Budget Day latest on Anti-Income Shifting (March 2008)

One of the big news items of this year's Budget was the 12 month postponement of the Anti-Income Shifting (AIS) proposals directed at family companies and partnerships. As a result there will now be further consultation to examine this wide reaching and complex legislation aimed at
introducing revised rules on 6 April 2009.

In the meantime, family businesses still need to plan for the end of the current year and the options outlined in our previous briefing remain valid. The difference is that there is now one more year at least in which a company can provide a couple with a useful means of managing profits tax-efficiently. The main means will be maximising dividends and there is not the same pressure to wind up companies before taper relief s abolished because of the potential availability of entrepreneurs’ relief in future. However, year-end planning remains as important as ever.

Dividends

Paying dividends to the ‘non-earner’ spouse or civil partner before the tax-year end is feasible, if they have not already used up their basic rate band and personal allowances. The normal personal allowance (£5,225) and the lower and basic rate bands (£34,600) mean that the total income receivable below higher rates is £39,825.

When calculating dividends, the net amount received needs to be ‘grossed up’ for a 10% notional tax credit. It is best to match the personal allowance with salary if the spouse's work for the company justifies it, because that amount is not grossed up and gives the company a corporation tax deduction. Therefore, the net dividends to use up the £34,600 can be up to £31,140.

Any company paying dividends must ensure they are completed before the end of the tax year. Simply declaring a dividend will not be enough; the cash has to be paid or the amount recorded properly in the company's books; and the company must have enough distributable reserves, otherwise the distribution is illegal and invalid.

Liquidation

If a company has more accumulated profits, the shareholders could consider liquidating it.

CGT on distributions in a winding up is only 10% if full business taper relief is available and there is the annual CGT exemption of £9,200 available to each shareholder (if not already used against other gains), plus any losses on other chargeable assets.

This is only worthwhile if the costs of a formal liquidation are less than the tax it will save. It is not possible to provide hard and fast guidance because the costs will depend on circumstances, but the liquidation route is unlikely to be beneficial unless the accumulated profits that cannot be paid out as dividends or salary, exceed £40,000.

The simplified procedure for having a company struck off under HM Revenue and Customs’ (HMRC) Extra-Statutory Concession C16 is not recommended because it relies on HMRC agreement, which is unlikely to be given for arrangements intended to save tax.

If you still want to use a company in the future, the business can be transferred to a new organisation, but you need to ensure that all contracts are properly transferred including, for example:

• car leasing;
• car insurance;
• PI cover;
• public liability insurance;
• the actual trading contract(s);
• property leases or licences;
• PAYE registration;
• bank account(s); and
• employee contracts.

If the company is VAT registered, ‘transfer of a going concern’ rules will apply if the transfer is made correctly.

Above all, it is vital to make sure that the payment is actually made:

• after the liquidator has been appointed;
• and before the end of the tax year.

For payments out of a liquidation, the date of disposal for CGT purposes is the day on which the payment is made – i.e. completed, not just declared, and involving the actual transfer of money.

The future: AIS goes beyond husband and wife businesses

The Government claims that AIS is only targeted at the specific ‘abuse’ of income shifting between spouses, but the rules are much more widely drafted. In addition, AIS will add an administrative burden on companies where there is no attempt at income shifting, but those companies will need to be able to show that they are acting compliantly. There is little scope for tax planning in anticipation of the new rules because that would be treated as an "arrangement" that would itself be caught by the new rules.

Following the announcement in the Budget to defer the introduction of AIS we will return to this topic in more detail when consultation on the new rules has been concluded and their final shape is known. In the mean time, you are welcome to contact your usual Baker Tilly representative for further discussion.

© Baker Tilly UK Group LLP, all rights reserved, 03.08

This technical briefing is designed for the information of readers. Whilst every effort has been made to ensure accuracy, information contained in this briefing may not be comprehensive and recipients should not act upon it without seeking professional advice from their usual professional adviser.

Baker Tilly & Co Limited is authorised and regulated by the Financial Services Authority to conduct a range of investment business activities.

Baker Tilly UK Audit LLP, Baker Tilly Tax and Advisory Services LLP, Baker Tilly Corporate Finance LLP and Baker Tilly Restructuring and Recovery LLP are not authorised under the Financial Services and Markets Act 2000 but we are able in certain circumstances to offer a limited range of investment services because we are members of the Institute of Chartered Accountants in England and Wales. We can  provide these investment services if they are an incidental part of the professional services we have been engaged to provide.

www.bakertilly.co.uk