On 22 November 2023, Jeremy Hunt delivered the ‘Autumn Statement for Growth’. Against an improving economic backdrop, the Chancellor is keen to stimulate economic growth and highlighted 110 measures for businesses. In addition, there were significant statements relating to National Insurance changes and also the reform of work-related state benefits.
In our report, we provide a comprehensive overview of the Chancellor’s key announcements, guiding you through the intricacies of the latest fiscal changes and dissecting the impact on businesses and individuals alike.
As a business owner, it’s inevitable that you will want to protect your legacy. This could mean that in some instances, you may eventually look to sell your business. However, before you can begin to find a buyer, it’s vital to establish your exit plan.
At Fiander Tovell, we work alongside our clients to prepare a solid exit plan that will help them to maximise the value of their business. This includes working to understand the tax position of the sellers and the businesses, before collaborating to find the most tax-efficient ways of preparing their business for sale.
In the second instalment of our Exit Planning mini-series, we introduce some of the aspects of tax planning that you should consider when preparing to sell your business.
Business Asset Disposal Relief
Business Asset Disposal (BADR) relief is one of the key considerations for business owners when they begin to think about selling their business. Previously known as Entrepreneurs’ Relief, BADR allows you to pay tax at 10% on the first £1m of gains on qualifying assets, rather than Capital Gains Tax in full. This is, of course, subject to strict criteria, so it’s important to make sure that you satisfy it in full before relying on it.
To qualify when selling your business, the following criteria must apply for at least two years up to the date you sell your business:
You must be a sole trader or business partner or own at least 5% of the share capital and voting right of a company and be an employee or director;
The Business must be a trading business.
Some sellers express concerns about whether having a lot of cash in the business could disqualify your eligibility for BADR. It’s unlikely that this would be the case – HMRC have publicised that it is rare for cash alone to cause this. However, having a lot of other, more active investments could impact your eligibility for BADR. With this in mind, it can sometimes be worthwhile for businesses to undergo some restructuring before the selling process begins.
It’s important to note that if you have previously transferred shares to your spouse, you will lose BADR on their shares, unless they qualify in their own right. If they do not qualify, you might want to consider transferring the shares back to yourself.
If you are a director, and hoping to claim BADR from your sale, then it’s crucial that you do not resign before the date of the sale, otherwise you will lose out on the relief!
Substantial Shareholdings Exemption
If the business you are selling is shares in a company owned by another limited company, then you may instead qualify for Substantial Shareholdings Exemption (SSE). This exempts company sellers from paying Capital Gains Tax or Corporation Tax on the disposal of shares. SSE applies when you sell shares owned by your company to a third party, and there aren’t too many conditions to satisfy. To qualify, you must fulfil the following criteria:
Your company only needs to have at least a 10% shareholding in the company that you’re selling
The company that you are selling must be a trading company
Your company must have held the shares in the company for at least 12 months
Forms of consideration
Forms of consideration refers to how you will be compensated by the buyer for the sale of your business. It’s important that this is decided in the negotiation stage of the business deal, as it is difficult to change the structure after that point. Cash proceeds are the most common element of sale, but you can also receive other forms of consideration such as shares, loan notes and earn outs.
Cash is taxed in full at the date of completion, even if the buyer defers it. This means that even if the business pays half at the time of the sale, and half in the next tax year, the full amount will be taxed when the first payment is received. If the second payment is not received, then you can reclaim the tax already paid on that half.
If you receive shares as part of the proceeds in business sale, then the monetary value is deferred and taxed when the shares are later sold. However, there is an option to tax the share value upfront and make the most of reliefs available at the date of completion (e.g., BADR or losses).
Loan notes are a more formal way of structuring a deferred cash payment. Under this form of consideration, you would receive a loan note instrument outlining the payment schedule, which can be secured or unsecured. Similarly to shares, you can choose whether to be taxed upfront or upon receipt of the full proceeds. We recommend that you receive clearance from HMRC in advance. This means that you will be aware of how the loan note will be taxed, to avoid confusion (e.g., you expect it to be treated as capital, but it is taxed as a dividend).
Earn-outs are also complex, as your future proceeds are dependent on a predetermined financial metric of the business, for example sales or profitability. Again, there are different ways in which earn-outs can be taxed, so it’s important to undergo tax clearance and take advice before agreeing with the buyer.
Over the years, HMRC have introduced a number of anti-avoidance legislation measures that you should be aware of when carrying out the tax planning for your business. This is to prevent individuals being able to manipulate situations to turn income into capital gains.
Transactions in securities rules (TIS) are in place to ensure that a company cannot take advantage of more attractive tax rates for capital gains, and avoid paying income tax. To avoid breach of TIS rules, we would recommend seeking clearance from HMRC beforehand, if your transaction is going to be anything other than straightforward.
Employment-related securities rules (ERS) are in place to ensure that money received by someone who is an employee or director of the business is taxed as employment income, and not capital gains. You cannot get clearance for this, but can seek advice in advance about how you will be taxed on the sale of your business. If you are aware that your gains will be taxed as employment income, then you can plan appropriately and include it in the transaction.
Earn-outs have already been mentioned as a form of consideration, and it’s important to be aware of their tax treatment. If it appears to HMRC that the payment is related to your performance as an employee of the business, then money you receive in payment will be taxed as employment income.
When a business is being struck off, there is a limit of £25,000 from the overall value of the business that can be taxed as capital, and anything above must be taxed as income. This should be a key consideration in the tax planning process if your transaction involves striking off part of the business or restructuring of a group.
It’s important to be aware of the targeted anti-avoidance rule, or Phoenix TAAR, as it’s affectionately known. This is in place to prevent a business’ operations being wound up to undergo liquidation only to then restart under a new guise – as a phoenix rises out of the ashes. When a seller does this, HMRC can tax the proceeds as dividend income rather than as capital gains .
HMRC operates a general anti-abuse rule, which applies to anything that they consider as contrived or artificial in order to gain an unfair tax advantage. To avoid breaking this, or any of HMRC’s anti-avoidance legislation, please do not hesitate to seek advice from our Tax team at Fiander Tovell.
Before you enter into the transaction process, it may be necessary for your business to go through some slight restructuring, particularly if you want to extract some assets to retain following the sale. The sooner you do this, the better, so that the various tax reliefs can legitimately be used. It’s typically business premises that are extracted, such as investment property or trading premises. However, you can also extract non-core business activities or divisions that you wish to retain post-sale.
If you do opt for corporate restructuring of your business ahead of the sale, there are various ways to do so. The key for each is to plan well ahead:
Management buyout (MBO) is where existing shareholders are bought out by a group led by individuals who are already in the business’ current management team.
A demerger allows your business’ operations to be divided into multiple components, to operate separately, be sold, or undergo liquidation.
Purchase of own shares is where a company buys its own shares back from shareholders which can be used as a way of restructuring the distribution of shares from the existing percentages.
Sellers may choose to incorporate their business, if they believe that it would be more attractive to buyers as a limited company.
Debt restructuring might be the right route if your business has outstanding debt that may make it less attractive to buyers. This is where a creditor allows you to change the terms of a loan repayment to make it more manageable.
Share options allow your employees to buy into the company and receive a share of the sale proceeds on exit.
Issues for the buyer
Going into the negotiation of your business sale, it’s likely to help if you are empathetic to your buyer’s concerns. If you do undergo some of the restructuring highlighted above within six years prior to the sale, then there could be some tax implications for the buyer. Similarly, movement of property assets may incur a stamp duty land tax charge if there is a change of ownership and assets have been moved in the group prior to this. The change of ownership can also lead to the extinction of any trading losses that you brought forward within the group, and it’s important that you consider how this may impact the buyer.
If the acquisition of your company makes the buyer a large group company, then they may be required to pay corporation tax in quarterly instalments, even if you aren’t obligated to currently. This could negatively impact their cash flow, which may influence how they choose to pay you following the sale. If you currently qualify for research and development tax credits, you may have different entitlements to the buyer, which could impact how they value your business.
The perceived profitability of your business could be impacted by a number of factors, such as transfer pricing and tax relief on interest. An international trader could be critically influenced by transfer pricing; they may need to change the pricing that’s applied to supplies from the UK to businesses in other jurisdictions, which could, in turn, impact the profitability of your business. You may be claiming tax relief on interest that you pay but following the sale the buyer may not be eligible for relief, therefore affecting the profitability for them.
Tax due diligence
We would recommend completing your own due diligence exercise in preparation of the sale, to avoid the buyer having the opportunity to over-state any risks that may arise. Comb through your business operations, and consider your tax compliance and identify any reliefs that haven’t been claimed yet. This also offers a prime opportunity for you to rectify anything that hasn’t yet been treated or claimed before the buyer even enters the picture! You can also use the opportunity to identify any liabilities in your business’ VAT, PAYE and minimum wage tax compliance, so that any problems can be solved before the buyer enters the picture.
At Fiander Tovell, we understand the importance of exit planning in the lifecycle of a business. We help our clients through the exit process, aiming to maximise value and bringing attention to the potential issues that could slow down their sale, to facilitate a smoother transaction with a fairer outcome.
For more information about forming an exit plan, or to enquire about our Business Planning services, please do not hesitate to contact Cathy Revis, Head of Tax, Transaction Support & Firm Principal, at firstname.lastname@example.org.
You can find more of the latest accounting and tax news here.
Did you miss part one of our Exit Planning series? Not to worry – you can read the article in full here, or catch up with our video series on YouTube.
Research and Development (R&D) is a fast-growing sector and makes up a major part of the UK’s economy. Recognising the significance of R&D projects to the nation’s infrastructure, the government has offered various tax reliefs and initiatives over the past 20 years, to support the efforts of UK companies.
However, the attractive nature of the government’s R&D tax relief schemes means that non-compliance issues arise frequently. Given how valuable the reliefs are in supporting the R&D sector, it is vital that the government is able to deliver the scheme as efficiently as possible. In a Corporate Report published earlier this year, HMRC introduced a new requirement for companies to submit additional information about their R&D claims when filing them, to discourage non-compliance.
What is the additional information form?
All R&D claims made from 8th August 2023 must be supported by an additional information form, submitted before the company’s corporation tax return. If a company fails to do this, but then goes on to claim R&D tax relief, their claim will be removed by HMRC.
The form will ask for information about your company (including company/contact details), when your accounting period begins and ends, and then details of the R&D expenditure you are claiming for, as well as any indirect R&D activities your company takes part in.
The form only allows for a fairly brief overview of your R&D project and so HMRC can only use it to make a rough risk-assessment of your claim. If after reviewing the form they think there is a higher risk that your claim doesn’t qualify for the relief they may open an enquiry to obtain further details.
Over the last year or so HMRC have been undertaking a lot more enquiries than they used to, and have been asking for considerably more detail when they do.
It is therefore very important to ensure that you have a more detailed report to support your claim. This can be attached to the company tax return, sent separately to HMRC, or kept back in case an enquiry is opened, but without it you may have difficulty defending your claim against a challenge.
We recommend that you plan in advance for the extra time that may need to be dedicated to the additional information required by HMRC, to avoid a last-minute rush. Alternatively, an agent acting on behalf of the company (such as one of our advisers) can complete the claim for you – check out HMRC’s full guidance here.
What R&D tax reliefs are there for SMEs?
If your company hires under 500 staff and makes a turnover of under €100 million, or has a balance sheet total under €86 million, then you may be eligible for R&D tax relief on your Corporation Tax obligations.
This would allow you to:
deduct an extra 86% of your qualifying costs from your yearly profit (on top of the typical 100% deduction)
claim a payable tax credit worth up to 10% of your surrenderable loss, if your company has claimed relief and made a loss.
Of course, you must be able to show how your company meets the standard definition of research and development, by explaining how it:
looked for an advance in the field;
had to overcome a scientific or technological uncertainty ;
tried to overcome that scientific or technological uncertainty; and
could not easily be worked out by a professional in the field.
At Fiander Tovell, we can help guide our clients through the R&D claims process. If you would like further information about the requirement to submit additional information, then please do not hesitate to get in touch on 023 8033 2733.
You can find more of the latest accountancy and tax updates here.
We continue to go from strength to strength and looking to build on the quality staff that we already have to support our growing client base.
We are delighted to announce that Chris Griffiths has been promoted to the Equity Board of Fiander Tovell. Chris joined the Commercial Team in 2015, and took over leadership of the team towards the end of 2022. Chris will be part of the team that will be determining the long term strategy of the firm, and we are looking forward to seeing this develop.
Esther McKay has joined us as a supervisor into our Outsourcing (management accounts) Team. Esther is an experienced management accountant who will be providing services to our ever increasing number of clients where we are providing a fully outsourced accounting function. We look to find the right complement of software and experience to provide valuable and regular financial information to enable our clients to manage and develop their business.
At this time of year we welcome in our new intake of trainees to join, what we have branded, the FT Academy. The role of the Academy is to provide structured training and development opportunities for A-level students joining the firm as they start on their journey to becoming an accountant. To meet current and future staffing needs we have taken on 6 additional trainees: Callum McAdam joins the Private Client Team; Megan Womersley, Luis Llewellyn, Henry Gay, Jamie O’Connor and Sam Evans join the Commercial Team. They have all come from local colleges with whom we have built strong relationships over many years.
Over the summer we had a number of college students come into the office for work experience.
More topics covered in this quarter’s issue include:
R&D single scheme uncertainty for companies
HMRC detective work means tax bill for eBay trader
Paying voluntary National Insurance contributions
Child Benefit – watch the sting in the tail
GDPR right of access: new guidance
What is extended producer responsibility for packaging?
Download a copy of our full business update below.
Although the 2022/23 tax year may now seem like a distant memory, you still need to remember to submit your Self Assessment tax return on time! Self Assessment is the system that HMRC uses to collect Income Tax from those who receive income from other sources, such as self employment. There are various Self Assessment deadlines in upcoming months, and it’s vital that you’re prepared for them. The upcoming deadlines relate to all income from the period between 6th April 2022 and 5th April 2023.
If this is the first year that you have been required to submit a Self Assessment tax return, then you will need to notify HMRC by 5th October. You can do this by simply registering for Self Assessment.
There are two methods of submitting your Self Assessment tax return: by paper or online, and they have different deadlines. If you are planning to submit a paper tax return, then this must be done by midnight on 31st October 2023. Online submissions, on the other hand, must be completed by midnight on 31st January 2024.
If your tax return is up to three months late, then you will be subject to a late filing penalty of £100. If it’s later than three months, then the penalties go up.
It’s also important to note the deadline to pay any tax owed is 31st January 2024. If you miss this deadline then it’s likely you will be penalised, unless you agree a Time To Pay plan with HMRC. Interest will also be charged on late payments, even if you’ve agreed a payment plan.
An update for next year…
If you’re a PAYE taxpayer who earns over £100,000 PAYE income, then you’ll be aware that you must submit a Self Assessment tax return. However, when the deadline comes around for the 2023/24 tax year, the threshold will be increased to £150,000, reducing the amount of people who are required to submit a return! Although this will not impact your income tax obligations, it will significantly decrease the administrative burden of filing a Self Assessment tax return.
If you earn between £100,000 and £150,000 then you must still submit your Self Assessment tax return for the 2022/23 tax year by the deadlines outlined above. Once the deadline has passed, you should receive a Self Assessment exit letter from HMRC, unless you satisfy other aspects of the criteria.
At Fiander Tovell, we’re on hand to help you navigate Self Assessment as smoothly as possible. For further advice, please do not hesitate to get in touch with a member of our team on 023 8033 2733.
You can find more of the latest accountancy and tax updates here.