The Fizz! Blog

Bad news from the Autumn Statement for profitable sole traders and partnerships

There was some pretty bad news for many profitable sole traders and partnerships from the Chancellor in last week's Autumn Statement.

For many years, there's been an opportunity to (quite legitimately) save some tax when transferring an unincorporated business (i.e. a sole trader or partnership business) into a limited company.  If one could reasonably argue that there was some intrinsic value to the business above and beyond just the skills of the owner - effectively, that there's a value there that might plausibly make it a saleable business to a third party - then you could quantify that value and sell it to the company.  That created two tax savings.  First, a one-off capital gain for the owner - generally taxable at a lower rate than income.  Second, an ongoing saving for the company, which could claim tax relief on the cost of the goodwill, over a period of years.  It was a great opportunity for a business of genuine value, and was a mainstream and commonly used tax planning strategy, often generating some really big tax savings.

As of last week, it's gone.  You can still make the transfer of course, and can still place a value on the goodwill.  However, one tax advantage has gone and the other is severely diminished.  The company can no longer save tax on the goodwill.  And although there still might be a modest tax saving for the individual on a fairly small goodwill valuation and capital gain, the bulk of the personal saving was generated by making a claim for something called Entrepreneurs' Relief - and you can no longer make that claim in those circumstances.

So pretty bad news for a lot of businesses that were planning such a move, which nobody saw coming at all.  If you were planning on making a shift into a limited company, it's still very likely to be worth it, since the ongoing tax and National Insurance benefits are unchanged.  But that one-off boost is pretty much a thing of the past.

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Our thoughts on the 2013 Budget

You may not have noticed, but it was budget day yesterday. Here's our roundup of the things that we think could be of most interest and practical use to owners of small businesses.  As usual, it's far from exhaustive - if you want a complete rundown of everything there are plenty of places that will provide it!

National Insurance savings for employers - from 2014

So, this is probably the biggest thing for many small businesses.  From 6 April 2014, employers will get let off the first £2,000 of Employer's National Insurance that they'd normally pay.  So, if you're in that position that's money in your pocket.  Of course, your profits will have gone up as a result, so you'll have a bit more tax to pay - a small company that benefits from the full discount will see its profits go up by £2,000, and therefore its corporation tax bill go up by £400.  So the real benefit to the company is £1,600.  But it's still worth having!

If you're a "director-only" company and have no National Insurance cost at present, it seems unlikely this change will benefit you that much, as it eliminates Employer's National Insurance but not Employee's National Insurance, meaning that it's unlikely to be massively beneficial to pay a significantly greater PAYE salary to take advantage of the concession.

Corporation Tax

As ever, all the headlines about corporation tax going down only apply to big companies (or, at least, companies making big profits).  For a company with profits of £300,000 a year or less, corporation tax was at 20% and it remains at 20%.

Income Tax

As was widely predicted, the personal allowance (i.e. the amount you can earn free of tax) will go up to £10,000 - from 6 April 2014, not now.  That's only actually about a 6% increase on the year to come, so not a massive difference, but will of course be welcome to many - it'll be worth £112 a year to basic-rate taxpayers.

Childcare Tax Break

From next year, parents of children under 5 will effectively be able to get £1,200 of childcare paid for by the state, per child, as along as they're not getting a childcare element to their tax credit payments.  This applies as long as a) both parents work and b) household income is less than £300,000.  Given that the government has in the last few months begun to withdraw child benefit from households where someone earns more than £50,000, you might question the logic of introducing a new flat-rate child payment that you can still get if you and your partner each earn £149,999.  So would we.

SEIS extended

The Seed Enterprise Investment Scheme is something we've talked about before, offering income tax savings on investments in new businesses.  I won't explain it again, you can read about it here:

http://tinyurl.com/cvr6k7x

Anyway, for the current tax year within the scheme there was also an opportunity to reduce or eliminate existing Capital Gains Tax bills by reinvesting in a company via SEIS.  That opportunity was supposed to cease on 5 April - but it's being extended for another year.

Tax reliefs for creative industries

The government confirmed the introduction of a tax credit for companies "involved in the production and development of culturally British animation, high-end television drama and documentaries, and video games".  However, at the moment it appears that the beneficiaries will be the actual companies producing the animation/film/game, rather than any subcontractors, and that animation for advertising purposes won't qualify.

Help to Buy

This will be of no particular use to 99% of people, but very valuable to a few.  Essentially, the government will apparently lend you most of the deposit for a new-build house, or guarantee most of your mortgage, on the condition you repay them at a later date.  Of course there are plenty of questions one could ask about this - what happens if the house goes down in value and you want or need to move, for example.  But there's no detail on the scheme yet anyway - with the previous FirstBuy scheme it was many months before the loans actually became available, so don't start looking at places this minute!

www.fizzhq.com