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The definitive tax guide for business owners

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1. Review reward packages
With an eye on the new 50 per cent personal income tax rate and the restriction of personal allowances already in place and the higher rates of Employee’s National Insurance (NI) coming in from April 5, 2011, business owners should aim for a tax-efficient mix of salary, dividends, bonuses and benefits including share award schemes.  

2. Consider further pension contributions
If your company makes a contribution on behalf of an employee, or the individual makes a net payment to the pension provider, it is now possible to receive tax relief on an amount equal to earnings (subject to an annual cap of £255k for 2010/11). For those with annual income in excess of £150,000 (in some cases including employer’s pension contributions), income tax relief on contributions may be restricted where total annual pension contributions in excess of £20,000 are being considered. This is a complex area – get advice to make sure you optimise pension tax reliefs. As an alternative to pension contributions, consider making Employer Financed Retirement Benefit Scheme (EFRBS) contributions. The government has warned that new rules will be introduced to restrict the tax advantages of EFRBs with effect from April 6, 2011 and discussions are taking place on the possibility of reducing the cap on annual pension contributions attracting tax relief. Consequently there is a short window of opportunity here.

3. Ensure efficient use of allowances on capital expenditure
Where appropriate, take advantage of allowances giving 100 per cent relief including the Annual Investment Allowance (AIA) and Enhanced Capital Allowances for qualifying energy and water-efficient expenditure. The maximum qualifying for AIA in this tax year and 2011/12 is £100,000, but this will reduce to £25,000 after April 5, 2012 (sole traders and partnerships) or March 31, 2012 (companies).

4. Review your business’ VAT arrangements
It is good practice to regularly review the impact of VAT on your business and whether there are more effective ways of managing this tax. A number of VAT technicalities have been challenged in the courts, so you should check whether these affect your business. The rate of VAT will increase to 20 per cent on January 4, 2011 and plans will need to be put in place to cope with the rate change.

5. Review loss relief claims
An extended loss relief facility is available enabling businesses to elect to carry back trade loss relief of up to £50,000 in certain instances (for losses incurred in accounting periods ending after November 23, 2008 and before November 24, 2010) for a period of up to three years instead of the usual one-year limit.

6. Minimising the aggregate family tax bill
Where possible ensure effective use of personal allowances and reliefs, and appropriate allocation of asset ownership and borrowings. Ensure that both spouses’ CGT and income tax allowances and tax bands are utilised by considering whether capital appreciating or income producing assets should be redistributed. This can include shares in the family business although care needs to be taken with anti-avoidance rules.

7. Consider transferring ownership of the business
Special IHT and CGT reliefs currently apply to certain transfers of business assets, so now is a good time to consider transferring a share in the family business to the next generation.

8. Give qualifying assets rather than cash to charity to maximise tax relief
Giving quoted shares, loan notes or units in authorised unit trusts, is generally more tax efficient than a cash gift as you will benefit from both CGT and income tax relief (this also applies to gifts of qualifying interests in land).

9. Invest for capital growth, use investment incentives and claim reliefs
The current CGT rate of 28 per cent still compares favourably with the new top rate of income tax of 50 per cent. Entrepreneurs’ Relief restricts the CGT charge to ten per cent of the first £5m of gains from certain trading assets, but the rules are tightly drawn and great care needs to be taken to ensure that the conditions are satisfied. Recent modifications to certain enterprise investment incentives such as the VCT and EIS regimes mean that there is extended carry-back relief against income tax and greater flexibility in the timing of when invested funds must be utilised by the investee.

10. Business Payment Support Service
On a final note, if your business is experiencing cashflow difficulties it may be possible to agree revised tax payment terms, without incurring penalties. The service covers most taxes and duties including income tax, corporation tax, VAT, PAYE and National Insurance.

Richard Mannion is national tax director at Smith & Williamson. You can contact him on 020 7131 4252 or at

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