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Meeting Points
REBECCA CAVE FCA CTA, director of Taxwriter Ltd reports highlights from the TaxAid conference on 9 July 2004.
The subjects covered were the effects of incorporation, husband and wife businesses, inheritance tax planning and money laundering. The speakers at this conference were Simon Birkett , Marion Hodgkiss , Chris Whitehouse and Stephanie Barber .
Meeting Points
REBECCA CAVE FCA CTA, director of Taxwriter Ltd reports highlights from the TaxAid conference on 9 July 2004.
The subjects covered were the effects of incorporation, husband and wife businesses, inheritance tax planning and money laundering. The speakers at this conference were Simon Birkett , Marion Hodgkiss , Chris Whitehouse and Stephanie Barber .
Reporting non-corporate distributions
Form CT 600 needs to be changed to accommodate the new non-corporate distributions rate of tax, but the amended form will not be available until 1 October 2004. Companies that need to pay the non-corporate distribution rate must wait until then to file their corporation tax return. Some companies may have ceased trading by October, but they will still need to wait to finalise their affairs.
Where the accounting period straddles the introduction of the non-corporate distribution rate on 1 April 2004, the part of the period before this date is treated as a separate accounting period. Profits are apportioned on a time basis or by another method if this gives a just and reasonable result. If the trade is seasonal, be sure to reflect this in the profit apportionment.
How much to distribute as dividends
When a company's profits fall entirely within the zero per cent band, the maximum profit that can be distributed is 100/119 x chargeable profits.
When profits exceed the zero per cent band, the maximum that can be distributed while still leaving enough funds to pay the tax is found by this equation:
Distributable profits = P x (P x (1- A) + L x A)
P x (1- A + B) + L x A
Where:
- P is the chargeable profits for the period;
- L is the limit on the starting rate (£10,000 or lower);
- A is the lower margin small companies rate (23.75 per cent); and
- B is the non-corporate distribution rate (19 per cent).
When is a distribution made?
Interim dividends are treated as 'made' when cheques are issued to the shareholders or when the funds are at the disposal of the shareholders by way of an accounting entry in the company's books. A final dividend creates an immediate debt when it is declared, so it is 'made' when declared at the annual general meeting if no specific date for payment is fixed. It may be necessary to draw up interim accounts and make a resolution to pay an interim dividend together with the appropriate book entries before the end of the accounting period.
How to avoid the non-corporate distributions rate
Dividends should be paid in periods when there are either no taxable profits, so the dividend is paid out of reserves, or when all profits are taxed at 19 per cent or more. The non-corporate distribution rate cannot be applied in either of these situations.
Excess distributions
Where the distributions made in an accounting period exceed taxable profits, excess non-corporate distributions are carried forward and treated as if they were non-corporate distributions paid in the next accounting period. However, if the company pays tax at 19 per cent or more in its next accounting period and is thus not liable to the non-corporate distribution rate, the excess non-corporate distributions are not carried forward again.
Gifts between spouses
Where shares are gifted between spouses, the settlements legislation may apply if the gift represents wholly or substantially a right to income and the intention of the arrangement is to divert income and to save tax. The Revenue argues that shares in a company with a low balance sheet value represent substantially a right to income.
Value of a company
The value of a small company is what a buyer will pay, not the value shown on the balance sheet. Most trading companies will be valued on the basis of the future income stream. To value a small company, look at what comparative businesses have been sold for.
Right to income
Ordinary shares do not give the shareholder a right to income, only an expectation of dividends. The company may reinvest the profits, rather than distribute them. This is likely to increase the balance sheet value.
On enquiry
The Revenue has said that it will charge interest and penalties on any tax found to be underpaid as a result of the settlements legislation applying in 2003-04 and subsequent years. If errors in this area are found for earlier years, interest, but not penalties, will apply.
Avoidance of care-home fees
The pre-owned asset tax has no motive test, so even if the aim was not to avoid inheritance tax, but to take assets out of consideration for residential care home fees, the gift may be still caught by the pre-owned assets tax charge. However, a gift escapes this tax charge if the asset is still treated as being in the estate for inheritance tax purposes.
Examples
1. A widower gives his flat to his daughter, but carries on living there. The gift is caught by the reservation of benefit rules, so it is not subject to the pre-owned assets tax charge.
2. The flat is put into a trust with the widower as the life-tenant. The flat is still part of the widower's estate for inheritance tax because he is the life tenant.
Share in a bank account
In the case of Sillars v Commissioners of Inland Revenue [2004] STC (SCD) 180 (SpC 401), the taxpayer made her daughters signatories on a bank deposit account, to enable each person to have access to all the funds in the account. It was held that the entire balance in the deposit account remained in the taxpayer's estate at death and the presumed gift of a share in the bank account was not effective.
Gift of share in the home
A widow lives in her own home with her unmarried daughter and gives her a 50 per cent stake in the property. They continue to occupy the property, sharing the expenses. The gift is a potentially exempt transfer for the widow, but there is no reservation of benefit for inheritance tax and no pre-owned asset charge. On the death of the widow, there is a discount in the valuation of her share in the property. For this gift to be effective for inheritance tax planning, both the donee and donor must continue to occupy the property. If the daughter dies first, her mother may be left without a home.
Avoiding the pre-owned assets tax on lifetime gifts
There can be no pre-owned assets tax if there are no lifetime gifts. The alternative strategy is to form a flexible life interest trust on death through the will. The actions of the trustees of this trust will not be caught by the pre-owned assets tax charge and there will be no reservation of benefit on the distributed assets.
Money laundering reports tax and related matters
The National Criminal Intelligence Service prioritises reports where a money laundering activity is in progress, so it may not acknowledge reports submitted that detail past events.
Money laundering reporting officers
Every firm should have appointed a money laundering reporting officer, but has a deputy been appointed? A deputy is needed to step in when the money laundering reporting officer is away for any reason.
Customs scrutiny
When Customs and Excise officers inspect a trader's VAT records they are checking, inter alia , whether cash sales in excess of the money laundering limit of 15,000 euros have been accepted since 1 April 2004.
High value dealers
Businesses which accept cash for goods to the value of 15,000 euros or more in a single transaction or a series of linked transactions must register with Customs and Excise as a high value dealer. A trader may avoid being subject to the money laundering regulations if he decides not to accept cash for items over about £8,000 and takes a banker's draft instead.
Source registration document
When a first disclosure is made to the National Criminal Intelligence Service, the online source registration document can be used to record the contact details of the reporting firm, the money laundering reporting officer, and the deputy money laundering reporting officer. The form should not be printed out and completed manually as there is a different form for paper-based reports. The contact details will not be required on future reports if the source registration document has been completed.
Consent process
If consent is required from the National Criminal Intelligence Service to continue to deal with a client, a full National Criminal Intelligence Service report form, not a limited intelligence value report, should be completed. The National Criminal Intelligence Service is required to reply within seven working days. If it imposes a moratorium on acting for the client, then legal advice should be sought immediately.
