Tag: private client

The importance of a partnership agreement

Posted on by Katie Trower

Partnerships can raise some of the following questions:

  • What happens in the event of a dispute between the members, if there is a claim made against a member or even how the business is perceived?
  • What if the members are of the same family?

There is often more than just tax and legal factors to consider, and the partnership agreement is a good starting point.

Partnership agreements

There is plenty of case law to suggest that the actual facts, actions of the parties and the circumstances can play a part in deciding whether it exists or not. Not only that, but a poorly drafted agreement may have an outcome not originally intended.

Whilst there is no requirement to have a partnership agreement, and even where an oral agreement can suffice, formalising a partnership with a documented partnership agreement has two clear advantages:

  1. Firstly, it focuses the parties’ minds on the nature of the transaction, and if the situation as to whether a partnership exists is borderline, the agreement may decide the matter.
  2. Secondly, there are sound practical reasons for putting the arrangement in writing to ensure that the subsequent business transactions are what the parties agreed to at the outset. This could include, for example, where the parties disagree on a matter, or their profit-shares may cease to reflect their continuing contribution, appointing new members or expelling disruptive members.

We should also keep in mind that in the absence of a partnership agreement, or in cases where something is not covered by one, we default to the rules as set out in the Partnership Act 1890, which may not give the results the parties intend.

Main contents of a partnership agreement

There are many points that will need to be covered and some will vary according to the type of business and the relationship between the members.

However, the agreement should be clear on whether there is a partnership and how the arrangement is to work. Some agreements run into hundreds of pages whereas others are just a few pages long. In general, factors such as how the members will share income and capital profits, what happens on the death of a member, putting restrictions on exiting partners, capital contribution requirements, and more will all need to be considered.

A small investment in legal and tax advice at inception can protect the partnership against a much more expensive battle if the parties later decide to split up. For further advice, contact Kiran Chotai, Private Client Senior Manager.

Why accounting firms are choosing LLPs over Limited companies – Accountancy Today and Accountancy Age

Posted on by Katie Trower

Kiran notes that this shift reflects a strategic adaptation to the UK’s evolving business landscape, where flexibility and direct tax benefits are increasingly prioritised. Above all, a firm needs to weigh up the benefits of each structure before deciding which resonates with their business model the best.

LLPs offer significant advantages, particularly in taxation and operational agility. Unlike LTD companies where profits are taxed both corporately and on dividends, LLPs enjoy a tax-transparent status, meaning profits are only subjected to income tax as they are earned, not when distributed. LLPs also inherently promote a more integrated business operation, with members engaging directly with clients and sharing in the firm’s administration and profits. This contrasts with LTD structures, where directors manage operations and shareholders are often removed from daily business engagements.

The process of transitioning however requires careful planning, including drafting an LLP agreement and transferring contracts under compliance with employment laws. In short, Kiran comments: “There are pros and cons for accountancy firms looking to become an LLP, but given the nature of our industry, the benefits of becoming an LLP can far outweigh the challenges.”

You can read Kiran’s article in full via Accountancy Today here and via Accountancy Age here.

Strategic tax advice for LLPs

For firms considering this move, the decision between an LLP and an LTD structure should align with long-term business goals and operational philosophies. The inherent flexibility and direct engagement offered by an LLP can be crucial for firms looking to enhance client relationships and agile management practices in a dynamic professional landscape.

For further advice on transitioning to an LLP, please contact Kiran directly.

Comments on HMRC’s MTD for ITSA Pilot – AAT

Posted on by Katie Trower

As part of the pilot, self-employed individuals and/or landlords earning over £50,000 annually can participate voluntarily. Participants are required to maintain digital financial records and send quarterly updates to HMRC using MTD-compliant software. Additionally, they must complete their tax returns by January 31 of the following year.

Katharine acknowledges the significance of the pilot as a preparatory step towards mandatory digital tax filings. However, she expresses concerns over the historical delays and the increased workload involved, which have made client participation in the pilot challenging. With an emphasis on the importance of timely and clear communication from HMRC to ensure a smooth transition for businesses, Katharine notes: “It’ll be important to participate in the pilot but it’ll be a challenge to persuade clients due to lack of confidence in HMRC and its systems.”

To read Katharine’s comments in full, visit the AAT article here.

Are you MTD ready?

Being prepared for the mandatory implementation of MTD before April 2026 is the best approach to remain tax compliant. For further advice on MTD, get in touch with Katharine directly or a member of our Private Client team.

Family companies: assess profit extraction strategy

Posted on by Katie Trower

Corporation Tax

The main rate of Corporation Tax is 25% for companies with profits of more than £250,000. A small profits rate of 19% applies to profits of £50,000 or below. Where profits are between the two, Corporation Tax is paid at the main rate reduced by marginal relief. This provides a gradual increase in the effective Corporation Tax rate. In all, higher Corporation Tax rates and marginal relief may mean new choices for profit extraction.

Tax efficient remuneration

Traditional remuneration strategy involves a small salary and extracting remaining profits as dividends.

Salary: this is usually set at a level sufficient to qualify for state benefits (notably State Pension entitlement) but pitched so that no liability for NICs arises. Salary counts as a deductible business expense for Corporation Tax purposes, as do employer NICs. Unless a director has a contract of employment that means they are a ‘worker’, there is no need to pay minimum wage hourly rates.

For 2023/24, the preferred salary in many cases will be £12,570, so that the standard personal allowance is fully used. NICs for directors are calculated based on an annual earnings period on salary and bonuses. Though employer NICs kick in at £9,100, employee NICs are due on earnings over £12,570, with a further 2% charged above the upper earnings limit of £50,270. We can help you review an appropriate figure for salary to suit your circumstances.

Dividends: The dividend allowance continues to fall, whilst the rate of tax on dividend income has increased. This means that extraction of profits through dividend payment has become more expensive. Whilst in many cases, it may still be tax efficient to take profits as dividends rather than salary, the decision is becoming more nuanced.

Bonus: In some cases, it may be more efficient to extract profit as a bonus, for example where there are not sufficient retained profits out of which to pay a dividend at the required level, or where Corporation Tax is paid at the full rate.

Like salary, bonuses are subject to Income Tax and NICs for the director, and employer NICs for the company. The cut to employee Class 1 NICs from 12% to 10% from 6 January 2024, will make payment of a bonus less expensive. The full effect of the reduction will only be felt from 6 April 2024. For 2023/24, directors will pay a ‘blended’ annualised NICs rate of 11.5%.

The rules around timing can sometimes be used to advantage. For Corporation Tax, bonuses can be decided after the end of the company year, when final results are known. They are still deductible in that year if paid within nine months. For Income Tax, there is scope to defer taxation of a bonus into a later tax year, or include in the current tax year, depending on how and when the bonus is declared. It is important to get the timing and procedure correct, and we can advise further.

Consider how to deal with directors’ loans

It is common for director-shareholders in family companies to have a loan account with the company. As most family companies are what are technically called ‘close companies’, this brings them within scope of the ‘loans to participator’ rules. This can mean a charge to Corporation Tax, often known as a s455 charge, if a director’s loan account is unpaid nine months after the end of the accounting period. For loans made on or after 6 April 2022, the charge is 33.75%.

A benefit in kind, subject to Income Tax and NIC, may also apply where a commercial rate of interest is not paid on an overdrawn director’s loan account.

Please do talk to us about the options for dealing with a director’s loan in your circumstances.

LLPs: HMRC’s new salaried members rules guidance on capital contributions

Posted on by Katie Trower

The rules tax the members of an LLP as employees if three conditions are all met:

  • Condition A: it is reasonable to expect that at least 80% of an individual member’s total remuneration is ‘disguised salary’ (which does not vary or which varies but without reference to the LLP’s profits);
  • Condition B: the individual member does not have significant influence over the affairs of the LLP; and
  • Condition C: the individual member’s capital contribution is less than 25% of the disguised salary that it is reasonable to expect will be payable to him in the relevant tax year.

Failure to meet one or more of these three conditions means that the relevant member will be taxed as self-employed rather than as an employee, which can result in a significant saving of employer’s National Insurance (NI). Alternatively, where salaried members are taxed as employees and their income forms part of the employer’s tax bill, it will also be subject to the Apprenticeship Levy (0.5%), where the employer’s annual total pay bill is £3m or more.

HMRC’s new guidance

HMRC has recently changed its guidance on the interaction of the targeted anti-avoidance rule (TAAR) and Condition C. The TAAR states that any arrangements must be disregarded if those arrangements , ensuring that salaried members rules do not apply.

Until recently, HMRC’s guidance did not preclude LLPs from requiring capital contributions of 25% or more, in order to ensure that Condition C was not applicable. HMRC has, however, amended its Partnership Manual to remove this assurance and to insert an example suggesting that the TAAR applies where a capital contribution is increased with a view to avoid meeting Condition C.

Why the change in stance?

Whilst we can’t be certain, we understand that HMRC’s change of stance was prompted by the recent case of HMRC v BlueCrest Capital Management (UK) LLP. The recent changes to HMRC’s guidance indicates that it is taking a wider view of how and when the TAAR will apply.

The changes to the guidance will be of immediate concern to LLPs and members who have arrangements in place, which apply incremental movements in capital, as these arrangements may now trigger the TAAR. LLPs must ensure they have a robust process in place and assess each member against all three conditions on a regular basis, and at least before the start of each tax year.

However, we must note that the change is only to HMRC’s guidance, not a change to the legislation or case law. HMRC’s guidance will remain relevant to arrangements put in place before the recent change.

How we can help

We can help you review current arrangements to determine if you are compliant with the legislation, to identify if there is a greater risk of HMRC challenge – given its change in guidance – and to mitigate any risks identified.

For more information or to discuss the above, please get in touch with your usual haysmacintyre contact, our Employment Tax team, or our Partnerships Tax team.

Strategies for a successful business exit’ webinar

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  •  May 14, 2024
     10:00 am - 11:00 am

Learn why planning your exit is crucial for maximising value, ensuring smooth transitions, and securing your financial future. The webinar will include a chance to ask questions. Registration is free – secure your place using the ‘register now’ button! (more…)

haysmacintyre reacts: All change for non-doms and offshore trustees?

Posted on by Katie Trower

As a UK non-UK domiciled (non-dom) and offshore trust structure tax specialist of almost 30 years, having heard on countless occasions that the non-dom regime would be abolished, I was sceptical of the rumours, but the Spring Budget 2024 proved exciting.

My main health warning is that the UK has a General Election that must be held no later than January 2025 and the proposed changes are scheduled to take effect from 6 April 2025. Therefore, if we have a new government, there is a significant risk that these proposals won’t be introduced in this form, which makes planning difficult. However, if it is not these rules, it’ll be a replacement because the path has now been set.

That aside, we can only work with what’s been announced, so it is first worth saying that these proposed changes look exceptionally attractive to any high net worth (HNW)/ultra-high net worth (UHNW) individuals or families looking for a friendly tax jurisdiction in which to realise significant value (for example, a business sale, substantial dividends or trust appointments). This is because, for up to four years, these could all be entirely free of UK tax. Thereafter, all future income and gains will be fully taxable, but there remain options to manage that exposure.

There are two immediate factors. Firstly, the UK recently removed its investor visa programme, making it far more difficult to move to the UK and take advantage of this, so early advice needs to be sought because this can be a slow process. Secondly, the alluded to Inheritance Tax (IHT) changes may mean that any individuals who do manage to make use of these rules, may be ‘forced’ to leave within 10 years of arriving.

Putting aside any trust interests for a moment (see below), a non-dom who is already UK resident may benefit from some limited transitional rules to help soften the impact as well as the potentially very exciting two-year window in which to bring historic income and gains to the UK at a much-reduced tax rate of 12%. However, very often the main concern is the UK’s 40% IHT rate so ‘watch this space’ (because the rules are yet to be ‘consulted’ on) but depending on how long someone has been in the UK, there may be options to prevent this being a reason to leave the UK earlier than otherwise planned.

Finally, but closest to my heart (because I owe my career to the Channel Islands trust industry) is the potential impact for offshore trustees and their non-dom ‘settlors’ and/or beneficiaries.

For UK resident ‘settlor interested’ trusts, all of the structure’s income and gains may suddenly become taxable on the settlor as if it were their own, unless within the four ‘bonanza’ years. The settlor may have a legal right under the UK’s tax legislation to have the sums reimbursed, but will the trustees be able to? I remember discussions about this from the 1990s, so I’m looking forward to opening those dusty books (remember them?) again. It’s going to be critical to understand what the scale of the potential impact may be, the options, and whether there are any protections available, such as the ‘motive defences’ within the various anti-avoidance rules, because this could mean the difference between no UK tax and up to 45% UK tax having to be planned for. Excluding the settlor and spouse may also achieve nothing for Capital Gains Tax (CGT) purposes, so be careful when considering irrevocable exclusions. The suggested IHT benefits will more than likely keep many structures very appealing. For anyone who does consider terminating any structure, this could come with some surprises.

For any other type of trust where a beneficiary may move to the UK to enjoy the four years of bliss, there could be a splendid opportunity to make tax free distributions to them.

To my friends and colleagues in the ‘offshore’ fiduciary services industry, this could be a very exciting time with a frenzy of new trusts before 6 April 2025 and a need to understand existing ones under the possible new regime.

Please beware that a lot of detail is still unknown, so if you are a non-dom individual who has ever used the remittance basis or who may be considering coming to the UK, I would suggest speaking to a specialist as soon as possible (if that’s us, then even better!). If you are a trustee of a non-UK trust structure who has a UK resident settlor or beneficiary, then now is the time for a fresh ‘health check’ to take stock and consider your options.

For more on our non-UK domiciled personal tax and offshore trust services, contact James for more information.

Year End Tax Planning Guide 2024

Posted on by Katie Trower

The freezing of many tax rates and thresholds continues to increase the Government’s tax take, but there are still many useful ways to arrange your affairs tax efficiently, and we provide an overview of some of these in this tax planning guide.
For example, where you have discretion over the timing of income, you can establish when that income is best taken — in this tax year or the next. A review before 5 April 2024 could therefore have a significant effect on your tax position. For Scottish taxpayers, to whom higher tax rates and thresholds apply, this is particularly true.

Each year brings its own tax challenges, and this year is no exception. Although the 2023 Autumn Statement was low on dramatic announcements, there are a number of important changes pre-dating this which will take effect shortly. These will merit consideration as part of a year-end review for many people, and include:

  • Further reduction to the Capital Gains Tax (CGT) annual exempt amount.
  • A further cut in the Dividend Allowance.
  • The introduction of basis period reform for unincorporated businesses.

Our Private Client team work to have the all-round vision of your circumstances that can really help make an impact, and we look forward to being of assistance.

Download our Year End Tax Planning Guide below.

Strategies for a successful business exit

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  •  February 22, 2024
     4:00 pm - 7:00 pm

Led by experts from our Private Client and Transaction Advisory Services teams, join us to explore essential strategies for a successful business exit. Learn why planning your exit is crucial for maximising value, ensuring smooth transitions, and securing your financial future. The event will be followed by a chance to network and enjoy some canapes (more…)

Reactions to the 2023 Autumn Statement

Posted on by Katie Trower

Changes to National Insurance Contributions (NICs)

The Chancellor Jeremy Hunt announced 110 measures as part of the Autumn Statement, designed to stimulate economic growth, with significant changes to NICs. However, Katharine comments that the cut in NI rates might not be as significant as it seems.

Katharine says: “While the NI cuts will somewhat lessen the burden for many individuals, the actual annual saving is, in reality, minor when compared to the current tax burden on households.” Katharine also notes that with record highs of inflation, it has pushed many people into higher tax bands, leading to a record number of receipts for personal taxes.

Changes to National Minimum Wage and National Living Wage

In addition, the Chancellor announced an increase to the National Minimum Wage (NMW) and National Living Wage (NLW) rates, effective from 1 April 2024. However, Katharine questions whether this is more burden on businesses: “While it will mean slightly more money in people’s pockets, which should help the wider economy, employers will now need to cope with more complicated payrolls, applying the new rates before the start of the new tax year, and meeting the costs of the increased Living Wage.”

You can read Katharine’s comments across various publications below:

haysmacintyre’s full coverage of the Autumn Statement is here. For further advice on the Statement and what it means for you, contact Katharine here.

Get in touch