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Are you aware that the Employment Allowance has been revoked from sole Director limited companies?
Following the 2015 Summer Budget where the Chancellor of the Exchequer indicated that the Employment Allowance would no longer be available to companies where the Director is the sole employee from April 2016. HMRC subsequently set up a consultation on the matter.
As of today, HMRC is stating “We are analysing your feedback” on this consultation. Nonetheless, from 6th April 2016, a limited company where the Director is the only employee paid above the Secondary Threshold for Class 1 National Insurance contributions of £156.00 a week is now excluded from the Employment Allowance.
This is set to impact the estimated 150,000 sole Director limited companies where the Director is paid a salary subject to PAYE and NI.
Notwithstanding the appalling lack of communication of this change from HMRC, it has been made apparent that any company that erroneously claims the Employment Allowance will be subject to a penalty.
However, to re-qualify for the Employment Allowance, the company would simply need to pass the ‘additional employee test’ which explicitly includes companies where:
Moreover, if the company circumstances change at any point during 2016-17 tax year and there is an additional employee earning above the Secondary Threshold, the company would be eligible for Employment Allowance for the whole tax year.
The decisive factor is that an additional employee must be paid at least £156.00 a week or an additional Director must be paid a minimum annual salary of £8,112.00, subject to pro-rata if the Directorship began after the start of the tax year.
Given that the Employment Allowance is up to £3,000.00 this year whilst the Chancellor’s stated aim is “to ensure that the NICs Employment Allowance is focussed on businesses and charities that support employment…”, this seems totally ill-conceived.
Extraordinarily, there is no connected person test to prevent the Director either appointing their spouse or civil partner, a relative or a friend as a Director. There would be no need even to pay this person, as the original Director could resign and, thereby, become the qualifying ‘additional employee’.
To make the legislation more ludicrous, it is permissible for the original Director to be reappointed as a Director after one pay cycle as an employee. The HMRC states that if “….circumstances change during the tax year and the Director becomes the only employee paid above the Secondary Threshold, you can still claim the Employment Allowance for the tax year.”
Alternatively, a friend or relative could be employed on a temporary or zero-hour contract basis. As long as that person earns over £156.00 for just one week in the tax year, again the company would be eligible for the Employment Allowance.
Given the current crackdown on tax avoidance and evasion, it is astonishing that the Treasury has implemented a change that can be so easily circumvented. Indeed, the guidance on HMRC website is not far short of an instruction manual.
Seemingly, the only companies that will be affected will either be those where the Director is unable to appoint another Director or employee or is unaware that this is an option.
If you are concerned over any aspect of your business or personal tax affairs, please contact us at firstname.lastname@example.org for an initial free and confidential consultation.
We have prepared a free, downloadable 2016-17 UK Tax Guide that provides comprehensive details on the rates and allowances for:
If you would like any further information on any aspect of business or personal taxation, please email us at email@example.com.
Have you ever wondered why the tax year in the United Kingdom runs from 6th April to 5th April?
The reason is steeped in history. Prior to 1752, New Year’s Day in Britain was on 25th March, the Spring Quarter day, and this was also the start of the tax year.
In 1582, Pope Gregory XIII had reformed the calendar from the Julian predecessor to the new Gregorian version to improve accuracy with one of the changes being to stop the century years from being a leap year.
Britain essentially ignored these modifications and, by 1752, their calendar was eleven days out of sync from the rest of Europe.
To correct this, parliament decreed that Wednesday 2nd September 1752 was to be followed by Thursday 14th September 1752, a change that caused riots on the streets due to the lack of compensation for the loss of income from the short working month.
The Treasury, mindful of this public fury, moved the start of the next tax year ahead by eleven days to 5th April 1753 so that the populous was not paying a full year of tax for only 354 active days.
Although, as part of the conversion to the Gregorian calendar, New Year’s Day was moved to 1st January, the quarter days still are used as the payment periods for agricultural and commercial rents.
1800 was no longer a leap year and, therefore, in effect a day shorter than it would have been. To reflect this, the Treasury moved the start of the tax year ahead by a day to 6th April 1800 and it has continued to be 6th April ever since!
If you would like any further information on any aspect of business or personal taxation, please email us at firstname.lastname@example.org or for our free downloadable 2016-17 UK Tax Guide please click here.
Not the title of the next Hollywood blockbuster but a cautionary tale showing that, in the global economy, no country has complete sovereignty over it’s tax regime.
More importantly, for those with patentable inventions or Intellectual Property (IP), there is potentially a huge tax benefit for starting this process before 30th June 2016.
One short paragraph in the 2016 UK Budget read “Patent Box – Compliance with new international rules – The government will modify the operation of the Patent Box to comply with a new set of international rules created by the OECD, making the lower tax rate dependant on, and proportional to, the extent of research and development expenditure incurred by the company claiming the relief. This will come into effect on 1 July 2016.”
To appreciate the implications, it is important to understand how the Patent Box currently works.
The Patent Box has been phased in since 1st April 2013 and enables companies to apply a lower rate of Corporation Tax of 10% to profits earned from its patented inventions. The percentage of the related profits entitled to the 10% Corporation Tax rate had been phased in as follows:
To qualify, a company must either own or exclusively licence-in patents and have performed qualifying development on them. In addition, the patent must have been granted by the UK Intellectual Property Office, the European Patent Office or by certain states in the European Economic Area.
Currently, the Patent Box excludes patents registered in countries including USA, France, and Spain due to the differences in the approval process for patent applications. Products that only have copyright or trademark protection are not covered.
A company needs to be able to demonstrate performed ‘qualifying development’ on the patent by making a significant contribution to the creation or development of the patented invention or a product incorporating the patented invention.
If a company is exclusively licensing-in a patent, it can still benefit from Patent Box so long as it has the entitlement to develop, exploit and defend rights in the patented invention plus at least one aspect is to the exclusion of all other persons and there is exclusivity in at least one entire country.
There are more relaxed criteria for a group of companies where one company may own the portfolio of patents whilst others develop and mercantile them.
It is not a requirement for all of the company profits to have been derived from patented inventions. To be germane, the income must come from at least one of the following:
Meanwhile, the Organisation for Economic Cooperation and Development published the conclusion of their OECD/G20 Base Erosion and Profit Shifting Project in October 2015 and, after a consultation, the UK government determined to adapt the Patent Box to comply with the with the modified nexus approach. The Executive Summaries can be read here.
The main thrust of the modified nexus is to ensure that the benefits of the UK tax regime are only available where the research and development (R&D) expenditure required to develop that innovation also took place in the UK.
As a result, under the new rules, for income to be eligible for the Patent Box it must be linked actual R&D expenditure. Companies will need to calculate IP profits on the basis of streaming income between qualifying and non-qualifying revenues and be able to track and trace expenditure corresponding to each stream.
For each profit stream figure, the company will apply the ‘nexus fraction’ to determine the amount subject to the reduced level of Corporation Tax.
All highly complicated and time-consuming to administer. HMRC have published an overview flowchart but if you would like the full details on the nexus approach, please email us.
On the plus side, the UK government is enveloping the nexus approach into the existing Patent Box rules, so the overall framework remains the same. However, the current method will be closed to new entrants from 1st July 2016.
Most critically, the maximum allowable transitional period has been set for existing IP so that the current Patent Box rules will continue to apply through to be 30th June 2021.
It is important to note that a patent is the most difficult form of protection to get. The process is complicated, lengthy and carries a cost. Nonetheless, a company will be treated as a qualifying company for the Patent Box if it has applied for a patent that has not yet been granted and meets the other qualifying criteria.
For those with IP either already generating revenue or likely to do so in the next five years, the benefits of exploiting the current Patent Box system are likely to far outweigh the costs.
If you would like any further information on the Patent Box or any other aspect of business taxation, please email us at email@example.com.