be experiencing cash flow problems.  The business owner believes that his customers are taking too long to settle their accounts.  By calculating their debtors days and recording the results, it will be possible not only to establish what the current position is, but also to set targets for the future.  This may be to reduce the debtor days from thirty five to twenty five days.  A reduction in debtor days will help ease cash flow and reduce the risk of bad debts.

An organisation should select a number of ratios which provide key information about its performance.  These are known as Key Results Indicators.  Whilst these will vary from business to business some of the most common are listed below:

  • Gross Profit Margin
  • Net Profit Margin
  • Trading Overheads as percentage of Turnover
  • Debtor & Creditor Days
  • Current Ratio
  • Debt to Equity
  • Return on Capital Employed

The calculated ratios should be recorded in a concise format and form part of the management information reports.  The use of graphs will allow trends to be easily identified, avoiding the risk of getting lost in the numbers.

We have helped many clients design and implement effective ratios as part of their business key performance indicators to help them assess where their business is.  If you would like any assistance on selecting the right ratios and other key performance indicators, please do not hesitate to contact us.

Enterprise Management Incentive Scheme (EMI) Options

3 min read

An Enterprise Management Incentive (“EMI”) scheme is an HMRC approved share option scheme aimed at smaller businesses to retain and motivates key employees. This guide will discuss what EMI schemes are and how they work.

So what is an EMI share options scheme ?

A share option gives the right to someone to purchase a share in a business at an agreed price at some point in the future.  Typically, but not necessarily, this would be at the point of sale. The option holder must be an employee of the company and must spend at least 75% of their working time at that company.


Why would you consider using an EMI scheme ?

EMI schemes are becoming more and more popular with businesses with HMRC reporting a marked increase in the number of business implementing the schemes during 2017.

The main reasons businesses consider introducing EMI schemes are to motivate and retain key members of their workforce.

Employees will have a sense of ownership and will also benefit from the increased value of the business.


Is an EMI scheme complicated to implement ?

At the outset there is a procedure that needs to be followed which is likely to require the assistance of professional advisors.
Outline of Procedure:

  • Prepare a market value valuation of the business and agree with HMRC
  • Agree the terms of the scheme and set out in an option agreement
  • Possibly minor amendments to the company’s Articles of Association
  • Grant the options to the employees and get them to sign the option agreement
  • Notify HMRC of the options that have been granted

Other than an annual declaration that has to be made to HM Revenue and Customs (HMRC) each year notifying them of any changes to the options that have been granted there is no on-going work required to maintain the scheme.

Much of the documentation that is mentioned above can be used for further granting of options at a later stage.  It may be necessary to obtain a further agreement from HMRC as to the value of the shares.


What are the Tax Advantages of EMI share options ?

EMI schemes have a number of tax advantages attached to them over unapproved share options.

  • Providing the options have an exercise price which was no less than the market value at the time of granting then there is no income tax or national insurance contributions payable.
  • Once the options have been exercised and sold then the employee will pay capital gains tax on any gain. The gain should qualify for Entrepreneurs Relief which will mean they will be taxed at a rate of 10%.  This is far less than if they were to pay income tax on the gain as they would do for unapproved options, which could be as much as 45% or possibly more if NICs were to become payable.
  • Key employees are likely to stay with the company as the probability of a profitable capital return, motivates them. Employee’s motivation and interests are aligned towards the shareholders and the board when they have a tangible interest in the company’s ownership. As a result, everyone is focused on adding more shareholder value.
  • Employees feel more valued in a share option scheme in the long term. Employees have an incentive to grow of the business and make themselves more accountable.


What will it cost me ?

Typically to implement an EMI scheme will cost around £2,500 to £3,000 plus VAT.  This may vary depending on how many employees are to be included in the scheme.


What are the downsides of an EMI scheme ?

If the trigger point for exercising the options is based around the sale of a business and the owner subsequently decides not to sell this can act as a demotivator for employees as the scheme may no longer be fit for purpose.

There are a number of disqualifying events laid down by HMRC which could affect the tax status of the scheme.  Whilst in most cases these may not be relevant, consideration needs to be given to them when making some business decisions.

The initial setup costs are high if options are only going to be granted to a small number of employees.

How we can help  ?

As an accounting firm, we are able to provide a wide range of services tailored to your particular industry. With over 40 years experience our team at Loucas has set up many EMI schemes for a variety of businesses in numerous business sectors. We have a dedicated team to ensure that you are guided though share option schemes with ease.

We believe by staying up to date with not only current but changing legislation and industry news we are better placed to help our clients and their businesses succeed.

If you would like to discuss you options with EMI share option schemes or how Loucas can assist you please do not hesitate to contact us.

Enterprise Management Incentive Scheme (EMI)

Further Information

The information contained in this publication has been prepared for general guidance and is not intended as advice. Whilst every care is taken to ensure the accuracy of the information, no responsibility can be accepted by Loucas for any loss resulting from acting or refraining from acting as a result of any material in this publication. The information in this publication is not designed as a substitute for seeking professional advice.

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