Money Matters – Know Your Tax
by Melanie Richards
From CIS to selling your company or business property, Melanie Richards guides us through the tricky world of tax.
TAX ENQUIRIES AND CIS
We have noticed an increase in the number of ‘compliance reviews’ carried out by HMRC recently, particularly focussing on the operation of the Construction Industry Scheme. Clients are facing a visit from HMRC inspectors who then ask for reams of information that takes days and weeks to collate.
HMRC is then taking weeks to respond to the information, making the whole process stressful to the business owner, who despite having operated the CIS system to the best of their ability, is worrying that they have made an expensive mistake. The CIS system is so complicated that it is virtually impossible to get every single bit right, especially if you are running a business employing subcontractors.
HMRC are then raising letters informing the client that they have to pay tax because they haven’t operated the system correctly. What the client isn’t told is that often the contractor at the other end of the transaction has already paid over tax which is then doubled up. You can ask HMRC to net the two amounts off, but unless you ask it won’t happen, leaving you out of pocket. It’s always good advice to ask an accountant to help you deal with tax visits or enquiries.
SELLING YOUR BUSINESS
Lots of people are selling (or buying) businesses at the moment. It’s great to see business owners finally getting some reward for all of their hard work over the years. Structuring the sale of a business is key to ensuring that you pay as little tax as possible once you have the money in your bank account.
If you are running a business as a sole trader or partnership, then you will be selling your goodwill and customer book usually. If you are selling a limited company though, you would expect to sell the shares in your company. There are times when this isn’t the best plan. Say for example that you had a bit of a worry over the employment status of a subcontractor. He or she has been with you a few years and while you are confident that they are definitely a subbie, the purchaser of your business is a bit wary of taking over the company because of it.
One way they will deal with this is to ask you to indemnify them against any future tax liabilities relating to that subcontractor. This could mean you having to pay up a large sum of money, years later, because the purchaser didn’t bother to argue the case properly, knowing you were sitting in the wings. It might be sensible in that circumstance, for the company to sell the trade and assets to the purchaser, and for you as the company owner to retain your shares. You can then get the company liquidated following the sale, assuming that the liquidator also agrees with your position.
Conversely sometimes, selling a property (usually commercial property) wrapped up in a company can be a benefit. Stamp duty on the sale of shares is half a percent, while Stamp Duty Land Tax (SDLT) can be considerably more. Buyers are then likely to be happier to increase their offer a little, knowing that there is an SDLT saving.
Sometimes however, it can be a disadvantage having a property in a company, particularly if the company has owned the property for a long time. Until recently, a company didn’t have to show the tax effect of selling the property in its accounts. This meant that if the company had owned the property for a while and then sold it, the profit it made was substantially reduced by the tax due on the profit.
Buying a company which owns a property without doing sufficient research into the date it was purchased and the records that have been kept since can be a really expensive mistake if you later sell the property out of the company.
In summary, it really pays to stop and ask some questions, before you sign on the dotted line. Even just a quick chat over the phone with your accountant can help you avoid a costly error.
Money Matters is written by Melanie Richardson – Managing Partner Swindells LLP Chartered Accountants & Chartered Tax Advisers.
Telephone: 01825 763366
As individual circumstances vary considerably from person to person, the views expressed in this article are meant only as a general guide, and any specific advice required should be sought from your own professional adviser or by contacting the writer at her place of work. No responsibility for loss resulting to any person acting as a result of any material in the above article can be accepted by the writer or Swindells LLP.