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HOTP – Watch the Redundancy minefield

Although unfortunate, reducing the number of employees may be a necessary response to the current economic climate. This may be just where the problems start for the employer. Not only is employment law advice necessary to avoid being sued for unfair dismissal, but tax advice should also be taken. Get it wrong and the whole process could be extremely costly. Some employers may never realise they have a problem until years later when HM Revenue & Customs visit to review the payroll records.

The tax side alone is a very complex area, which isn’t helped by the common myth that the first £30,000 of the final payment will be tax free. Unfortunately this isn’t true and it is not that simple. Before the tax treatment can be confirmed the payment will need to be reviewed to check if it is contractual (express or implied), or compensation, whether for breach of contract, loss of employment, or something else. Providing certain conditions can be met it may be possible to save tax in a difficult situation. 

QTT – Shattering the tax myths – you can rely on the Revenue to repay!

Tax myths are creating problems in an already confusing tax system. In each edition we will unravel a well known tax myth and give you the truth. In this edition we’ll concentrate on the myth “If you have paid too much tax then you can rely on HM Revenue & Customs to pay it back”. 

Unfortunately not is the simple answer. If you only have employment income and have overpaid tax then it should happen automatically. However the position can often be more complicated and you will have to ask for the tax back either by completing a tax return or a tax repayment claim form, sometimes referred to as an R40.

Pensioners or those with various sources of income are more likely to over pay tax. So it is always worth checking the tax you have paid at the end of the tax year.

QTT – Do you want to save national insurance?

If you pay personal pension contributions and your employer is open to saving some national insurance themselves, then read on. It may be possible for your employer to pay part of your salary or bonus direct into your personal pension as an “employer’s contribution”.

While tax savings are possible on pension payments normally, this option would save your employer the employers National Insurance of 12.8% and you the employees National Insurance.

You could arrange with your employer to reduce your salary or not take a bonus due to you to cover the cost of the employer pension contributions. However care is needed as HM Revenue & Customs are particular how this is done and documented.

QTT – Sharing out jointly owned property

There are occasions where land or property is jointly owned, perhaps by partners in a farming partnership, perhaps by individuals investing in property together. Whatever the reason, if there is a parting of the ways, then sharing the spoils can often result in significant tax liabilities for all involved.  

For example, two joint owners of two investment properties each give up a half share in one property and take the full ownership of the other. The result for tax purposes is that each individual has disposed of their half share in one property and acquired a half share in the other. This would result in significant capital gains tax liabilities arising for each individual, which can be complicated further if personal homes, or mortgages are involved.

However with careful planning a claim may be possible that allows the individuals to defer the Capital Gains into the properties that they are acquiring. The same claim can cover land (including milk or potato quotas relating to the land), and property.

One example is a father and son farming partnership. Over the years both partners have owned all assets jointly, including the two farm houses that they respectively live in. The father now wants to retire and take the farmhouse where he lives out of the business. Providing each could normally claim full relief against Capital Gains Tax on a sale if they each owned 100% of the farmhouses where they live, then they may make a claim to avoid Capital Gains Tax on disposing of their half interests in each other’s homes.  

QTT – Retain your key employees

Retaining your key employees is even more important in the current market. How do you do this without throwing a lot of money at them, especially at a time when cash may be tight?

Consider setting up a tax-efficient share scheme for the key employees. Apart from the professional costs of setting up and maintaining such a scheme there is nothing else to pay at this time. For example awarding options to employees under an approved Enterprise Management Incentive can be a very cheap way to tie them in.

They effectively receive rights to purchase shares in the future, based upon today’s value of the business. There is no tax to pay until they come to sell the shares. It may even be possible to reduce the tax payable on the shares to as little as 10%.

Key employees will then change their focus from instant monetary salary increases to longer term reward by helping to increase the value of the business. Your key employees are incentivised to help you grow the business. 

QTT – Selling up?

You’re a married sole trader that has been trading for a number of years. You’ve had enough and decided to sell up and retire with your spouse. The trade operates from business premises which you will also look to sell as part of your pension. You own the property jointly with your spouse (or civil partner).

Unfortunately as your spouse is not a business owner, they will not be entitled to Entrepreneur’s relief in their own right. They will ultimately pay a higher tax bill than you on their half share of the business premises. All is not lost.

In advance of any sale your spouse can transfer their half share in the property to you without any Capital Gains Tax arising. You will be entitled to Entrepreneur’s Relief on the full value of the property sold, thereby significantly saving tax overall. As long as you have owned your business for more than a year, it is irrelevant how long you have owned the property.