The Fizz! Blog

Should my company buy stuff before 31 March 2023, or after?

At present, companies buying plant and machinery (computers, machinery, furniture, vans, that kind of thing - not cars, though) can claim the Super-deduction.  This means that for every £1 they spend, they save tax as if they’ve spent £1.30.  Since corporation tax is currently 19%, this means they effectively save tax at 24.7% on those purchases this year.

This was put in place because corporation tax is going up in April 2023, and if nothing was done then companies would have deferred those purchases until then.  The Super-deduction was designed to put companies in a broadly similar position whenever they bought stuff, so as not to discourage investment.

So, with corporation tax going up in April, and the Super-deduction being withdrawn, does that mean it’s not worth thinking about when you buy new assets?  Not necessarily!  There are actually going to be three corporation tax rates in place:

• Companies with profits under £50,000 will still pay tax at 19%.  If you know your company will have profits of less than £50,000 each year, you should invest before the end of March.  You’re effectively saving 24.7% this year, not 19% next year, a big saving.
• Companies with profits over £250,000 will pay tax at 25%. If you know your company will have profits of more than £250,000 each year, it doesn’t really matter when you invest.  A 24.7% tax deduction this year and a 25% tax deduction a year later are more or less the same.
• Profits in between £50,000 and £250,000 will effectively be taxed at 26.5% - a “catch up” rate to go from 19% to 25%.  If you know a purchase will reduce your profits from less than £250,000 to more than £50,000, arguably you might want to wait until next year to invest, as saving 26.5% is better than saving 24.7%.  But it’s only a bit better, so you might as well just buy whatever it is as soon as it’ll be useful to you!

(Things are a bit more nuanced for companies that don't have a 31 March year-end, who won't get the full 130% deduction - but they'll still get more than 100%).

Of course, you should never buy anything solely to save tax!  You buy things to ultimately pay MORE tax, not less.  But if you’re going to buy something, the good news is that you’re not going to go far wrong by just getting it as soon as your company needs it.

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You buy things to pay MORE tax, not less

You quite often get asked by clients “should we buy some more equipment to save some tax”?  It’s an understandable question - but we’d say it’s exactly the wrong perspective to look at things from.  You should spend money in your business with the intention of paying *more* in tax, not less.

If you buy some bit of machinery or other, then probably it’s because it’s going to make your business more productive, or it’s going to maintain productivity by replacing something else that’s knackered.  If paying £10,000 for this thing ends up making your company an extra £80,000, then it’s better off by £70,000 overall.  The machine hasn’t saved you any tax at all.  In fact, it’s cost you £14,000 of corporation tax!  But that was the whole point of buying it - you bought it to maintain or increase profits, and bigger profits lead to bigger tax bills.  Bigger corporation tax bills are good because they mean profits are bigger and dividends available to owners are bigger.  Anyone who is disappointed that their company’s tax bill has gone up year-on-year probably hasn’t fully grasped how the pieces fit together.

Imagine taking on a new marketing person and paying them £40,000 a year.  In their first year, they bring in enough new business to pay their salary AND contribute another £250,000 of profit on top.  You’re hardly going to fire them because they’ve cost you £50,000 of corporation tax, we hope?  If you look at it from a tax saving point of view, then perhaps you’d prefer that they brought in nothing at all, thereby saving you £8,000 of tax on their salary!  But that’s probably not what you really want.  Actually you’d love them to cost you even more in tax!

Of course, there can be broader “value” than just stark financial benefits.  The value in a purchase might be in making your working life more enjoyable or fun, perhaps.  When we first moved into our current offices, we paid £3,000 or something for a big table and some benches.  Did we do it because we thought it’d directly lead to £3,000+ of extra profit?  No.  But did we do it because it would save us £600 of tax?  Also no.  We did it because we thought it looked cool and it would be quite functional in our workplace and we really liked it.  We still do!  We’re content it’s paid for itself - and would have done regardless of any tax saved or not saved.

So next time, think about asking yourself “Is this purchase going to increase my tax bill?”.  And if the answer is yes, go ahead and make it!

www.fizzhq.com

Electric company cars - some traps to look out for!

Electric company cars have become extremely tax-efficient, and therefore extremely popular. But if you’re thinking of getting one, then there are some traps that you need to be careful to avoid:

• It’s only fully electric cars with zero emissions that are going to give you the really generous tax-efficiency. A hybrid won’t.
• The car has to be provided by the company, either via the company owning it or leasing it. It’s no good for it to be a personal lease or purchase with the company paying.
• There’s no superdeduction available on the allowance, unlike most plant and machinery bought by companies.
• The car has to be new! A second-hand car, even if fully electric, doesn’t attract full tax relief in year one. However, that could be a bit of a red herring, because…
• If you’re buying that new electric car outright, you shouldn’t be drawn in too much by the “100% tax relief in the year of purchase” aspect in any case. In the future year when you sell it or trade it in, you’ll effectively have to pay some of the tax back on whatever you sell it for (maybe at a higher rate, if you buy now when the corporation tax rate is 19% and sell in a couple of years’ time when it’s 25%!). Any asset is only going to save tax in the long run on the effective cost over its life with your company - what it buys it for minus what it sells it for. Which year or years the tax is saved may vary, but it’s just timing, you wind up saving tax on the same real cost in the end, and that's what you should focus on. That 100% relief in year one really just represents a little cashflow benefit, nothing else.

We know at some point we’re going to come across someone who - say - has taken out a Personal Contract Purchase plan in their own name, and set the direct debit up from their company bank account, thinking it’s a company car when it’s not. And we’re going to come across someone who is pleased for their company to save £15,200 when buying an £80,000 car, but is discombobulated when they trade it in for £50,000 and have to pay back £12,500 of the tax that was saved. Don’t let that be you!

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What’s the super-deduction?

If you’re in business, you’ll be used to the idea that generally you get to save tax on the whole cost of new equipment (except cars) in the year you buy it – the “Annual Investment Allowance”, which gives you a 100% deduction from profits for the cost of a laptop, van, loom or whatever. As of 1st April, companies will be able to claim a 130% deduction instead (aka the super-deduction).  

If you think about it, the government had to do it, because they've announced that the corporation tax rate will rise from 19% to 25% in April 2023.  Knowing that, companies would have delayed big investments in equipment until then, trying not to buy anything significant for a couple of years.  That’s not conducive to economic recovery.   How do you eliminate that factor from the decision-making process?  You give a 130% deduction for the next couple of years.  19% x 130% comes to 24.75%, meaning that a company that’s going to be paying tax on its profits at the new 25% rate will save more or less the same amount of corporation tax if they make the purchase between 1 April 2021 and 31 March 2023 as they will if they wait until April 2023.  The super-deduction just removes any tax incentive to delay investments.

As you’d expect, though, there are some wrinkles and things to be aware of!  Here are a few.

• The super-deduction only applies to companies, not to sole traders, partnerships or LLPs. That’s completely reasonable – that known approaching increase in the tax rate doesn’t apply to them, it only applies to limited companies.  Other businesses continue to save tax at the marginal rate of the sole trader or partner – most likely 29% or 42%.  There’s no reason for them to delay purchases, so no special incentive is needed.
• Not all companies will pay tax at a pure rate of 25% from 2023.  In fact, most won't - it's only companies with profits over £250,000 that will pay at that rate.  Companies with profits under £50,000 will still pay at 19%, so for them the super-deduction actually is a genuine boost for a couple of years.  Companies with profits between £50,000 and £250,000 will pay tax at 19% on the first £50,000 and then 26.5% on the next £200,000, so they'd still technically benefit by waiting to invest, but not by much; saving at 26.5% rather than 24.75% isn't going to make much of a difference unless the investment involved is pretty big.
• The super-deduction doesn’t apply to cars. This one is a bit more surprising.  The government is using the tax system to strongly incentivise companies to provide electric vehicles to employees.  There’s now a competing disincentive to delay purchase and provision of them until 2023.  Perhaps the government thinks that the incentives are so big that they outweigh that disincentive, or that people need to drive around and can’t just sit at home until 2023 so cars are going to be bought anyway.
• It also doesn’t apply to some other, more niche, classes of assets, like integral features in buildings, so any company looking at big levels of investment in anything other than mainstream plant and machinery should be careful (or at least be open to the possibility that it won’t all get the super-deduction).
• It doesn’t apply if you’re going to be leasing the asset out to customers (although, for companies letting out commercial property, a subsequent change of heart by HMRC means that the super-deduction is now available on certain qualifying assets of those businesses, after they were excluded in the first draft of the legislation).
• Although you save tax on 130% of the cost on the way in, if you sell the thing again before the tax rate goes up, you have to pay tax at 130% of the proceeds on the way out too. So you can’t claim 130% tax relief on something you buy and then sell it on in short order to try and craftily create a tax windfall.
• You can’t claim the super-deduction on second-hand goods – there could be quite a lot of second-hand equipment around at the moment as businesses have failed or shrunk, but those things will only save tax at the normal rate.

So, great headlines, but when you scratch the surface things aren’t quite as generous or simple as they seem!  It’s really an incentive to behave in exactly the same way as you would have done if you didn’t know corporation tax is due to rise in 2023.

www.fizzhq.com

Thinking of investing a lot of money in your business in the coming months? Get your skates on!

Unlike general overheads, there are special rules for how and when a business can claim tax relief for long-term "plant and machinery" like computers, furniture, vans and so on.  Few businesses have to worry about the details of those rules though, because they save tax right away on the first £1m of such purchases each year - it's called the Annual Investment Allowance (AIA).  Historically, that £1m is unusually high, and from 1 January it's due to revert to £200,000.  Around 30,000 businesses each year spend more than £200,000 on plant and machinery, so they're going to find the pace with which they can save tax on those costs slowing.

If a business does not have a 31 December year-end, the rules are complex, and there are traps it's easy to fall into.

31 March is a very common year-end.  A company with a 31 March 2021 year-end is going to have a total AIA of £800,000 - that's 9/12ths of 2020's £1m (which is £750,000), plus 3/12ths of 2021's £200,000 (which is another £50,000).  However, when the spending happens is important too, and the company's year is split into two for these purposes.  If the company spends £600,000, and it all happens in the calendar year 2020, that's fine - it's covered by the £750,000 allowance for the first nine months.  However, if they spend it in January, February and March 2021 it's not fine.  Only £50,000 of AIA is available for those last three months, and any unused allowance from the first nine months is lost.  The balance of £550,000 must be carried forward, and relief claimed at a very slow rate through the years.  You could potentially mitigate things a bit by changing the year-end, but whilst that would give you a bit more upfront relief the bulk of the problem would remain.

So, if someone is, say, going to be fitting out a restaurant in the next six months, they might be wise to think about trying to get it done in 2020, not in the New Year.  There's a Budget before the end of the year, and there's always the possibility that the £1m AIA will be extended into 2021, but you can't bank on it.

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The Fizz Summer Budget email newsletter

We don't usually put our monthly email on the blog, since it's a client care thing to us rather than a marketing thing.  But from time to time we like to give a flavour of it to people we don't work with, so here's this month's email, our summary of the Summer Budget.

More thoughts on dividend tax in our earlier article here.

It was the second Budget day of the year yesterday!  And it was a big one for small business owners - particularly those operating via limited companies, or thinking of doing so.

New tax on dividends

This is the thing that's going to be of most significance overall to small business.  As a basic summary at this stage, as of 2016, for business owners planning on getting most or all of their profits into their own hands each year, there will no longer be any material tax/National Insurance incentive to operate via a limited company, as opposed to operating as a sole trader, partnership or LLP (see later).  We could go through detailed numbers, but that's the key thing to understand.  It's pretty much the same at all profit levels.

There do remain some reasons why limited companies will still be appropriate for many businesses, though!

• Many business owners *don't* want to draw out all of the profits that the business makes - limited companies remain a great way of sheltering profits that you don't need right now from higher-rate tax.
• They remain a very useful tool for keeping income below £50k so as to retain Child Benefit.
• It's easy to forget that the most fundamental benefit of a limited company is the "limited" - provided you're not naughty or reckless, you're less at risk personally if things go wrong with the business than you would be as a sole trader or partner.
• Very often, a customer will insist on your invoicing them via a limited company, so you don't have a choice anyway.
• Limited companies will also remain the most appropriate way for most businesses with multiple owners / investors to be set up.
• We look after lots of businesses that qualify for Research and Development Tax Credits - for those claims, a company is still essential (even an LLP can't claim).

However, it's definitely now the case that there's significantly less of an incentive for a typical one-person freelancer to work via a limited company.

One thing we think we'll see more of is LLPs - Limited Liability Partnerships.  They effectively offer the personal protection of a limited company, but the tax regime of a sole trader or partnership, with more flexible profit splits than limited companies too.  Up until now, they've been somewhat niche, because most people preferred the tax regime of limited companies and the attractions of flexible profit splits weren't enough to tempt them away.  Now that there's not much to choose between the tax regimes, the greater flexibility of an LLP is bound to tempt people towards them.  We imagine we'll be setting up quite a lot of them in future!  They're no good for sheltering "unneeded" profits from higher-rate tax though.

Of course, we'll be talking to all our affected clients about this individually over the year, and we'll be making very clear recommendations to you when the time comes.  It's quite probably going to be the case that most limited company owners remain in their current format, but it'll mean changes for some.  The biggest effect is likely to be deterring small businesses from shifting to a limited company in future.

People will come up with ideas for alternative ways of operating via a limited company to make the position better (we've had a couple already) but overall the tax and NI burden of a business owner is going to become much less of a factor in choosing their business structure.

We're not saying all this is a bad thing, by the way - there's a very good argument that company owner/directors have had things unfairly tilted in their direction until now.  In any case, it's the new reality!

Employment Allowance

At present, employers get let off the first £2,000 of Employer's National Insurance in a tax year.  That's going up to £3,000 next year.

However, it's being withdrawn from "director-only" businesses - allowing such businesses to claim the allowance had created a situation in which we'd been able to save about £200 per year per director by exploiting the interaction between the allowance, National Insurance and corporation tax.  We won't be able to do that for you next year!

For many employers of course, the extra £1,000 saving will be more than wiped out by...

Increases in National Minimum Wage

George got lots of headlines by calling it a new National Living Wage, but of course it's really just a change in the NMW.  It's a big one, though.  Within a few years, the NMW for over 25s will be £9 an hour.  Since it's presently £6.50 an hour, that's a 38% increase.  Anyone employing lots of people at that level but only making modest profits is going to have some serious issues with their business model.  Will it incentivise employers to sack people on the eve of their 25th birthday?  We'll see.

As an aside, it'll also of course mean an equivalent rise in the pension contributions employers will have to make on behalf of their employees once they've got an Auto Enrolment pension scheme in place.  There was nothing of any relevance to Auto Enrolment in the budget, by the way - it remains the case that small employers are going to need to have schemes in place in 2016 or (more likely) 2017.  Do talk to us about that if you've got worries about it.

Annual Investment Allowance

This was non-news really.  The AIA is the cap on the tax relief you can get for buying new fixed assets (computers, machinery, vans, tools etc).  It's bounced around an annual limit of £250k to £500k of purchases for the last few years.  It was due to come down to £25k.  That was never going to happen.  Instead, it's going to be £200k for a year - a level which is going to be completely fine for 99.5% of businesses, needless to say!

Corporation Tax

Big headlines for corporation tax coming down to 19% then 18%.  The reduction to 18% is in 2020 though!  Amazing the headlines you can get for something that won't happen for five years.  For limited company owners, it's a trivial reduction compared to the new dividend tax.

Insurance Premium Tax

This tax (which is added on to your insurance premiums, so you might pay it without even noticing most of the time) is going up from 6% to 9.5%, so a pretty hefty increase if you've large insurance costs.

Tax relief for landlords

At present, a wealthy Buy To Let landlord might save tax at 45% on the mortgage interest they pay for the property.  The maximum tax saving is going to be restricted to 20% (phased in from 2017) - effectively a landlord who is a basic rate taxpayer will be no worse off, but higher earners will be.

In addition, the ability to claim a 10% wear and tear allowance when you're letting out a furnished property is going too.  Though HMRC have previously redefined "furnished" to such a strict level that few landlords could legitimately claim to be letting out a furnished property in any case.

Inheritance Tax

The government's obsessed with the idea of passing on the family home tax-free for some reason.  By 2020 there will be an extra bit of IHT allowance available when a home is included in the estate (or even if it's been sold when the owner, say, downsized but there are equivalent other assets in the estate), effectively increasing the amount a couple can pass on tax-free to £1m.  IHT for estates over £2m will go up to cover the cost.

Decreased pension allowance for high earners

At present (subject to some other rules) anyone can contribute up to £40,000 to a personal pension each year.  That's going to be reduced for those earning over £150,000.  For every £2 your income is over that limit, you lose £1 of the allowance.  So, by the time your earnings hit £210,000, you'll have lost £30,000 of the entitlement, and can only contribute £10,000 in a year.  It stops there - you're still able to contribute up to £10k and get tax relief, no matter how high your income.

If anything else came up in the Budget that you weren't clear on or think could be of use to you, do call or email - we'll be pleased to talk about it.  Similarly, if you'd like to talk about any of the topics above, let us know (although it's a bit early to delve into the detail of dividend tax - let's wait a little while on that until the dust has settled and the small print's clear!).

www.fizzhq.com

Investing in new kit for your business?

When a business buys equipment for long term use (computers, furniture, vans and the like - most assets of that nature qualify), it can usually set the cost against its profits before working out its tax bill.  This tax year, every business can deduct the first £100,000 of investment against its taxable profits in that way.  Obviously, that £100,000 allowance covers most of us!  Any excess will get tax relief eventually, but on a much slower basis.

Next year (i.e. from April 2012), that allowance is going down to £25,000.  That will still cover the entire spend of most small businesses, of course.  But there are some businesses that invest more each year - and some small businesses could spend more if they had a big one-off project, like an office move or a big new IT system.

So, if you're in that position, you might want to look at bringing forward some spending so that it falls under the period covered by the £100,000 allowance rather than later on, when only the first £25,000 of your investment will save tax in the first year.

It's potentially a bit more complicated than that, but those are the basics.  Talk to your accountant if you think it could be an issue for you.

www.fizzhq.com

The end of the tax year's approaching - go shopping!

Lots of businesses have 31 March or 5 April year-ends.  If that's the case, and you're thinking of making new capital purchases for your business (computers, plant and equipment, vans, that kind of thing) you should consider buying them *before* your year-end rather than after.  That will benefit most businesses, as you'll be able to deduct the costs from *this* year's profits when your tax bill is calculated and you'll pay less tax as a result.  If you delay the purchase a few days into the next year then you'll get that tax relief in *next* year's accounts - you'll still save some tax, but 12 months later.

On top of that, some commentators are speculating that the currently generous tax reliefs for the capital purchases of small businesses might be withdrawn for the next tax year, so that's another reason to consider bringing purchases forward.

On the other hand, surprising as it may seem, some people might prefer higher profits this year and lower profits next year - for example, those exposed to the 50% tax rate next year, or some claimants of tax credits.  So if you think that might include you, tread carefully - talk to us if you're not sure.

And never buy things just to save tax!

www.fizzhq.com

Buying a commercial building?

If so, you should be aware of changes to the capital allowances available on fixtures and fittings in buildings (lifts, heating and ventilation systems, that sort of thing).  At the moment, these attract capital allowances under the usual rules (25% reducing balance basically, plus a first year allowance for SMEs - the detail isn't important here).  When buying a building, it's almost always best for tax purposes to attribute as much of the purchase price as possible to fixtures and fittings, and as little as possible to the building itself.  In fact there are tax specialists who do nothing but that.

From April, that 25% rate falls to 10% reducing balance, with no first year allowance, unless your total expenditure on plant is less than £50,000 for the year, which is probably fairly unlikely if you're in a position to buy a building.  For most businesses purchasing premises, the tax relief on the fixtures and fittings is likely to be reduced (well, delayed) significantly.  The tax relief on the building itself is being drastically reduced, but that's another story.

Planning points:

1.  It's even more important than before to think about whether you can justify writing the costs off to your P&L immediately, rather than relying on the capital allowances system for tax relief.

2.  It's also even more important than before to think about exactly when you incur the expenditure - 100% relief via the £50,000 Annual Investment Allowances that also comes in April is much more attractive than eventual relief via the new 10% rate.

As ever, if you think this may affect you, we'd love to hear from you.

www.fizzhq.com