Introduction:

When a Limited Company makes a profit, it is normally a simple fact of life that there will be tax to pay. Many company owners have to decide on what to do with the profits, and how to best distribute them to Directors and Employees.

Finance Bill 2011:
Since the 9th of December, when HMRC released their Draft Finance Bill 2011, there have been many discussions around Corporation Tax and also how to reward Employees without triggering a full PAYE tax charge (Click here for more information).

We have also reviewed the HMRC Q&A pages issued on the 21st February 2011 (Click here to download)

There are now three of options available to Company owners where their business is expecting to make taxable profits in excess of £100,000.

Option 1- Specialist Finance Planning:
This is a NEW and very exciting addition to our portfolio - we can now offer a MONTHLY extraction arrangement, starting from only £7,500 per month (or £100,000 lump sum). This planning creates an allowable business expense to reduce Corporation Tax, while at the same time passing funds to the required individual without incurring Income Tax or NIC. If you want to know more, simply contact us and ask.

Option 2- EFRBS Planning (Also helps existing EFRBs or EBTs):
Until April 2011 the rules still allow for corporation tax relief on an EFRBS contribution. The only issue comes about is that of personal access to the funds. If an EFRBS is established for the benefit of all employees, there comes a time when one or more individuals will need to have this money earmarked as theirs, or indeed distributed to them for use. HMRC will allow earmarking up to April 2011, but any distributions made will suffer full PAYE tax.

However, we have a solution for companies with profits in excess of £250,000 (or EBT/EFRBS valued in excess of £350,000)

Any EFRBS (or EBT) can purchase a special type of contract based annuity for a named individual without triggering a PAYE tax charge. This can be done now, or indeed after 6th April 2011. (Clarified by the HMRC Q&A information issued on the 21st Feb 2011 under Q1 which confirms amendment to Part 7A of the Finance Bill).

As long as income comences imediately, or within 5 years, there will be no PAYE Tax liability on the purchase.

Once funds are paid into this contract, the Member can continue to control investments and secure tax-free gains. Which in itself is a beneficial position, especially as the funds are also outside of their Estate for IHT purposes (saving a further 40%).

The annuity provider gets a formal actuarial valuation carried out to determine what level of income can be paid. Assuming the Member is in good health, the income for life will be relatively low.

Once in payment, the remaining funds can be used to grant loans without triggering a PAYE tax charge, as they come from a commercial organisation who are not employers of the Member, allowing all the Finance Bill 2011 provisions to be bypassed.

This is therefore a great solution for all existing EFRBS or EBT holders who are in a position where funds are stuck in a Trust and cannot be used without a full PAYE Tax exposure.

Option 3- Special Corporate Investment:
The providers of the Bio Medical Research used for income tax planning (click here for more information), have a reliable 'corporate' version of their planning.

A company with taxable profits in excess of £250,000 would make an investment into an LLP (Limited Liability Partnership). As a corporate member of the LLP they would need to make accounting provision for this investment.

The investment level represents 13.5% of the profits to be sheltered. Using generally accepted accounting provisions, the investing Company can then claim a first year loss equal to 100% of the profit being sheltered.

Mathematically, this might look like this:
Company has profits of £650,000 and wishes to reduce this to £300,000 (for example). The tax due on £650,000 of profits would be £167,125 or 25.7%.

An investment of 13.5% x (£650,000 - £300,000) = 13.5% x £350,000 = £47,250 is made. This reduces the taxable profits to £300,000 where the tax due would be £63,000.

If you add these together, and compare that with the starting position, you can see that £167,125 tax has been replaced with £63,000 tax plus £47,250 as an LLP investment. Only £110,250 is paid out. A net saving of £56,875 for the company which spent only £47,250 as an investment in the first place.

For companies with very large profits (£1.5m), this planning can be used to reduce the profits down to a level were Corporation Tax is no longer paid quarterly on account - saving not only money in actual terms, but improving cashflow - as tax is not being paid up front in stages, but is deferred until well after the business year end.

As the LLP is trading with a view to making a profit, the medical trials may ALSO give rise to profits for the investing company. This will have the effect of REDUCING the 13.5% cost even further.

Another point to remember is that with the taxable profits reduced by (in this example) £350,000 - the company has £245,000 of 'net' funds sat in its bank account that can be distributed as extra Dividends, or used to buy one of our special contract based annuities. The advantages of which are outlined under the EFRBS heading, but in simple terms allows tax efficient access to funds in a way that is no longer available through Trust structures such as EBTs and EFRBS.

If you want to know more, simply Contact Us Now.