DMS Posts

Entrepreneurs’ Relief is a capital gains tax relief available to those selling or giving away their business.

Entrepreneurs’ Relief reduced the amount of CGT paid on a disposal of qualifying business assets on or after 6 April 2008.

This relief will be available to:

Sole traders and partners selling or gifting the whole or part of their business
Company directors and employees holding at least 5% of ordinary shares and voting rights in a qualifying company who will share or gift all or part of their shareholding
In 2010, the relief changed to qualifying gains arising from 23 June 2010 being taxed at a flat rate of 10%, with the previous need to reduce the gain by 4/9ths being removed.

Conditions for relief

To claim relief, you have to satisfy a number of conditions through the qualifying period, which depend on the type of business disposal you’ve made.

Relief is available where there is either:

Material disposal of business assets
Disposal associated with a material disposal
Disposal of trust business assets
Disposal of a material asset

If the person is only selling part of a business, this part must be capable of being carried on as a going concern.

According to Tolley’s guidance, the disposal of assets which don’t constitute a sale of business capable of being carried on in its own right won’t qualify for the relief.

The definition of a material disposal depends on the type of asset sold:

In the case of a sale or gift of whole or part of a sole trade or partnership business, it must have been owned by the vendor throughout the year ending on the date of the disposal or cessation
It must have been owned by the taxpayer for one year prior to cessation and must be sold within three years of cessation
In the case of the sale or gift of shares or securities in a company, the disposal is material if throughout one year prior to the disposal of shares or date company ceased trading:

The company is a trading company
The company is the taxpayer’s personal company
The taxpayer is an officer or employee of the company or another company in the same group
Entrepreneurs’ Relief is only given in respect of relevant business assets, i.e. assets used for business purposes such as premises.

This means businesses can’t get relief for chargeable assets bought within the year, as long as they are brought into use in the business.

There is no relevant business assets requirement for the sale of shares or securities, meaning there is no need to prorate the relief in accordance with underlying investments held by the company.

Tolley advises using HMRC’s CGT for land and buildings toolkit when calculating the capital gain or loss on the disposal of land or buildings.

Definition of a trading company

According to Tolley Guidance, this is a company carrying on trading activities which does not include to a substantial extent activities other than trading activities.

HMRC says “substantial extent” means more than 20%. However, 20% of what?

Tolley says the test is applied to criteria such as:

Asset base or balance sheet
Directors’ time

HMRC won’t apply the test if the company had a particularly poor trading period. Without this, according to Tolley, a company with seasonal trading fluctations, for example, might not be considered a trading company.

It’s suggested that the taxpayer might consider making a non-statutory business clearance application to HMRC for a trading status ruling, which would be separate to tax compliance from the shareholder.

Associated disposals

A disposal made after material disposal of business assets can qualify for Entrepreneurs’ Relief it it’s associated with it.

How it can be associated:

The individual makes a material disposal of the whole or part of their interest in a partnership or shares or securities in their personal trading company
The material disposal is made as part of the withdrawal of participation in the business
The asset sold after material disposal had been used in that business throughout one year ending with either the disposal or cessation of the partnership or company
Tolley said these conclusions flagged a few points, including:

The associated disposal rules don’t apply to sole traders
These rules don’t apply to isolated disposals of assets
The material disposal must happen first
HMRC says there should not be a significant interval between the material disposal and associated disposal.

Time-frames for associated disposal are:

Within one year of cessation
Within three years of cessation if the asset hasn’t been leased or used for any other purpose after the business ceased
Where the business hasn’t ceased, within there years of the material disposal provided the asset hasn’t been used for any purpose other than that of the business
There are also restrictions of relief on an associated disposal: If the asset is used in the business for only part of the ownership period, is only partly used in the business, or if the individual isn’t involved in the business throughout the period or if the asset was rented to the business.

How to claim and report Entrepreneurs’ Relief

It must be claimed by the first anniversary of the 31 January following the tax year of the disposal.

The gains are reported via usual channels on the CG summary supplementary pages in accordance with the type of asset sold. Calculations of the gains must be attached and submitted with the tax return.

The relief is claimed by crossing boxes 20, 26 and 34 based on the type of asset and including details in the white space on page CG2.


Entrepreneurs’ Relief

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DMS Posts

Number of tax refund scams escalating

A sharp rise in the number of scam emails and text messages targeting taxpayers has been flagged by HMRC, with renewed warnings that criminals are attempting to trick the public into thinking they have received a tax rebate so they hand over their account and personal details.


The tax authority says the scams are timed to coincide with the period in which HMR is processing tax refunds after the end of the 2017- 2018 tax year.

Mel Stride, financial secretary to the Treasury, said: ‘HMRC only informs you about tax refunds through the post or through your pay via your employer. All emails, text messages, or voicemail messages saying you have a tax refund are a scam. Do not click on any links in these messages, and forward them to HMRC’s phishing email address and phone number.

‘We know that criminals will try and use events like the end of the financial year, the self-assessment deadline, and the issuing of tax refunds to target the public and attempt to get them to reveal their personal data. It is important to be alert to the danger.’

In March 2018 HMRC requested 2,672 phishing websites be taken down and received 84,549 phishing reports, and the tax authority warns that this kind of phishing is expected to continue in the coming months as genuine tax refunds are issued.

HMRC advises that income tax for 6 April 2017 to 5 April 2018 will be calculated over the coming months and anyone owed a genuine tax rebate will receive a tax calculation letter by post between June and October.

HMRC advises taxpayers to recognise the signs – genuine organisations like banks and HMRC will never contact anyone out of the blue to ask for their PIN, password or bank details.

It also advises people to stay safe by not giving out private information, replying to text messages, downloading attachments or clicking on links in emails they were not expecting.

Avoid and report internet scams and phishing advice

Genuine HMRC contact and recognising phishing emails guidance


DMS Posts

How to make company car purchases cost effective

Tax and NI charges can make company cars expensive. However, if you use your business to run a car for a family member, say a son or daughter, there are steps you can take to make it cheaper than personal ownership. What are they?

Expensive but still cost effective

In April 2018 the tax and NI charges for company cars crept up again. While the maximum charge didn’t increase, the CO2emissions bands moved so that the majority of company car drivers will pay more in 2018/19 and in 2017/18 for the same car. Despite this, financing a car through your company can be more cost effective than doing it personally. This is something to keep in mind if your spouse, son or daughter needs a new set of wheels.

Example. Peter is a director shareholder of Acom Ltd. He is a higher rate taxpayer. His daughter Katy needs a car and Peter agrees to fund the purchase. His budget is £13,000. To keep annual costs down Katy picks one with CO2 emissions of under 95g/km. Katy will pay the running costs, e.g. insurance, servicing, etc. How do personal and company ownership stack up against each other?

Katy as owner. The idea is for Katy to keep the car after four years and buy a replacement herself. At that time its expected value is £4,750. This means the net cost to him is £8,250 (£13,000 – £4,750). He takes extra dividends of £12,222 from Acom to cover this, which after tax at 32.5% leaves £8,250.

Acom as owner. The cost over the four years to Acom would also be £8,250, but it receives corporation tax (CT) relief at 19%, which makes the net cost to it £6,683. Peter must pay tax on the company car of £988 per year. He takes dividends each year of £1,464 to cover the tax bill. That’s £5,856 over four years. After 32.5% tax that’s £3,952. Acom has to pay Class 1A NI on the car benefit, which after CT relief is £1,104. The total cost to Acom for the car is £13,643 (£6,683 + £5,856 + £1,104). The calculations indicate that personal ownership by Katy is the cheaper option, but that’s not the full story.

Reimbursed costs

If Acom (and not Katy) pays the running costs and Peter reimburses Acom, and Katy reimburses him, this reduces the tax and NI payable on the company car option. This can tip the balance in favour of Acom owning the car.

Tip. For the reimbursed expenses to reduce the tax and NI, Acom must make it a condition of it providing the car. This should be put in writing in case HMRC asks questions.

Less tax and NI. Assume the average annual cost of insurance, road tax, servicing etc. is £1,700. If Acom pays this and requires Peter to reimburse it, the corresponding amount on which he is taxed for the car is reduced by the same amount. Over the four years of ownership that’s a tax saving of £2,720. Therefore, Peter needs correspondingly fewer dividends from Acom to cover the cost. Acom also saves money. Katy’s financial position is neutral, it’s just that she reimburses Peter for the running costs instead of paying them direct.

Tax saving makes the difference. In our example, the tax savings achieved by simply changing how the running costs are managed is over £4,500 (see The next step ). This makes company ownership significantly the cheaper option.

If your company buys the car and pays the running costs, but the family member reimburses it the latter, the usual company car tax and NI is reduced. The savings mean that overall company ownership can be cheaper than the family member buying the car themselves by up to several thousand pounds.
DMS Posts

Annual accounting – how to make it work for you

A business associate says that his firm uses VAT annual accounting to help with its cash flow. What are the conditions for joining the scheme and can it offer you the same cash-flow advantages?

Annual accounting

As the name suggests, VAT annual accounting is an HMRC scheme that allows you to submit a single VAT return each year instead of the usual four. That alone makes the scheme attractive, but it also means you pay fixed VAT payments plus an annual balancing payment. Monthly payments are the norm, but you can ask HMRC to go quarterly.

Choose your date carefully

The annual accounting scheme rules allow you to choose the starting point for your annual return. Picking the right date to suit your business can give you a cash-flow advantage.

Tip. If your trade is seasonal, choosing an annual return period that starts at the beginning of the seasonal boom gives you the best result.

Example. Bill and Ben own three restaurants in seaside towns. 75% of their £800,000 (excluding VAT) annual turnover occurs in July to September. Before annual accounting they made VAT returns for calendar quarters meaning that £120,000 of their annual VAT was payable at the end of October each year, while the remaining £40,000 was spread over the other three VAT quarters.

They applied for an annual accounting year starting on 1 July. This meant their VAT bill in October was just £40,000 which allows them to hang on to the difference of £80,000 (£120,000 -£40,000) an extra three to nine months.

The annual return and payment

When you’re in the scheme your monthly or quarterly payments are based on your VAT bill for the previous twelve months. This means if your turnover is growing you gain another cash-flow advantage.

Example. In the first year of using the scheme Bill and Ben’s turnover increased so that their annual VAT bill rose to £200,000. However, their first three quarterly payments in the second year remain at £40,000. Of course, they must pay the difference and this is due one month after making their annual return, which must be submitted by 31 July. Their VAT payments for their third year in the scheme are based on their second year and so are £50,000 per quarter.

Beware a reducing VAT bill

If the VAT payable for a year is less than the previous one, say because of falling turnover or increased purchases, your fixed payments under the annual accounting scheme will exceed your actual liability. If you think that’s going to happen you can apply to HMRC to reduce your payments.

Joining the scheme

You can apply to HMRC to use the annual accounting scheme if you expect to make VATable supplies of up to £1,350,000 (excluding VAT) in the next twelve months (see The next step ). But you can’t apply if you’re registered for VAT as part of a group, have stopped using annual accounting in the previous twelve months or owe VAT which is overdue.

Your expected VATable supplies over the next twelve months must not be estimated at more than £1,350,000 (excluding VAT) and your business must not be part of a VAT group registration. You can usually gain a cash-flow advantage if your business income is growing or is seasonal.