Entrepreneurs’ Relief changes fail to meet up to the test

During the last Budget, the Government announced new conditions to entrepreneurs’ relief that would take immediate effect to change the definition of a “personal company” for shareholders who claim entrepreneurs’ relief.

By introducing these changes, they hope to restrict shareholders relief to those with a genuine material stake of at least five per cent in a company.

For gains arising from shares, or assets used by the company, the company has to be their “personal company”, which requires them to be an employee or officer of that business or one within the same trading group.

In order to obtain relief shareholders would, therefore, have to meet four conditions:

  • hold five per cent of the ordinary share capital
  • control five per cent of the voting rights
  • have a right to at least five per cent interest in the distributable profits
  • have a right to at least five per cent of the net assets on a winding-up of the company.

However, the last two points are proving difficult to codify into law, due to the fact that they appear to rely on provisions relating to companies, intended to prevent the abuse of corporation tax group relief.

This has resulted in the tests referring back to definitions of a company receiving a distribution from another company, rather than looking at this issue at an individual shareholder level.

The point regarding distributable profits also creates issues as such entitlement, usually in the form of dividends, is not given until a dividend resolution is passed by all the eligible shareholders.

Following these issues, HMRC has tabled an amendment that will create an alternative test for a “personal company” based on the shareholder’s entitlement to proceeds in the event of a hypothetical sale of the whole company.

This will ensure that it will be easier to estimate the value of the whole company on a single day, rather than changing shareholder’s rights and dividend entitlements over the entire qualifying period.

Just over half of businesses are prepared for Making Tax Digital

A new study into preparations for Making Tax Digital amongst businesses has found that only 57 per cent of firms are ready to comply with the new regime by 1 April 2019.

Despite the various delays and changes to the Government’s new digital tax system, businesses have had several years to prepare themselves for this landmark change in taxation.

Initially, the new system will only apply to the recording and reporting of VAT on a quarterly basis for those VAT-registered businesses over the VAT threshold (£85,000).

However, the Government intends to extend the system out to other areas of taxation and to other businesses from April 2020 at the earliest.

Businesses will be offered a “soft landing” period of a year during which they won’t be fined if they don’t comply with the reporting requirements in time.

HM Revenue & Customs has also recently confirmed that during this period “where a digital link has not been established between software programs, HMRC will accept the use of cut and paste as being a digital link for these VAT periods.”

Despite its recent communications HMRC has been heavily criticised for not doing enough to make businesses aware of the new regime, with it only launching its social media and email campaign to small businesses in Autumn last year.

Link: Overview of Making Tax Digital

Late payers to be flagged up to businesses under new proposals

The Small Business Commissioner, Paul Uppal, has recommended a new “traffic light” system that will warn smaller firms which businesses have a consistent record of late payment and those most likely to request longer payment terms.

It is thought that around £2.5 billion is lost annually within the economy due to late payments and they have been attributed to the closure of around 50,000 businesses each year.

Under the new proposals, current payment data collected by the Government will be used to highlight businesses with a poor record.

Large companies have been required to report supplier payment records twice a year since 2017 and so it is thought that the Government already holds a good record of poor payers. However, companies which fail to report payment practices will also receive a red light under the new system.

The Small Business Commissioner explained that his plans would allow smaller suppliers to make better decisions on who they work with.

The Government has outlined its own measures that will ensure that public contracts are only given to companies that can demonstrate prompt payment to their own suppliers.

At present, the Commissioner does not have the authority to distribute late payment fines, and his department only managed to recover £2.1 million in unpaid invoices his first year in office.

Link: Small Business Commissioner calls for ‘traffic light’ warning system

Automatic Enrolment contributions to increase

The next increase in Automatic Enrolment (AE) pension contributions for both employees and employers will take place from 6 April 2019.

The minimum employer contribution will increase from two per cent to three per cent, while the employee contribution will rise from three per cent to five per cent – taking the total minimum contribution from five per cent to eight per cent.

The minimum contribution only applies to employees earning £10,000 a year or more and percentage contributions will be calculated using only the employee’s earnings between £6,136 and £50,000 from April. This is an increase from the existing income threshold of £6,032 to £46,350.

For the purposes of AE pension contributions, earnings include:

  • Salary
  • Wages
  • Commission
  • Bonuses
  • Overtime
  • Statutory sick pay
  • Statutory maternity pay
  • Ordinary or additional statutory paternity pay
  • Statutory adoption pay

It is important to ensure that your payroll processes take account of the changes, as the penalties for non-compliance can be steep.

Link: Increase of automatic enrolment contributions