Setting up multiple companies to separate business interests can seem very straight forward. There are however important considerations. We explore the implications of owning too many companies.
June 2024 Newsletter
11 June 2024
Accounting & Compliance, Reducing Tax
General Election on 4th July – What could it mean for Tax?
Prime Minister Rishi Sunak announced on the 22 May that a snap election would take place on 4 July 2024, triggering a 6-week campaigning period.
If you’re not already registered to vote, the deadline will be 18 June 2024 to make it in time for the General Election.
We’ve not seen sight of a pre-election fiscal statement this year, however following the election outcome we may see an ‘emergency budget’ to establish any new tax policies.
Each party will soon be releasing their party manifestos but let’s have a look at the statements made over the past few weeks.
What could happen under a labour government?
At recent conferences, Shadow Chancellor, Rachel Reeves has announced the following Labour policies:
- Removing VAT and business rates exemptions from private schools;
- Increasing stamp duty land tax for buyers from overseas;
- Abolishing non-domicile status (a measure that was taken up by the current Chancellor in Spring Budget 2024); and
- Capping the headline rate of corporation tax at 25% for the rest of the next parliament, along with retaining full expensing and the annual investment allowance.
- In addition to the above announcements, in April 2024, Labour published their ‘Plan to close the tax gap’. In summary, the tax gap would be reduced by engaging in the following:
- Increased compliance activity from HMRC;
- Investing in technology transformation in the tax system; and
- Making more legal challenges in order to deter tax evasion.
Labour acknowledges HMRC’s challenges with digitisation, including MTD for ITSA, to date and say that there will be “new, achievable timescales for delivery”.
What could happen under a conservative government?
The picture is clearer in this case as the current government’s plans were set out in recent fiscal events.
Chancellor Jeremy Hunt has also said that he views National Insurance as “unfair” and that he plans to reduce it with a view to scrapping it entirely.
He has also announced that in future, the high-income benefit charge (HICBC) will be calculated on a household income basis.
If you’d like a reminder of the announcements in the most recent Budget, take a look at our summary here –Budget Special
Should Employees Reimburse their employer for private fuel?
Where a company car is provided for use by an employee or director there is a benefit in kind taxable on the employee based on the original list price of the vehicle multiplied by the CO2 emissions percentage for that vehicle.
Private Fuel
There is an additional benefit in kind where private fuel is paid for by the employer, which also needs to be reported on form P11d unless the employer has arranged with HMRC to deal with the tax on the benefits via monthly payroll.
Note that unless the employee fully reimburses the employer for private mileage, the additional benefit in kind is based on a notional list price of £27,800 multiplied by the CO2 emissions percentage for that vehicle.
That could be as much as 37%, £10,286 for a car with high CO2 emissions.
That would mean £4,114 income tax for a higher rate taxpayer.
That would be an awful lot of fuel!
National Insurance Contributions
In addition, there would be £1,419 class 1A national insurance contributions payable by the employer.
The table below sets out the HMRC advisory fuel rates that apply from 1 June.
Note that this is an all or nothing benefit and, unless there is full reimbursement, there is an additional taxable benefit.
The deadline for reimbursing private fuel is 6 July 2024 for the 2023/24 tax year.
If you have any queries on providing an employee with a company car or fuel benefit, please contact your account manager.
HMRC official rate of interest remains at 2.25% – Should directors take advantage of this?
HMRC have announced that the official rate of interest will remain at 2.25% for 2024/25, despite the Bank of England Base Rate currently standing at 5.25%.
The official rate of interest is used to calculate the income tax charge on the benefit of employment related loans and the taxable benefit of some employment related living accommodation.
These rates used to fluctuate in line with base rate, and changed several times a year, but in recent years HMRC has fixed the rate for the whole tax year making the calculation of the taxable benefit easier to compute.
For those employers including beneficial loans on form P11d for 2023/24 the official rate to be used is 2.25%.
The charge applies where the amount of the loan exceeds £10,000.
Can directors take advantage of this?
The answer is yes!
As mentioned above the HMRC rate of interest on beneficial loans looks very attractive compared to the Bank of England Base rate of 5.25%, and much higher rates charged by banks for unsecured loans.
Note that where loans are made to participators (broadly shareholders) of a close company there is potentially a special tax charge on the company on any loan still outstanding 9 months after the end of the accounting period.
The charge is currently 33.75%, the same as the higher rate of tax on dividend income.
This tax charge is only repaid to the company after the loan to the participator is repaid or written off.
For example
Fred, the managing director and controlling shareholder of Bloggs Ltd, is loaned £100,000 interest free on 6 April 2023.
No repayments are made in the year ended 31 March 2024.
The company would need to show a taxable benefit in kind on Fred’s 2023/24 P11d of £2,250 (2.25%)
If Fred repays the loan in full before 31 December 2024 there would be no special charge on the company although Fred would be assessed on the beneficial loan for the 9 months that the loan was in existence in 2024/25.
Readvance Rules
Note that there are anti- “bed and breakfast” rules to counteract the situation where the loan is readvanced by the company.
The anti-avoidance would not apply where the loan is cleared by crediting a bonus or dividend to Fred’s loan account.
If, however, only £60,000 was repaid by Fred before 31 December 2024 leaving £40,000 outstanding then there would be a tax charge on the company of £13,500 (assuming 33.75% dividend rate continues) which would be payable in addition to the company’s corporation tax liability for year ended 31 March 2024.
The company would show a taxable benefit in kind on Fred’s 2024/25 P11d based on the official rate of interest on beneficial loans for 2024/25.
If the company then decides to write off or waive the outstanding loan in year ended 31 March 2025 the £13,500 would be refunded.
However, Fred would be assessed on the £40,000 as an income distribution (dividend) arising at the date of waiver in 2024/25.
The verdict?
In summary, should a director need to borrow a sum of money from the company for a short amount of time there could be advantages.
As long as the loan is repaid in full within 9 months of the accounting period it is made there would be no tax charge at 33.75%.
As long as the director paid the company interest at a rate of 2.25%, there would be no taxable benefit in kind.
The overall result is that the director has secured a short term loan for a very favourable interest rate compared to current unsecured loan rates.
The content in this blog is correct as at 11th June 2024. See terms and conditions.
