Disposing of a business? Make sure to claim reliefs

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Entrepreneurs’ Relief (ER) is a valuable tax relief for individuals seeking to dispose of their business. It can give access to a 10% rate of capital gains tax (CGT), subject to a £10 million lifetime limit. ER is potentially available to company shareholders, trustees, and owners of, or partners in, unincorporated businesses.

However, important new conditions have recently been added – are you up-to-date?

A look at the new ownership period

Ownership conditions apply throughout the period up to the date of disposal. The 2018 Autumn Budget brought changes affecting all business owners and shareholders looking to claim ER. For disposals on or after 6 April 2019, the necessary qualifying period of ownership is extended, becoming two years, rather than one.

‘Personal companies’ – a definition

New rules have been published on exactly what constitutes a ‘personal company’. Under these rules, an individual must, throughout the relevant qualifying period:

  • be a company employee or office holder
  • hold at least 5% of the company’s ordinary share capital
  • be able to exercise at least 5% of the voting rights; and
  • satisfy either the distribution test or the proceeds test.

Note that for trustees who are company shareholders, the qualifying beneficiary of the trust must (had they owned the shares personally) fulfil these criteria, and pass either the distribution or the proceeds test.

Analysing the distribution test

For disposals made on or after 29 October 2018, the 2018 Autumn Budget introduced the requirement that an individual must satisfy the distribution test. By virtue of their holding, an individual must be entitled to at least 5% of the company’s profits available for distribution to ‘equity holders’, and 5% of the assets available for distribution to equity holders in a winding up. Note that the basis is profits available to equity holders, rather than shareholders: this has a wider impact.

Unfortunately, this could impact companies genuinely issuing different classes of shares – sometimes known as ‘alphabet’ shares – to different shareholders. As different classes of shares have different rights, alphabet shareholders may not meet the distribution test, especially if those shares are not pari passu.

Examining the proceeds test

To address this, the government introduced an alternative test, based on proceeds on disposal.

For disposals made on or after 29 October 2018, the individual must, in the event of a disposal of the whole of the ordinary share capital of the company, be beneficially entitled to at least 5% of the proceeds. Here, the 5% threshold is computed by reference to the market value of the company at the end of the qualifying period. This could mean – in situations where the new distribution tests are not met – that it would not be apparent whether ER will be available until shares are actually disposed of.

Check your eligibility now

These changes will impact many claims for ER, and we advise that you review your eligibility for ER now. If your current shareholding fails to qualify under the distribution test, and may not qualify under the proceeds test, your qualifying ownership period has ended. To reactivate eligibility for ER, action to change shareholding will be required.

To discuss whether you need to act to ensure ER will be available on any future disposal, please get in touch.

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Government tax investigations ‘taking three years to complete’, data suggests

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Data published by law firm Pinsent Masons has suggested that government tax investigations into large businesses are taking ‘three and a half years’ to complete.

According to the law firm, HMRC’s litigation and settlement strategy makes it difficult for government investigators to settle for less than the full amount.

Commenting on the issue, a spokesperson for HMRC said: ‘The tax we collect funds the UK’s vital public services. We’ve secured over £62 billion in additional tax revenue from large businesses since 2010 – tax that would otherwise have gone unpaid.

‘Over 85% of our investigations conclude within 18 months, but some cases are more complex and so will take longer to resolve and even require us to litigate.’

However, experts argue that tax investigations are often ‘very disruptive’ for businesses.

‘HMRC’s inflexible approach to tax avoidance is driving delays as it frequently aims to win every point against the business,’ said Jason Collins, Partner at Pinsent Masons.

‘HMRC’s latest disclosure facility shows that HMRC is clamping down on what it views as businesses diverting profits from the UK through aggressive, out-of-date or erroneous transfer pricing.’

Reviewing the changes to pensions auto-enrolment

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From 6 April 2019, minimum employer and total contributions into pension schemes rose. Here, we review these changes, and analyse the pensions auto-enrolment scheme in greater detail.

Auto-enrolment: an overview

Under the pensions auto-enrolment scheme, employers must automatically enrol eligible workers into a qualifying pension scheme. Employers’ duties include assessing the types of workers in their business; providing a qualifying auto-enrolment pension scheme for workers; paying employer contributions; reassessing the workforce; and completing the declaration of compliance once every three years.

Under auto-enrolment, there are three categories of worker: entitled workers; eligible jobholders; and non-eligible jobholders. To qualify as an eligible jobholder, a worker must be aged between 22 years and the State Pension age; meet the minimum earnings threshold of £10,000; work or ordinarily work in the UK; and not already be part of a qualifying pension scheme. Most workers fall into the eligible jobholders category. These workers are entitled to auto-enrolment pension contributions from the first day of their employment, or on meeting the age and earnings qualifications. It may be possible to delay assessment for individual workers for up to three months, under ‘postponement’, however timely communication with the worker on this issue is vital.

Non-eligible jobholders are able to opt-in and join the auto-enrolment pension scheme and are then eligible for contributions on the same terms as eligible jobholders, including entitlement to employer pension contributions. Meanwhile, entitled workers have the right to join a pension scheme. However, for this type of worker, employers are not required to pay employer contributions.

Rising contributions and fines

On 6 April 2019, employer minimum contributions rose from 2% to 3%. The total minimum contribution also increased from 5% to 8%. Employers are required to make at least the minimum contribution, and employees must make up the difference.

Since the introduction of pensions auto-enrolment in 2012, regulatory body the Pensions Regulator (TPR) has handed out a significant number of fines.

The number of fines handed out rose considerably when auto-enrolment was rolled out to include small employers. Since 2017, small firms with fewer than 50 employees have been required to comply with auto-enrolment. Penalties for non-compliance range from fixed penalty fines of £400 to daily escalating penalties of between £50 and £10,000, depending on the number of employees a business has.

Employers must ensure they are fully compliant with the auto-enrolment regulations. Detailed guidance can be found on TPR’s website: https://bit.ly/2DL3YGv.

Contact us to ensure you are compliant with auto-enrolment.

Business groups outline principles for UK trade policy

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Business groups, including the Confederation of British Industry (CBI), the Federation of Small Businesses (FSB) and the Trades Union Congress (TUC) have set out ‘core principles’ for UK trade policy post-Brexit.

The business groups’ letter to the government, which has also been signed by consumer association Which? and the Fairtrade Foundation, states that trade ‘can be a powerful tool to increase and share prosperity in the UK and around the world’. According to the business groups, the government needs to build a trade policy which:

  • helps every region in the UK to grow, raise living standards, promote good jobs and fair pay
  • upholds and enforces international labour standards and human rights
  • maintains consumer rights and standards
  • ensures fair and transparent dispute resolution
  • reinforces the UK’s global reputation for environmental stewardship, diversity and inclusion.

In the letter, the business groups said: ‘We are committed to working with each other – and with all politicians – to achieve these goals and draw up practical guidance to make them a reality. This is the best way of creating an inclusive trade policy for the UK that workers, businesses and communities will benefit from.’

Government Equalities Office ‘considering gender pay gap reporting for small firms’

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The Government Equalities Office has recommended extending the gender pay gap reporting initiative to include small and medium-sized enterprises (SMEs).

Currently, only employers with 250 employees or more are required by law to publish their gender pay gap figures on their website and report their pay gap data to the government via its gender pay gap reporting service.

Hilary Spencer, Director of the Government Equalities Office, told the Treasury Select Committee: ‘There’s a number of ways we could take reporting in the future. One option is to lower the threshold, another option is to ask for more data on gender, and another is to ask for data about different characteristics.

‘We’re putting advice to ministers on ways we can take this forward, including ethnicity pay gap reporting.’

A range of proposals have been outlined, including expanding the range of data collected and giving the Equality and Human Rights Commission (EHRC) additional powers to issue immediate fines to businesses that fail to comply with the reporting requirements.

Significant number of individuals ‘choosing to live cashless life’, research suggests

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Research carried out by trade association UK Finance has suggested that many individuals in the UK are choosing to live a ‘largely cashless life’.

According to UK Finance, digital technology is ‘transforming the world of payments’, allowing consumers to ‘take advantage’ of the ever-widening range of payment options.

The research revealed that debit cards were the most frequently used payment method in 2018: debit card payments accounted for 40% of all payments.

Additionally, more than two-thirds of adults used online banking in 2018, and almost half used mobile banking. An estimated 8.5 million consumers are registered to purchase goods and services using mobile payment systems.

‘The same pick ‘n’ mix approach people now take when it comes to music, television or the news is expanding into payments, as consumers take advantage of new technologies to pay in a way that suits them,’ said Stephen Jones, Chief Executive of UK Finance.

‘More and more customers are now opting for the speed and convenience of paying with their contactless cards, or using mobile banking to check their balances and make transfers while on the move. This rapid rate of technological change is set to continue over the coming decade, as people embrace the ever-widening number of ways to pay and manage their finances.’

DIT launches online tool for international investors

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The Department for International Trade (DIT) has launched an online tool to help potential international investors set up and expand their operations in the UK.

The new tool, termed the UK Investment Support Directory, enables international investors to connect with a range of businesses across the UK. The directory allows potential investors to find an expert in their specific industry or region. They are also able to source the business and language expertise they require.

Experts listed in the directory include those in the accountancy, law, consultancy and recruitment industries, amongst many others. Once selected, businesses will offer a free one-hour consultation to discuss the potential investor’s needs.

According to the DIT, the UK Investment Support Directory has been created to make information about the investment process ‘more accessible’, and is part of a wider initiative to ‘generate more foreign direct investment in the UK’.

Graham Stuart, Minister for Investment, said: ‘The launch of the new UK Investment Support Directory is one of many ways in which the DIT is helping to drive investment to every corner of the UK. We hope this new directory will be an invaluable resource for investors thinking of setting up operations in the UK.’

The directory can be found here: https://www.great.gov.uk/investment-support-directory/.